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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, 1998
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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, 1998:
38,446,311 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)
DIRECT
SUBSIDIARIES: National Fuel Gas Distribution Corporation
(Distribution Corporation)
National Fuel Gas Supply Corporation (Supply Corporation)
Seneca Resources Corporation (Seneca)
Highland Land & Minerals, Inc. (Highland)
Leidy Hub, Inc. (Leidy Hub)
Data-Track Account Services, Inc. (Data-Track)
National Fuel Resources, Inc. (NFR)
Horizon Energy Development, Inc. (Horizon)
Upstate Energy Inc. (Upstate)
Niagara Independence Marketing Company (NIM)
Seneca Independence Pipeline Company (SIP)
Utility Constructors, Inc. (UCI)
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, 1998 and 1997 4 - 5
b. Consolidated Balance Sheets - June 30, 1998 and
September 30, 1997 6 - 7
c. Consolidated Statement of Cash Flows - Nine
Months Ended June 30, 1998 and 1997 8
d. Notes to Consolidated Financial Statements 9 - 19
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19 - 41
Item 3. Quantitative and Qualitative Disclosures About Market Risk 41
Part II. Other Information
--------------------------
Item 1. Legal Proceedings *
Item 2. Changes in Securities 41
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information 41
Item 6. Exhibits and Reports on Form 8-K 42
Signature 43
* The Company has nothing to report under this item.
<PAGE>
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,
------------------
1998 1997
---- ----
(Thousands of Dollars, Except Per Share Amounts)
INCOME
Operating Revenues $242,447 $246,051
-------- --------
Operating Expenses
Purchased Gas 65,088 82,954
Fuel Used in Heat and Electric Generation 8,789 245
Operation 64,792 59,448
Maintenance 6,440 6,334
Property, Franchise and Other Taxes 20,716 23,194
Depreciation, Depletion and Amortization 31,019 29,286
Income Taxes - Net 11,877 13,307
-------- --------
208,721 214,768
Operating Income 33,726 31,283
Other Income 5,651 1,275
-------- --------
Income Before Interest Charges and
Minority Interest in Foreign Subsidiaries 39,377 32,558
-------- --------
Interest Charges
Interest on Long-Term Debt 14,636 10,418
Other Interest 5,427 3,235
-------- --------
20,063 13,653
Minority Interest in Foreign Subsidiaries (207) -
--------- --------
Net Income Available for Common Stock 19,107 18,905
EARNINGS REINVESTED IN THE BUSINESS
Balance at April 1 446,565 486,696
-------- --------
465,672 505,601
Dividends on Common Stock
(1998 - $.45; 1997 - $.435) 17,224 16,541
-------- --------
Balance at June 30 $448,448 $489,060
======== ========
Earnings Per Common Share:
Basic $0.50 $0.50
===== =====
Diluted $0.49 $0.49
===== =====
Weighted Average Common Shares Outstanding:
Used in Basic Calculation 38,358,065 38,141,019
========== ==========
Used in Diluted Calculation 38,719,074 38,485,420
========== ==========
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)
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Nine Months Ended
June 30,
-----------------
(Thousands of Dollars, Except Per Share Amounts) 1998 1997
---- ----
INCOME
Operating Revenues $1,076,116 $1,108,247
---------- ----------
Operating Expenses
Purchased Gas 418,228 498,617
Fuel Used in Heat and Electric Generation 26,010 1,363
Operation 224,128 197,603
Maintenance 19,347 18,300
Property, Franchise and Other Taxes 75,607 83,427
Depreciation, Depletion and Amortization 88,936 84,971
Impairment of Oil and Gas Producing Properties 128,996 -
Income Taxes - Net 25,085 69,719
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1,006,337 954,000
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Operating Income 69,779 154,247
Other Income 32,413 2,598
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Income Before Interest Charges and
Minority Interest in Foreign Subsidiaries 102,192 156,845
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Interest Charges
Interest on Long-Term Debt 37,517 30,882
Other Interest 26,260 11,358
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63,777 42,240
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Minority Interest in Foreign Subsidiaries (3,036) -
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Income Before Cumulative Effect 35,379 114,605
Cumulative Effect of Change in
Accounting for Depletion (9,116) -
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Net Income Available for Common Stock 26,263 114,605
EARNINGS REINVESTED IN THE BUSINESS
Balance at October 1 472,595 422,874
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498,858 537,479
Dividends on Common Stock
(1998 - $1.32; 1997 - $1.275) 50,410 48,419
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Balance at June 30 $448,448 $489,060
========== ==========
Basic Earnings Per Common Share:
Income Before Cumulative Effect $0.93 $3.01
Cumulative Effect of Change in Accounting for Depletion (0.24) -
----- -----
Net Income Available for Common Stock $0.69 $3.01
===== =====
Diluted Earnings Per Common Share:
Income Before Cumulative Effect $0.92 $2.98
Cumulative Effect of Change in Accounting for Depletion (0.24) -
----- -----
Net Income Available for Common Stock $0.68 $2.98
===== =====
Weighted Average Common Shares Outstanding:
Used in Basic Calculation 38,272,907 38,060,709
========== ==========
Used in Diluted Calculation 38,688,564 38,408,273
========== ==========
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,
1998 September 30,
(Unaudited) 1997
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(Thousands of Dollars)
ASSETS
Property, Plant and Equipment $3,082,496 $2,668,478
Less - Accumulated Depreciation, Depletion
and Amortization 910,642 849,112
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2,171,854 1,819,366
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Current Assets
Cash and Temporary Cash Investments 38,910 14,039
Receivables - Net 138,402 107,417
Unbilled Utility Revenue 13,444 20,433
Gas Stored Underground 17,133 29,856
Materials and Supplies - at average cost 23,134 19,115
Prepayments 30,080 17,807
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261,103 208,667
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Other Assets
Recoverable Future Taxes 91,011 91,011
Unamortized Debt Expense 22,878 23,394
Other Regulatory Assets 49,981 48,350
Investment in Unconsolidated Foreign Subsidiary - 18,887
Deferred Charges 9,521 12,025
Other 73,869 45,631
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247,260 239,298
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$2,680,217 $2,267,331
========== ==========
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,
1998 September 30,
(Unaudited) 1997
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(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common Stock Equity
Common Stock, $1 Par Value
Authorized - 200,000,000 Shares; Issued
and Outstanding - 38,388,902 Shares and
38,165,888 Shares, Respectively $ 38,389 $ 38,166
Paid in Capital 412,925 405,028
Earnings Reinvested in the Business 448,448 472,595
Cumulative Translation Adjustment (1,059) (2,085)
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Total Common Stock Equity 898,703 913,704
Long-Term Debt, Net of Current Portion 795,968 581,640
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Total Capitalization 1,694,671 1,495,344
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Minority Interest in Foreign Subsidiaries 23,902 -
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Current and Accrued Liabilities
Notes Payable to Banks and
Commercial Paper 201,900 92,400
Current Portion of Long-Term Debt 153,437 103,359
Accounts Payable 70,189 74,105
Amounts Payable to Customers 15,519 10,516
Other Accruals and Current Liabilities 146,659 83,793
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587,704 364,173
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Deferred Credits
Accumulated Deferred Income Taxes 241,059 288,555
Taxes Refundable to Customers 19,427 19,427
Unamortized Investment Tax Credit 11,584 12,041
Other Deferred Credits 101,870 87,791
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373,940 407,814
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Commitments and Contingencies - -
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$2,680,217 $2,267,331
========== ==========
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
------------------------------------
(Unaudited)
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Nine Months Ended
June 30,
-----------------
(Thousands of Dollars) 1998 1997
---- ----
OPERATING ACTIVITIES
Net Income Available for Common Stock $ 26,263 $114,605
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Cumulative Effect of Change in Accounting
for Depletion 9,116 -
Impairment of Oil and Gas Producing Properties 128,996 -
Depreciation, Depletion and Amortization 88,936 84,971
Deferred Income Taxes (44,829) 3,909
Minority Interest in Foreign Subsidiaries 3,036 -
Other (215) 4,540
Change in:
Receivables and Unbilled Utility Revenue (6,357) (62,034)
Gas Stored Underground and Materials and
Supplies 14,422 26,116
Unrecovered Purchased Gas Costs - (233)
Prepayments (8,930) 13,907
Accounts Payable (14,237) (10,245)
Amounts Payable to Customers 5,003 2,170
Other Accruals and Current Liabilities 40,088 61,629
Other Assets and Liabilities - Net 1,332 31,539
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Net Cash Provided by
Operating Activities 242,624 270,874
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INVESTING ACTIVITIES
Capital Expenditures (315,223) (134,292)
Investment in Subsidiaries, Net of Cash
Acquired (111,179) (21,605)
Other 2,065 243
-------- --------
Net Cash Used in Investing Activities (424,337) (155,654)
-------- --------
FINANCING ACTIVITIES
Change in Notes Payable to Banks and Commercial
Paper 105,187 (67,600)
Proceeds from Issuance of Long-Term Debt 198,750 -
Reduction of Long-Term Debt (53,048) (785)
Dividends Paid on Common Stock (49,734) (47,718)
Proceeds from Issuance of Common Stock 5,429 6,930
-------- --------
Net Cash Provided by (Used in)
Financing Activities 206,584 (109,173)
-------- --------
Net Increase in Cash and
Temporary Cash Investments 24,871 6,047
Cash and Temporary Cash Investments
at October 1 14,039 19,320
-------- --------
Cash and Temporary Cash Investments at June 30 $ 38,910 $ 25,367
======== ========
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. Financial Statements (Cont.)
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National Fuel Gas Company
-------------------------
Notes to Consolidated Financial Statements
------------------------------------------
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation. During the quarter ended June 30, 1998, Horizon's
wholly-owned subsidiary, Horizon Energy Development B.V. (Horizon B.V.) (name
changed from Beheer-En-Beleggingsmaatschappij Bruwabel, B.V. in April 1998)
increased its ownership interest in Prvni severozapadni teplarenska, a.s. (PSZT)
from 75.3% at March 31, 1998 to 85.9% at June 30, 1998. Horizon B.V. also
increased its ownership interest in Severoceske Teplarny, a.s. and its
subsidiaries (SCT) from 75.2% at March 31, 1998 to 82.7% at June 30, 1998. The
Company consolidates both PSZT and SCT into its accounts. The equity method was
used to account for Horizon B.V.'s minority ownership interest in SCT during
fiscal 1997.
The acquisitions of SCT and PSZT have been accounted for in
accordance with the purchase method as specified by Accounting Principles Board
Opinion Number 16, "Business Combinations" (APB 16). The acquisitions resulted
in approximately $20.6 million of goodwill, which is being amortized over a
twenty year period. This goodwill ($20.1 million at June 30, 1998) is recorded
in Other Assets in the Company's Consolidated Balance Sheet at June 30, 1998.
The final amount of goodwill may be subject to further purchase price
adjustments.
"Minority Interest in Foreign Subsidiaries" represents the minority
stockholders' share of the equity and net income of SCT and PSZT.
Quarterly Earnings. The Company, in its opinion, has included all adjustments
that are necessary for a fair statement of the results of operations for the
reported periods. The consolidated financial statements and notes thereto,
included herein, should be read in conjunction with the financial statements and
notes for the years ended September 30, 1997, 1996 and 1995 that are included in
the Company's combined Annual Report to Shareholders/Form 10-K for 1997. The
fiscal 1998 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, 1998 (exclusive of
the cumulative effect of a change in accounting for depletion and the impairment
of oil and gas producing properties, both of which are discussed below) should
not be taken as a prediction of earnings for the entire fiscal year ending
September 30, 1998. 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 (WNC)
included in Distribution Corporation's New York tariff. The WNC is effective for
October through May billings. Distribution Corporation's tariff for its
Pennsylvania jurisdiction does not have a WNC. In addition, Supply Corporation's
straight fixed-variable rate design, which allows for recovery of substantially
<PAGE>
Item 1. Financial Statements (Cont.)
- -------------------------------------
all fixed costs in the demand or reservation charge, reduces the earnings
impact of weather fluctuations.
Cumulative Effect of Change in Accounting. Effective October 1, 1997, Seneca
changed its method of depletion for oil and gas properties from the gross
revenue method to the units of production method. The new method was adopted
because it provides a better measure of depletion expense and is the preferable
method used by oil and gas producing companies. Seneca's recent acquisition
activities have increased its size and scope of operations in relation to those
of the Company. Consequently, the change in method was warranted at such time.
(See further discussion of acquisitions in Note 6 - Acquisition of HarCor Energy
Inc. (HarCor) and in Item 2, Management's Discussion and Analysis under
"Exploration and Production".) The units of production method has been applied
retroactively to prior years to determine the cumulative effect through October
1, 1997. This cumulative effect reduced earnings for the nine months ended June
30, 1998, by $9.1 million, net of income tax. Depletion of oil and gas
properties for the quarter and nine months ended June 30, 1998, has been
computed under the units of production method. The effect of the change from the
gross revenue method to the units of production method increased net income for
the quarter ended June 30, 1998 by $879,000 ($0.02 per common share, basic and
diluted). For the nine months ended June 30, 1998, the effect of the change
increased income before cumulative effect and net income by $1,716,000 ($0.04
per common share, basic and diluted).
Pro forma amounts for the three months ended June 30, 1997 and the nine months
ended June 30, 1998 and 1997 shown below, assume the retroactive application of
the new depletion method. Actual amounts for the three months ended June 30 1998
are also shown for comparative purposes.
Three Months Nine Months
Ended Ended
June 30, June 30,
--------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
(Thousands of Dollars,
except per share amounts)
Net Income
Available for
Common Stock $19,107 $19,007 $35,379 $114,604
======= ======= ======= ========
Earnings
Per Common Share:
Basic $0.50 $0.50 $0.93 $3.01
===== ===== ===== =====
Diluted $0.49 $0.49 $0.92 $2.98
===== ===== ===== =====
Oil and Gas Exploration and Development Costs. Oil and Gas property acquisition,
exploration and development costs are capitalized under the full-cost method of
accounting as prescribed by the Securities and Exchange Commission (SEC). All
costs directly associated with property acquisition, exploration and development
activities are capitalized, with the principal limitation that such capitalized
amounts not exceed the present value of estimated future net revenues
(discounted at 10%) from production of proved gas and oil reserves plus the
lower of cost or market of unevaluated Item 1. Financial Statements (Cont.)
<PAGE>
Item 1. Financial Statements (Cont.)
- ------------------------------------
properties, net of related income tax effect (the full-cost ceiling). Future net
revenue is estimated based on end-of-quarter prices adjusted for contracted
price changes. If capitalized costs exceed the full-cost ceiling at the end of
any quarter, a permanent impairment is required to be charged to earnings in
that quarter. Such a charge has no effect on the Company's cash flow.
The surplus of crude oil world-wide has caused oil prices to drop to
their lowest level in recent years, and gas prices continue to be negatively
impacted by the warmer than normal 1997/1998 winter. Due to these price
declines, Seneca's capitalized costs under the full-cost method of accounting
exceeded the full-cost ceiling at March 31, 1998. Seneca was required to
recognize an impairment of its oil and gas producing properties in the quarter
ended March 31, 1998. This charge amounted to $129.0 million (pretax) and
reduced net income for the nine months ended June 30, 1998 by $79.1 million
($2.07 per common share, basic; $2.04 per common share, diluted). No impairment
charge was required for the quarter ended June 30, 1998.
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, 1998
and 1997 amounted to $38.0 million and $35.0 million, respectively. Net income
taxes paid during the nine months ended June 30, 1998 and 1997 amounted to $33.0
million and $55.2 million, respectively.
Details of the SCT, PSZT and HarCor stock acquisitions during the
nine months ended June 30, 1998, are as follows (dollars in millions):
SCT PSZT HarCor Total
Assets acquired $71.0 $143.5 $104.5 $319.0
Liabilities assumed (27.2) (79.6) (72.1) (178.9)
Existing investment at acquisition (18.9) - - (18.9)
Cash acquired at acquisition (6.3) (0.9) (2.8) (10.0)
----- ----- ----- ------
Cash paid, net of cash acquired $18.6 $63.0 $29.6 $111.2
===== ===== ===== ======
Reclassification. Certain prior year amounts have been reclassified to conform
with current year presentation.
Earnings per Common Share. Basic earnings per common share is computed by
dividing income available for common stock by the weighted average number of
common shares outstanding for the period. Diluted earnings per common share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Such additional shares are added to the denominator of the basic earnings per
common share calculation in order to calculate diluted earnings per common
share. The only potentially dilutive securities the Company has outstanding are
stock options. The diluted weighted average shares outstanding shown on the
Consolidated Statement of Income reflects the potential dilution as a result of
these stock options. Such dilution was determined using the Treasury Stock
Method as required by Statement of Financial Accounting Standards No. 128,
"Earnings per Share."
<PAGE>
Item 1. Financial Statements (Cont.)
- -------------------------------------
New Accounting Pronouncements:
Employers' Disclosures about Pensions and Other Postretirement Benefits. In
February 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits" (SFAS 132). SFAS 132 supersedes the
disclosure requirements in SFAS 87, "Employers' Accounting for Pensions", SFAS
88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits", and SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions". SFAS 132 does not
change the measurement or recognition of the Company's pension or other
postretirement benefit plans. SFAS 132 standardizes the disclosure requirements
for pension and other postretirement benefits to the extent practicable,
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis and eliminates
certain disclosures that are no longer useful under SFAS 87, 88 and 106. The
Statement is effective for fiscal year 1999. Earlier application is encouraged.
SFAS 132 requires restatement of disclosures for prior periods for comparative
purposes.
Accounting for Derivative Instruments and Hedging Activities. In June 1998, the
FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). SFAS 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The intended use
of the derivative and its designation as either (1) hedging the exposure to
changes in the fair value of a recognized asset or liability or a firm
commitment, (2) hedging the exposure to variable cash flows of a forecasted
transaction, or (3) hedging the foreign currency exposure of a net investment in
a foreign operation, will determine when the gains or losses on the derivatives
are to be reported in earnings and when they are to be reported as a component
of comprehensive income.
The Company is required to adopt SFAS 133 in the first quarter of
fiscal 2000. However, earlier application is permitted. Initial application of
SFAS 133 should be as of the beginning of a fiscal quarter, at which time
hedging relationships must be designated and documented in accordance with the
provisions of SFAS 133. SFAS 133 is not to be applied retroactively to financial
statements of prior periods. Management is currently in the process of
determining the impact on the Company of adopting SFAS 133.
<PAGE>
Item 1. Financial Statements (Cont.)
- ------------------------------------
Note 2 - Income Taxes
The components of federal and state income taxes included in the
Consolidated Statement of Income are as follows (in thousands):
Nine Months Ended
June 30,
-----------------
1998 1997
---- ----
Operating Expenses:
Current Income Taxes -
Federal $59,208 $59,199
State 6,814 6,611
Foreign 3,892 -
Deferred Income Taxes (44,829) 3,909
-------- -------
25,085 69,719
Other Income:
Deferred Investment Tax Credit (457) (502)
Minority Interest in Foreign Subsidiaries (1,576) -
Cumulative Effect of Change in Accounting (5,737) -
-------- -------
Total Income Taxes $17,315 $69,217
======= =======
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,
-----------------
1998 1997
---- ----
Net income available for common stock $ 26,263 $114,605
Total income taxes 17,315 69,217
-------- --------
Income before income taxes $ 43,578 $183,822
======== ========
Income tax expense, computed at
statutory rate of 35% $ 15,252 $ 64,338
Increase (reduction) in taxes resulting from:
Current state income taxes, net of federal
income tax benefit 4,429 4,165
Depreciation 1,738 1,972
Miscellaneous (4,104) (1,258)
--------- --------
Total Income Taxes $ 17,315 $ 69,217
======== ========
<PAGE>
Item 1. Financial Statements (Cont.)
- ------------------------------------
Significant components of the Company's deferred tax liabilities
(assets) were as follows (in thousands):
At June 30, 1998 At September 30, 1997
------------------- -----------------------
Deferred Tax Liabilities:
Excess of tax over book
depreciation $137,207 $190,913
Exploration and
intangible well
drilling costs 135,481 117,759
Other 52,161 62,189
-------- --------
Total Deferred Tax
Liabilities 324,849 370,861
-------- --------
Deferred Tax Assets:
Overheads capitalized
for tax purposes (21,768) (19,406)
Other (62,022) (62,900)
--------- --------
Total Deferred Tax
Assets (83,790) (82,306)
--------- --------
Total Net Deferred
Income Taxes $241,059 $288,555
======== ========
The primary issues related to Internal Revenue Service audits of the
Company for the years 1977 - 1994 were settled early in calendar year 1998. Net
income for the nine months ended June 30, 1998 was increased by approximately $5
million as a result of interest, net of tax and other adjustments, related to
this settlement.
Note 3 - Capitalization
Common Stock. During the nine months ended June 30, 1998, the Company issued
22,194 shares of common stock under the Company's section 401(k) Plans, 28,796
shares to participants in the Company's Dividend Reinvestment Plan and 9,334
shares to participants in the Company's Customer Stock Purchase Plan.
Additionally, 162,690 shares of common stock were issued under the Company's
stock option and stock award plans.
On December 11, 1997, 658,500 stock options were granted at an
exercise price of $44.875 per share. On June 18, 1998, 111,500 stock options
were granted at an exercise price of $41.875.
At the Annual Meeting of Shareholders in February 1998, the Company's
shareholders voted to increase the number of shares of authorized Company common
stock from 100,000,000 shares to 200,000,000 shares. This change became
effective April 3, 1998, upon the filing of a certificate of amendment with the
Secretary of State of the State of New Jersey.
Preferred Stock. At the Annual Meeting of Shareholders in February 1998, the
Company's shareholders voted to eliminate the Company's authorized 3,200,000
shares of $25 par value preferred stock and replace it with an authorized amount
of 10,000,000 shares of $1 par value preferred stock. This change became
effective April 3, 1998, upon the filing of a certificate of amendment
<PAGE>
Item 1. Financial Statements (Cont.)
- -----------------------------------
with the Secretary of State of the State of New Jersey. The Company does not
have any preferred stock outstanding at this time.
Long-Term Debt. In May 1998, the Company issued $200.0 million of 6.303%
medium-term notes due to mature in May 2008. After deducting underwriting
discounts and commission, the net proceeds to the Company amounted to $198.8
million.
SCT has term loans amounting to 153.2 million Czech Koruna (CZK),
which translates to $4.6 million as of June 30, 1998. The principal of these
loans will be paid in quarterly installments over the term of the loans, the
last of which matures in June 2006. The interest rates on these loans ranged
from 16.03% to 16.95% at June 30, 1998.
PSZT has U.S. dollar denominated debt in the amount of $50.6 million
as of June 30, 1998. During the quarter ended June 30, 1998, the Czech Koruna
increased in value in relation to the U.S. dollar. Accordingly, PSZT recognized
a pretax gain of approximately $1.2 million, which is included in Other Income
in the Consolidated Statement of Income. Since acquiring PSZT in February 1998,
an exchange rate gain of $3.4 million (pretax) has been recorded concerning
PSZT's U.S. dollar denominated debt. Subsequent exchange rate changes over the
term of the loan may result in the recognition of additional gains or losses.
The principal of this debt will be paid in quarterly installments over the
period of March 2000 - December 2004. The interest rate on this debt was 7.98%
at of June 30, 1998.
PSZT also has long-term debentures in the amount of CZK 300 million
($9.1 million). The debentures mature in December 1999 and bear an interest rate
of 13%.
As a result of the acquisition of HarCor, the Consolidated Balance
Sheet at June 30, 1998, includes approximately $53 million of HarCor's senior
secured debt (See note 6 for further discussion).
Note 4 - Derivative Financial Instruments
Seneca 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 Seneca 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 Seneca for its natural gas and crude oil production.
The following summarizes Seneca's activity under price swap
agreements for the quarter and nine-month periods ended June 30, 1998 and 1997,
respectively:
<PAGE>
Item 1. Financial Statements (Cont.)
- ------------------------------------
Quarter Ended Quarter Ended
June 30, 1998 June 30, 1997
------------- -------------
Natural Gas Price Swap Agreements:
Notional Amount - Equivalent Billion
Cubic Feet (Bcf) 6.0 6.3
Range of Fixed Prices per Thousand Cubic
Feet (Mcf) $2.00 - $2.84 $1.77 - $2.06
Weighted Average Fixed Price per Mcf $2.25 $1.90
Range of Variable Prices per Mcf $2.06 - $2.41 $1.84 - $2.41
Weighted Average Variable Price per Mcf $2.27 $2.13
Loss $($82,000) $(1,421,000)
Crude Oil Price Swap Agreements:
Notional Amount - Equivalent
Barrels (bbl) 219,000 360,500
Range of Fixed Prices per bbl $17.50 - $20.56 $17.40 - $18.71
Weighted Average Fixed Price per bbl $19.04 $18.02
Range of Variable Prices per bbl $13.67 - $15.47 $19.22 - $20.87
Weighted Average Variable Price per bbl $14.69 $19.94
Gain (Loss) $982,000 $(692,000)
Nine Months Ended Nine Months Ended
June 30, 1998 June 30, 1997
----------------- -----------------
Natural Gas Price Swap Agreements:
Notional Amount - Equivalent Bcf 19.1 18.7
Range of Fixed Prices per Mcf $1.77 - $2.84 $1.71 - $2.10
Weighted Average Fixed Price per Mcf $2.13 $1.92
Range of Variable Prices per Mcf $2.01 - $3.44 $1.77 - $4.11
Weighted Average Variable Price per Mcf $2.55 $2.65
Loss $(8,167,000) $(13,597,000)
Crude Oil Price Swap Agreements:
Notional Amount - Equivalent bbl 672,000 1,030,500
Range of Fixed Prices per bbl $17.50 - $20.56 $17.40 - $18.71
Weighted Average Fixed Price per bbl $18.76 $17.99
Range of Variable Prices per bbl $13.67 - $21.28 $19.22 - $25.18
Weighted Average Variable Price per bbl $16.93 $22.31
Gain (Loss) $1,221,000 $(4,498,000)
Seneca had the following price swap agreements outstanding at June
30, 1998.
Natural Gas Price Swap Agreements:
Notional Amount Range of Fixed Weighted Average
Fiscal Year (Equivalent Bcf) Prices Per Mcf Fixed Price Per Mcf
- ----------- ---------------- -------------- -------------------
1998 7.3 $2.00 - $2.84 $2.28
1999 17.5 $2.00 - $2.50 $2.31
2000 3.1 $2.29 - $2.47 $2.37
----
27.9
====
<PAGE>
Item 1. Financial Statements (Cont.)
- ------------------------------------
Crude Oil Price Swap Agreements:
Notional Amount Range of Fixed Weighted Average
Fiscal Year (Equivalent bbl) Prices Per bbl Fixed Price Per bbl
- ----------- ---------------- -------------- -------------------
1998 219,000 $17.50 - $20.56 $19.04
1999 135,000 $19.30 - $20.56 $19.86
-------
354,000
=======
Gains or losses from these price swap agreements are accrued in
operating revenues on the Consolidated Statement of Income at the contract
settlement dates. At June 30, 1998, Seneca had an unrecognized gain of
approximately $0.1 million related to the price swap agreements which are offset
by corresponding unrecognized losses from Seneca's anticipated natural gas and
crude oil production over the terms of the price swap agreements.
NFR participates in the natural gas futures market to manage a
portion of the market risk associated with fluctuations in the price of natural
gas. Such futures are not held for trading purposes. At June 30, 1998, NFR had
the following futures contracts outstanding:
Long "Buy" Positions
Notional Amount Range of Fixed Weighted Average
Fiscal Year (Equivalent Bcf) Prices Per Mcf Fixed Price Per Mcf
- ----------- ---------------- -------------- -------------------
1998 3.7 $2.04 - $2.70 $2.33
1999 4.6 $2.04 - $2.96 $2.57
2000 1.0 $2.45 - $2.74 $2.66
---
9.3
===
Short "Sell" Positions
Notional Amount Range of Fixed Weighted Average
Fiscal Year (Equivalent Bcf) Prices Per Mcf Fixed Price Per Mcf
- ----------- ---------------- -------------- -------------------
1998 2.2 $2.11 - $2.76 $2.46
1999 0.7 $2.38 - $2.77 $2.67
---
2.9
===
Gains or losses from natural gas futures are recorded in Other
Deferred Credits on the Consolidated Balance Sheet until the hedged commodity
transaction occurs, at which point they are reflected in operating revenues in
the Consolidated Statement of Income. At June 30, 1998, NFR had unrealized gains
of approximately $1.7 million related to these futures contracts. NFR had a
minimal gain for the quarter ended June 30, 1998 and recorded losses of
approximately $0.3 million for the quarter ended June 30, 1997. NFR recorded
gains of approximately $1.3 million and $1.2 million for the nine months ended
June 30, 1998 and 1997, respectively. Since these futures contracts qualify and
have been designated as hedges, any gains or losses resulting from market price
changes are substantially offset by the related commodity transaction.
<PAGE>
Item 1. Financial Statements (Cont.)
- ------------------------------------
The Company has SEC authority to enter into hedging transactions
related to all or a portion of its existing or anticipated debt. The notional
amounts of the hedging instruments may not exceed the amount of the Company's
outstanding debt. No such hedging transactions were entered into during the
quarter ended June 30, 1998 and none are currently outstanding.
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 and futures
contracts 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
recognizing gains on the price swap agreements and futures contracts 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 may range from $13.7 million to
$14.7 million. At June 30, 1998, Distribution Corporation has recorded the
minimum liability of $13.7 million. The approximate 50% increase in the
liability since September 30, 1997 mainly relates to changing circumstances and
revised estimates for one particular former manufactured gas plant site. The
ultimate cost to Distribution Corporation with respect to the remediation of all
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, 1998 includes related regulatory assets in the amount
of approximately $13.0 million. For further discussion, see
<PAGE>
Item 1. Financial Statements (Cont.)
- -----------------------------------
disclosure in Note H - Commitments and Contingencies under the heading
"Environmental Matters" in Item 8 of the Company's 1997 Form 10-K.
Other. The Company is involved in litigation arising in the normal course of
business. The Company is involved in regulatory matters arising in the normal
course of business that involve rate base, cost of service and purchased gas
cost issues. While the resolution of such litigation or regulatory matters could
have a material effect on earnings and cash flows, none of this litigation, and
none of these regulatory matters, is expected to have a material effect on the
financial condition of the Company at this time.
Note 6 - Acquisition of HarCor Energy, Inc.
In May 1998, Seneca West Corporation (Seneca West), a wholly-owned
subsidiary of Seneca, completed a tender offer (an offer of $2.00 per share) for
the outstanding shares of HarCor. The tender offer was commenced pursuant to the
terms of an Agreement and Plan of Merger among HarCor, Seneca and Seneca West
which provided for the merger of Seneca West with and into HarCor following the
successful consummation of the tender offer. Approximately 95% of the
outstanding shares of HarCor common stock were tendered in accordance with the
tender offer. Accordingly, Seneca West has been merged with and into HarCor and
the common stock that was not purchased pursuant to the tender offer was
converted in the merger into the right to receive $2.00 per share. The cost of
the tender offer and subsequent conversion of the remaining shares of HarCor was
approximately $32.4 million.
The acquisition of HarCor was accounted for in accordance with the
purchase method as specified by APB 16. HarCor's results of operations were
incorporated into the Company's consolidated financial statements for the period
subsequent to the completion of the tender offer in May 1998.
As a result of the acquisition, the Consolidated Balance Sheet at
June 30, 1998 includes approximately $53 million of HarCor's senior secured
debt. This debt is payable semi-annually on January 15 and July 15 of each year.
The debt is redeemable, in whole or in part, at the option of HarCor at any time
on or after July 15, 1999 at the following redemption prices: 1999 - 110% of the
principal amount; 2000 - 107% of the principal amount; 2001 and thereafter -
100% of the principal amount. An opening balance sheet adjustment has been made
such that the effective interest rate recognized by the Company regarding this
debt will be approximately 5.875%.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations
---------------------
RESULTS OF OPERATIONS
Earnings.
The Company earnings were $19.1 million, or $0.50 per common share
($0.49 per share on a diluted basis), for the quarter ended June 30, 1998. This
compares with earnings of $18.9 million, or $.50 per common share ($0.49 per
common share on a diluted basis), for the quarter ended June 30, 1997.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
The Company's earnings were $26.3 million, or $0.69 per common share
($0.68 per common share on a diluted basis), for the nine months ended June 30,
1998. This includes the non-cash impairment of Seneca's oil and gas assets, in
the amount of $79.1 million (after tax) as well as the cumulative effect through
October 1, 1997, of a change in depletion methods for Seneca's oil and gas
assets in the amount of $9.1 million, or $0.24 per common share. Without these
two non-cash items, earnings for the nine months ended June 30, 1998, would have
been $114.5 million, or $3.00 per common share ($2.96 per common share on a
diluted basis). This compares with earnings of $114.6 million, or $3.01 per
common share ($2.98 per common share on a diluted basis), for the nine months
ended June 30, 1997. The earnings for the nine months ended June 30, 1998 also
reflect $5.0 million of after tax income from the settlement of the primary
issues relating to IRS audits of years 1977-1994.
Discussion of Quarter Results.
Overall, earnings for the quarter were basically flat when compared
with the prior year's quarter, with increases in earnings of the Pipeline and
Storage segment and a lower loss experienced in the International segment,
offset by lower earnings in the Utility, Exploration and Production and Other
Nonregulated segments.
In the Pipeline and Storage segment, earnings were up due mainly to
lower operation and maintenance (O&M) expense and a buyout of a firm
transportation agreement by a customer in the amount of $2.5 million which was
received during the quarter. Partly offsetting these positive impacts to
earnings were lower revenue from unbundled pipeline sales and open access
transportation.
The International segment is realizing increases from Horizon's share
of earnings from its two main investments in district heating and power
generation operations located in the Czech Republic. Horizon initially acquired
36.8% of Severoceske Teplarny, a.s. (SCT) in fiscal 1997, and increased its
ownership during fiscal 1998 to 82.7% by June 30, 1998. Also in this fiscal
year, Horizon invested in Prvni severozapadni teplarenska, a.s. (PSZT), and
owned an 85.9% interest at June 30, 1998. However, the additional cost of debt
to fund these acquisitions has reduced results for the quarter to a slight loss
position.
Although the Utility segment continues to benefit from lower O&M
expense, the impact of warmer than normal weather during the quarter, and the
consequent overall lower usage per account, has again taken its toll on the
earnings of this segment. In the New York jurisdiction, the Weather
Normalization Clause (WNC) is not available to mitigate weather impacts
subsequent to the May billing cycle. In the Pennyslvania jurisdiction, there is
no WNC.
In the Exploration and Production segment, earnings are down mainly
because of low oil prices and additional expenses of operating the properties
acquired in the Whittier, HarCor Energy Inc. (HarCor) and Bakersfield Energy
Resources (BER) acquisitions, as well as higher interest costs related to these
acquisition activities. These factors more than offset the positive
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
contribution to earnings that resulted from higher production of both oil and
gas and higher gas prices. The production increases are mainly attributable to
the properties acquired as noted above.
The Other Nonregulated segment's earnings are down mainly because of
lower margins and higher expenses of the natural gas marketing operations and
lower earnings of the timber operations.
Discussion Of Nine-Months Results.
Earnings for the nine months ended June 30, 1998 (exclusive of the two
nonrecurring items noted above) were also basically flat when compared with the
prior year. Lower earnings of the Utility and Exploration and Production
segments were offset by higher earnings of the International and Pipeline and
Storage segments. The Utility segment showed lower year-to-date earnings because
of warmer weather and lower gas usage. The Exploration and Production segment
had lower year-to-date earnings mainly because of lower overall production and
prices and higher expenses. The International segment's earnings increased
because of its share of earnings from its investments in the Czech Republic. The
settlement of the primary issues relating to IRS audits provided a positive
contribution to earnings in the Pipeline and Storage segment as well as the
Exploration and Production segment, while reducing the earnings of the Utility
segment. In addition, the Pipeline and Storage segment's year-to-date earnings
also benefited from the previously mentioned customer contract buyout.
Discussion Of Asset Impairment And Cumulative Effect Of A Change In Depletion
Method.
Seneca follows the full-cost method of accounting for its oil and gas
operations. Under this method, capitalized costs are limited by a present worth
calculation of future revenues from oil and gas assets (full-cost ceiling). The
surplus of crude oil world-wide has caused oil prices to drop to their lowest
level in recent years, and gas prices continue to be negatively impacted by the
warmer than normal 1997/1998 winter. As a result of these lower prices, a
non-cash asset impairment of $129 million (pretax) was recorded as of March 31,
1998. No impairment charge was required for the quarter ended June 30, 1998.
Effective October 1, 1997, Seneca changed its method of depletion for
oil and gas properties from the gross revenue method to the units of production
method. The new method was adopted because it provides a better measure of
depletion expense and is the preferable method used by oil and gas producing
companies. Seneca's recent acquisition activities have increased its size and
scope of operations in relation to those of the Company. Consequently, the
change in method was warranted at such time. The units of production method has
been applied retroactively to prior years to determine the cumulative effect
through October 1, 1997. This cumulative effect reduced earnings for the nine
months ended June 30, 1998, by $9.1 million, net of income taxes. Depletion of
oil and gas properties for the quarter and nine months ended June 30, 1998, has
been computed under the units of production method. Additional discussion of
this accounting change is included in Note 1 "Summary of Significant Accounting
Policies."
<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,
------------------------- -------------------------
1998 1997 % Change 1998 1997 % Change
---- ---- -------- ---- ---- --------
Utility
Retail Revenues:
Residential $100,816 $126,809 (20.5) $553,950 $642,067 (13.7)
Commercial 17,831 29,085 (38.7) 114,512 154,699 (26.0)
Industrial 3,478 3,901 (10.8) 15,137 19,110 (20.8)
-------- -------- -------- --------
122,125 159,795 (23.6) 683,599 815,876 (16.2)
Off-System Sales 9,201 6,661 38.1 39,972 37,337 7.1
Transportation 15,196 13,242 14.8 52,710 41,430 27.2
Other (618) 723 (185.5) 2,834 1,358 108.7
--------- -------- -------- --------
145,904 180,421 (19.1) 779,115 896,001 (13.0)
-------- -------- -------- --------
Pipeline and Storage
Storage Service 15,315 15,711 (2.5) 47,785 48,402 (1.3)
Transportation 22,756 22,479 1.2 71,218 71,058 0.2
Other 3,252 4,924 (34.0) 10,509 11,809 (11.0)
-------- -------- -------- --------
41,323 43,114 (4.2) 129,512 131,269 (1.3)
-------- -------- -------- --------
Exploration and
Production 36,802 27,842 32.2 86,330 90,220 (4.3)
-------- -------- -------- --------
International 18,639 321 NM 72,786 1,845 NM
-------- -------- -------- --------
Other Nonregulated 24,054 18,462 30.3 85,380 70,002 22.0
-------- -------- -------- --------
Less-Intersegment
Revenues 24,275 24,109 0.7 77,007 81,090 (5.0)
-------- -------- -------- --------
$242,447 $246,051 (1.5) $1,076,116 $1,108,247 (2.9)
======== ======== ========== ==========
OPERATING INCOME (LOSS) BEFORE
INCOME TAXES
(in thousands) Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- ------------------------
1998 1997 % Change 1998 1997 % Change
---- ---- -------- ---- ---- --------
Utility $ 12,956 $ 15,750 (17.7) $132,810 $134,774 (1.5)
Pipeline and Storage 19,960 20,404 (2.2) 56,976 58,188 (2.1)
Exploration and
Production* 11,859 8,369 41.7 (104,507) 32,815 NM
International 794 (782) 201.5 7,704 (2,369) NM
Other Nonregulated 124 1,269 (90.2) 3,063 2,458 24.6
Corporate (90) (420) 78.6 (1,182) (1,900) 37.8
-------- ------- --------- --------
$ 45,603 $ 44,590 2.3 $ 94,864 $223,966 (57.6)
======== ======== ======== ========
*Nine months ended June 30, 1998 includes non-cash impairment charge of
$128,996,000.
NM = Not meaningful.
<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,
------------------------ -------------------------
1998 1997 % Change 1998 1997 % Change
---- ---- -------- ---- ---- --------
Utility Gas Sales
Residential 10,739 15,954 (32.7) 66,749 79,478 (16.0)
Commercial 2,219 4,189 (47.0) 15,406 21,178 (27.3)
Industrial 884 1,059 (16.5) 3,353 4,082 (17.9)
Off-System 3,484 3,041 14.6 14,432 11,469 25.8
------- ------ ------ -------
17,326 24,243 (28.5) 99,940 116,207 (14.0)
------- ------ ------ -------
Non-Utility Gas Sales
Production(in
equivalent MMcf) 15,840 12,395 27.8 36,293 37,048 (2.0)
------- ------- ------ -------
Total Gas Sales 33,166 36,638 (9.5) 136,233 153,255 (11.1)
------- ------- ------- -------
Transportation
Utility 14,690 15,270 (3.8) 50,022 48,306 3.6
Pipeline and Storage 59,281 59,443 (0.3) 255,174 254,537 0.3
Nonregulated 262 260 0.8 538 320 68.1
------- ------- ------- -------
74,233 74,973 (1.0) 305,734 303,163 0.8
------ ------ ------- -------
Marketing Volumes 6,176 5,854 5.5 20,696 17,674 17.1
------- ------- ------- -------
Less-Inter and
Intrasegment Volumes:
Transportation 22,796 27,553 (17.3) 125,539 138,218 (9.2)
Production 1,001 1,072 (6.6) 3,059 3,225 (5.1)
------- ------- ------- -------
23,797 28,625 (16.9) 128,598 141,443 (9.1)
------- ------- ------- -------
Total System Natural Gas
Volumes 89,778 88,840 1.1 334,065 332,649 0.4
======= ====== ======= =======
Utility.
Operating revenues for the Utility segment decreased $34.5 million
and $116.9 million for the quarter and nine months ended June 30, 1998,
respectively, as compared with the same periods a year ago. These decreases
primarily reflect the recovery of lower gas costs which resulted from a decrease
in gas sales (a 6.9 billion cubic feet (Bcf) decrease and a 16.3 Bcf decrease
for the quarter and nine months ended June 30, 1998, respectively). While the
decrease in gas sales also reflects, in part, the migration of certain retail
customers to transportation service in both the New York and Pennsylvania
jurisdictions, as a result of new aggregator services, the major reason for the
decrease stems from warmer weather (see Degree Days table below). The switch to
new aggregator services is discussed further in the "Rate Matters" section that
follows.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
The impact on operating revenue of a general base rate increase in
the New York jurisdiction effective October 1, 1997 ($7.2 million on an annual
basis) was mostly mitigated by the recognition of a refund provision of $1.8
million for the quarter and $4.9 million year-to-date to the Utility's customers
for a 50% sharing of earnings over a predetermined level in accordance with the
New York rate settlement of July 1996. The cumulative estimated refund provision
liability, including amounts accrued in fiscal 1997, is $7.9 million. The final
amount owed to customers, if any, will not be known until after September 30,
1998, which is the conclusion of the settlement period. In addition, operating
revenues in the year-to-date period ended June 30, 1998, include $6.0 million of
revenue recorded by the Utility segment's New York jurisdiction related to the
previously mentioned recent settlement of IRS audits. This $6.0 million
represents the rate recovery of interest expense as allowed by the New York rate
settlement of July 1996. Both this revenue and the refund provision are included
in the "Other" category in the Utility section of the Operating Revenues table
above.
Operating income before income taxes for the Utility segment decreased
$2.8 million and $2.0 million for the quarter and nine months ended June 30,
1998, respectively, as compared to the same periods a year ago. Excluding the $6
million of rate recovery of interest expense related to the IRS audits, as noted
above (this rate recovery is offset 100% by interest expense, included below the
operating income line), the Utility segment's pretax operating income decreased
$8.0 million for the nine months ended June 30, 1998. The decrease in operating
income before income taxes for the quarter and nine months ended June 30, 1998,
resulted primarily from the negative impact of warmer weather and the related
decrease in normalized gas usage per customer account. Partly offsetting this
decrease in operating income before income taxes, the Utility segment continues
to experience decreases in O&M expense (a 8.4% and 5.7% decline for the quarter
and nine months ended June 30, 1998, respectively) relating primarily to
benefit, labor and outside services expense reduction.
The negative impact of warmer weather directly impacts the operating
income of the Pennsylvania jurisdiction since Pennsylvania does not have a WNC.
The impact of the warmer weather experienced by the New York jurisdiction was
tempered by the WNC through May billing cycles each year. Thus, about half of
May's sales, as well as June's sales are not covered by the WNC. During the
prior year this segment benefited during the non-weather normalized period as a
result of the colder weather, while this year the warmer weather negatively
impacted the Utility's operating results.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
Degree Days
Three Months Ended June 30:
- --------------------------
Percent (Warmer) Colder
in 1998 Than
Normal 1998 1997 Normal 1997
- ---------------------------------------------------------------------
Buffalo 919 738 1,151 (19.7) (35.9)
Erie 880 695 1,125 (21.0) (38.2)
Nine Months Ended June 30:
- -------------------------
Buffalo 6,525 5,817 6,601 (10.9) (11.9)
Erie 6,123 5,338 6,248 (12.8) (14.6)
- ---------------------------------------------------------------------
Pipeline and Storage.
Operating income before income taxes for the Pipeline and Storage
segment decreased $0.4 million and $1.2 million for the quarter and nine months
ended June 30, 1998, respectively, as compared with the same periods a year ago.
For both the quarter and nine months ended, the decrease is primarily
attributable to lower revenue from unbundled pipeline sales and open access
transportation, offset in part by lower O&M expense. The decrease in O&M expense
for the quarter is primarily the result of lower employee benefits and outside
service costs. The decrease in O&M expense for the nine months ended June 30,
1998, is primarily the result of lower employee benefits, labor and outside
service costs, as well as the reversal of a portion of a reserve set up in a
prior period for the Laurel Fields Storage Project. The Pipeline and Storage
segment was able to recapture approximately $1.0 million by selling preliminary
engineering, survey, environmental and archeological information from the Laurel
Fields Project to the Independence Pipeline Company, which intends to build a
370-mile interstate pipeline system designed to transport approximately 900,000
dekatherms (Dth) per day of natural gas from Defiance, Ohio to Leidy,
Pennsylvania (the Independence Pipeline project is discussed further under
"Investing Cash Flow", subheading "Pipeline and Storage"). Partially offsetting
these decreases in O&M expense, was the establishment of reserves for
preliminary survey and investigation costs associated with the Niagara Expansion
and Green Canyon projects. (The Niagara Expansion and Green Canyon projects are
discussed further under "Investing Cash Flow", subheading "Pipeline and
Storage"). Certain of these costs for which reserves have been established may
be recovered at a future date.1 In addition, Supply Corporation recognized a
base gas loss at its Zoar Storage Field. In total, these three items amounted to
$3.7 million, pretax.
While transportation volumes in this segment decreased 0.2 Bcf and
increased 0.6 Bcf, respectively, for the quarter and nine months ended June 30,
1998, the change in volumes did not have a significant impact on earnings as a
result of Supply Corporation's straight fixed-variable (SFV) rate design.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
Exploration and Production.
Operating income before income taxes from the Company's Exploration and
Production segment increased $3.5 million for the quarter ended June 30, 1998,
compared with the same period a year ago. This increase resulted from higher oil
and gas revenues during the quarter, a net gain on hedging activities (versus a
loss in the prior year) and lower depletion expense. These items were partly
offset by higher lease operating expense. Oil and gas revenues increased mainly
as a result of West Coast production from the properties acquired in the
Whittier, HarCor and BER acquisitions. Increases in Gulf Coast gas production as
well as higher overall gas prices also helped increase revenues for the quarter
while significantly lower oil prices reduced the current quarter's revenues (see
tables below for production and price information). The decrease in depletion
expense is the result of a lower depletion rate, determined under the units of
production method, because of the significant addition to reserves resulting
from the Whittier, HarCor and BER acquisitions, as well as the continued success
in adding new reserves from exploratory drilling. The change in depletion
method, made effective October 1, 1997, from the gross revenue method to the
units of production method, also lowered depletion expense for the quarter. See
further discussion of this change in accounting method in Note 1 - "Summary of
Significant Accounting Policies." Lease operating expense increased mainly
because of the additional expenses of operating the newly acquired properties.
For the nine months ended June 30, 1998, operating income before income
taxes for the Exploration and Production segment decreased $137.3 million,
compared with the same period a year ago. Excluding the $129 million non-cash
impairment of this segment's oil and gas assets, as discussed previously,
operating income before income taxes decreased $8.3 million as compared with the
prior year's period. This decrease resulted from lower oil and gas revenues and
higher lease operating expense offset in part by lower depletion expense and
lower hedging losses. Gas revenues are lower as a result of lower prices and
overall production in the Gulf Coast, offset in part by increased prices and
production in the West Coast. Oil revenues are down overall primarily as a
result of the significant decrease in prices. The decrease in depletion expense
and increase in lease operating expense was mainly caused by the reasons noted
in the quarter discussion above.
Hedging activities resulted in a net pretax gain of $0.9 million and a
net pretax loss of $6.9 million for the quarter and nine months ended June 30,
1998, respectively. For the quarter and nine months ended June 30, 1997, hedging
activities resulted in pretax losses of $2.1 million and $18.1 million,
respectively. Refer to further discussion of the Company's hedging activities
under "Financing Cash Flow" and in Note 4 - Derivative Financial Instruments.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
PRODUCTION VOLUMES
Exploration and Production.
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
1998 1997 % Change 1998 1997 % Change
---- ---- -------- ---- ---- --------
Gas Production - (MMcf)
Gulf Coast 8,552 8,137 5.1 21,253 23,658 (10.2)
West Coast 697 293 137.9 1,109 844 31.4
Appalachia 1,193 1,246 (4.3) 3,677 3,820 (3.7)
----- ----- ------ ------
10,442 9,676 7.9 26,039 28,322 (8.1)
====== ===== ====== ======
Oil Production - (Thousands of Barrels)
Gulf Coast 312 327 (4.6) 921 1,073 (14.2)
West Coast 586 124 372.6 780 374 108.6
Appalachia 2 2 - 8 7 14.3
--- --- ---- -----
900 453 98.7 1,709 1,454 17.5
=== === ===== =====
WEIGHTED AVERAGE PRICES
Exploration and Production.
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
1998 1997 % Change 1998 1997 % Change
---- ---- -------- ---- ---- --------
Weighted Avg. Gas Price/Mcf
Gulf Coast $2.29 $2.19 4.6 $2.52 $2.68 (6.0)
West Coast $2.19 $1.53 43.1 $2.17 $1.81 19.9
Appalachia $2.72 $2.30 18.3 $2.95 $2.92 1.0
Weighted Average $2.33 $2.18 6.9 $2.57 $2.69 (4.5)
Weighted Average After
Hedging $2.32 $2.03 14.3 $2.25 $2.21 1.8
Weighted Avg. Oil Price/bbl
Gulf Coast $12.70 $19.36 (34.4) $15.54 $22.16 (29.9)
West Coast $ 8.75 $16.79 (47.9) $10.10 $19.21 (47.4)
Appalachia $14.85 $19.61 (24.3) $17.00 $22.03 (22.8)
Weighted Average $10.13 $18.66 (45.7) $13.06 $21.40 (39.0)
Weighted Average After
Hedging $11.22 $17.13 (34.5) $13.78 $18.31 (24.7)
International.
Operating income before income taxes for the International segment increased
$1.6 million and $10.1 million for the quarter and the nine-months ended June
30, 1998, respectively, compared with the same periods a year ago. This
increase, as well as the significant revenue increase shown in the "Operating
Revenue" table above, reflects current quarter and year-to-date results
including 100% of the revenues and pretax operating income of SCT, as well as
100% of the revenues and pretax operating income of PSZT for February through
June 1998. Both SCT and PSZT have district heating and power generation
operations located in the northern part of the Czech Republic. Horizon first
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
acquired a 34% interest in SCT in April 1997 and increased its ownership to
82.7% as of June 30, 1998. In January 1998, Horizon signed an agreement to
acquire 75.3% of the outstanding shares of PSZT. The acquisition was completed
in February 1998 and Horizon owned 85.9% of PSZT as of June 30, 1998. The
minority interests in SCT and PSZT are shown separately on the Consolidated
Statement of Income after operating results. The prior year's June quarter
reflected no operating income from SCT or PSZT. The following table summarizes
the heating sales and electricity sales of SCT and PSZT for the quarter and
fiscal year ended June 30, 1998:
Three Months Ended June 30:
Heating Sales 1,442,736 Gigajoules* (1.4 Bcf Equivalent)
Electricity Sales 252,931 Megawatts
Nine Months Ended June 30:
Heating Sales 6,139,033 Gigajoules*(5.8 Bcf Equivalent)
Electricity Sales 496,331 Megawatts
*Gigajoules = one billion joules. A joule is a unit of energy.
Because of the change in the nature of operations of the International
segment during the past year, operating income comparisons between the current
period and prior periods may not be meaningful. Future revenues from district
heating operations are expected to fluctuate with changes in weather. The
Company expects that rates charged for heating operations in the Czech Republic
will continue to be monitored by the Czech Ministry of Finance.1
Other Nonregulated.
Operating income before income taxes associated with this segment
decreased $1.1 million for the quarter ended June 30, 1998 and increased $0.6
million for the nine-months ended June 30, 1998, compared with the same periods
a year ago. The decrease for the quarter can be primarily attributed to
increased operating expenses in the Company's timber operations, as well as
decreased margin and increased operating expense for NFR, the Company's gas
marketing subsidiary. The increase for the nine-months ended can be primarily
attributed to increased performance by the Company's timber operations offset by
decreased margin and increased O&M for NFR.
Income Taxes.
Income taxes decreased $1.4 million and $44.6 million, respectively,
for the quarter and nine months ended June 30, 1998, primarily as a result of a
decrease in pretax income (pretax income before cumulative effect, for the nine
months ended June 30, 1998).
Other Income.
Other income increased $4.4 million and $29.8 million, respectively,
for the quarter and nine months ended June 30, 1998. The increase in other
income for the quarter resulted from a buyout of a firm transportation agreement
by a Pipeline and Storage segment customer in the amount of $2.5 million which
was received by Supply Corporation during the quarter. In addition, other income
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- -----------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
for the quarter includes a gain of approximately $1.2 million associated with
U.S. dollar denominated debt carried on the balance sheet of PSZT (see further
discussion regarding this PSZT debt in Item 1, Note 3- Capitalization), as well
as interest income on temporary cash investments of SCT and PSZT. The increase
for the nine months is due to the same reasons noted in the quarter (the gain on
U.S. dollar denominated debt was $3.4 million for the nine month period), as
well as $18.5 million of interest income which resulted from the recent
settlement of IRS audits.
Interest Charges.
Total interest charges increased $6.4 million and $21.5 million for the
quarter and nine months ended June 30, 1998, respectively. Other interest
increased $2.2 million and $14.9 million for the quarter and nine-month period,
respectively. The increase for both the quarter and nine-month period relates
primarily to an increase in the average amount of short-term debt outstanding.
Short-term debt was utilized to fund the acquisition activities in the
International and Exploration and Production segments, until a portion was
replaced with long-term debt in May 1998 (see below). In addition, the increase
in other interest for the nine months resulted from interest expense related to
the previously mentioned settlement of IRS audits (total interest expense
related to the IRS audits amounted to $11.7 million).
Interest on long-term debt increased $4.2 million and $6.6 million for
the quarter and nine-month period, respectively, mainly because of a higher
average amount of long-term debt outstanding compared to the same periods a year
ago. Contributing to the higher outstanding debt balance was the issuance of the
$200.0 million of medium-term notes in May 1998. Also contributing to the higher
outstanding debt balance was the borrowings of Horizon's subsidiaries, PSZT and
SCT, as well as approximately $53 million of HarCor's senior secured debt. (See
further discussion regarding HarCor debt in Item 1, Note 3-Capitalization and
Note 6-Acquisition of HarCor Energy, Inc.).
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary sources of cash during the nine-month period
consisted of cash provided by operating activities and short-term bank loans and
commercial paper.
Operating Cash Flow.
Internally generated cash from operating activities consists of net
income available for common stock, adjusted for non-cash expenses, non-cash
income and changes in operating assets and liabilities. Non-cash items include
the cumulative effect of a change in accounting for depletion, the impairment of
oil and gas producing properties, depreciation, depletion and amortization,
deferred income taxes, minority interest in foreign subsidiaries 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
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
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 $242.6 million for
the nine months ended June 30, 1998, a decrease of $28.3 million compared with
$270.9 million provided by operating activities for the nine months ended June
30, 1997. The majority of this decrease occurred in the Utility segment. The
Utility segment experienced a decrease in cash receipts from gas sales and
transportation service (sales were down mainly due to warmer weather), an
increase in cash payments for property, franchise and other taxes (primarily due
to timing) and an increase in interest payments (primarily related to the recent
settlement of IRS audits). These decreases to cash were partially offset by
lower cash payments for gas purchases.
Partly offsetting the decreases experienced by the Utility segment was
an increase in cash provided by operating activities of the Pipeline and
Storage, Exploration and Production and International segments. The Pipeline and
Storage segment experienced an increase in cash provided by operating activities
primarily because of interest income resulting from the recent settlement of IRS
audits combined with cash received from a customer resulting from a buyout of a
firm transportation agreement. The Exploration and Production segment
experienced an increase in cash provided from operations primarily because of
interest income resulting from the aforementioned IRS settlement, a decrease in
cash outlays for hedging transactions as well as a decrease in cash outlays for
federal taxes. These increases to cash were partly offset by lower cash receipts
from the sale of oil and gas combined with higher operating costs (primarily due
to the Whittier, HarCor and BER acquisitions). The increase to cash provided by
operating activities in the International segment is a result of the operations
of SCT and PSZT.
Investing Cash Flow.
Capital Expenditures and Other Investing Activities
- ---------------------------------------------------
Capital expenditures represent the Company's additions to property,
plant and equipment and are exclusive of other investments in corporations
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
(stock acquisitions) and/or partnerships. Such investments are treated
separately in the Statement of Cash Flows and further discussed in the segment
discussion below.
The Company's capital expenditures and other investments totaled $441.6
million during the nine months ended June 30, 1998. The following table
summarizes the Company's capital expenditures and other investments by business
segment:
Other Total
Capital Investments Capital
Expenditures through Expenditures and
through 6/30/98 6/30/98 Other Investments
--------------- ----------- -----------------
Utility $ 36.3 $ - $ 36.3
Pipeline and Storage 15.2 5.2 20.4
Exploration and Production 249.6 32.4 282.0
International 9.4 88.8 98.2
Other Nonregulated 4.7 - 4.7
------ ------ ------
$315.2 $126.4 $441.6
====== ====== ======
Utility
- -------
The bulk of the Utility capital expenditures were made for
replacement of mains and main extensions, as well as for the replacement of
service lines.
Pipeline and Storage
- --------------------
The bulk of the Pipeline and Storage capital expenditures were made
for additions, improvements, and replacements to this segment's transmission and
storage systems. Approximately $2.3 million was spent on the 1998 Niagara
Expansion Project. As part of this expansion, Supply Corporation began
transportation service for an additional 25,000 Dth per day in November 1997. In
April 1998, Supply Corporation received Federal Energy Regulatory Commission
(FERC) approval concerning an additional 23,000 Dth per day expansion of firm
winter only capacity. Supply Corporation anticipates beginning transportation
service for the additional 23,000 Dth per day in November 1998.1 As there has
not been much interest in further expansion in this area at this time, the
Company established a reserve in March 1998 for approximately $1.7 million
(pretax) related to preliminary survey and investigation costs associated with
the proposed 1999 Niagara Expansion Project.
Seneca Independence Pipeline Company (SIP) has made a $5.2 million
investment in 1998 representing a one-third general partnership interest, in
Independence Pipeline Company, a Delaware general partnership. This investment
was financed with short-term borrowings. Independence Pipeline Company intends
to build a 370 mile natural gas Pipeline from Defiance, Ohio to Leidy,
Pennsylvania at an estimated cost of $675 million.1 If the Independence Pipeline
Project is not constructed, SIP's share of the development costs (including
SIP's investment in Independence Pipeline Company) is estimated not to exceed
$6.0 million to $8.0 million.1
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
In November 1996, Supply Corporation entered into a Memorandum of
Understanding (the MOU) with Green Canyon Gathering Company, 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,
at an estimated total cost of approximately $200 million.1 The MOU has been
amended several times since then. In April 1998, Green Canyon Gathering Company
notified Supply Corporation that it wished to withdraw from the project. Based
on a lack of shippers willing to contract for this service, the Company had
already decided that it would be prudent to establish a reserve of approximately
$1.0 million (pretax) for preliminary survey and investigation costs incurred on
the project. This reserve was recorded in March 1998.
Exploration and Production
- --------------------------
In March 1998, Seneca acquired properties in the Midway-Sunset and
North Lost Hills field in the San Joaquin Basin of California from the Whittier
Trust Company for approximately $140 million. This acquisition is included in
the Exploration and Production capital expenditure amount in the table above.
In June 1998, Seneca acquired the oil and gas assets of the BER,
which are located in the South Lost Hills Field in the San Joaquin Valley near
Bakersfield, California. The purchase price was approximately $30.0 million for
BER's 25% ownership. These properties produce gas and high gravity oil, include
a gas processing plant and associated pipelines, and provide opportunities for
additional drilling and development.1 This acquisition is included in the
Exploration and Production capital expenditure amount in the table above.
Other Exploration and Production segment capital expenditures
included approximately $63.2 million on the offshore program in the Gulf of
Mexico, including offshore drilling expenditures, offshore construction, lease
acqusition costs and geological and geophysical expenditures. Offshore
exploratory drilling was concentrated on High Island 179, High Island A356,
Vermilion 309 and South March Island 122. Offshore construction occurred
primarily at West Cameron 540 and Vermilion 309. Lease acquisition costs
resulted from successful bidding on fourteen state of Texas and two federal
lease tracts in the Gulf of Mexico. Offshore geological and geophysical
expenditures were made for purchases of 3-D seismic data.
The remaining $16.4 million capital expenditures included onshore
drilling and construction costs for wells located in Louisiana, Texas and
California as well as onshore geological and geophysical costs, including the
purchase of certain 3-D seismic data.
In May 1998, Seneca West Corporation (Seneca West), a wholly-owned
subsidiary of Seneca, completed a tender offer (an offer of $2.00 per share) for
the outstanding shares of HarCor. The tender offer was commenced pursuant to the
terms of an Agreement and Plan of Merger among HarCor, Seneca and Seneca West
which provided for the merger of Seneca West with and into HarCor following the
successful consummation of the tender offer. Approximately 95% of the
outstanding shares of HarCor common stock were tendered in accordance with the
tender offer. Accordingly, Seneca West has been merged with and into HarCor and
the common stock that was not purchased pursuant to the tender offer was
converted in the merger into the right to receive $2.00 per share.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
The cost of the tender offer and subsequent conversion of the remaining shares
of HarCor was approximately $32.4 million.
As a result of this acquisition, the Consolidated Balance Sheet at June
30, 1998 includes approximately $53 million of HarCor's senior secured debt.
This debt is payable semi-annually on January 15 and July 15 of each year. The
debt is redeemable, in whole or in part, at the option of HarCor at any time on
or after July 15, 1999 at the following redemption prices: 1999-110% of the
principal amount; 2000-107% of the principal amount; 2001 and thereafter - 100%
of the principal amount. An opening balance sheet adjustment has been made such
that the effective interest rate recognized by the Company regarding this debt
will be approximately 5.875%.
The HarCor oil and gas properties are the remaining 75% ownership of
the same properties as the BER acquisition discussed above, located on the west
side of the San Joaquin Basin in California.
The acquisitions of Whittier, HarCor and BER were initially financed
using short-term borrowings. Subsequently, approximately $120 million of
short-term borrowings were replaced with long-term borrowings. These
acquisitions complement the Exploration and Production segment's reserve mix,
bringing its new reserve base to approximately 712 Bcf equivalent, of which 55%
is oil and 45% is gas.
Capital expenditures for the quarter ended September 30, 1998 in the
Exploration and Production segment are expected to be approximately $40.0
million with approximately 84% being spent in the Gulf Coast region.1
International
- -------------
In Fiscal 1998, Horizon B.V. acquired additional shares of SCT
thereby increasing its equity interest in SCT to 82.7% as of June 30, 1998. The
cost of acquiring these additional shares was approximately $24.9 million.
In February 1998, Horizon B.V. acquired a 75.3% equity interest in
PSZT and subsequently increased its ownership interest to 85.9% as of June 30,
1998. The cost of acquiring the shares of PSZT was approximately $63.9 million.
Short-term borrowings were initially used to finance the acquisition
costs of SCT and PSZT. Subsequently, approximately $80 million of short-term
borrowings were replaced with long-term borrowings.
The bulk of the International segment capital expenditures were made
by PSZT for the reconstruction of boilers at its heating plant to comply with
stricter clean air standards. Short-term borrowings and cash from operations
were used to finance these capital expenditures. Going forward, it is
anticipated that up to an additional $38 million (approximately $6 million for
the remaining three months of 1998) will be spent on this reconstruction
project, which will extend into fiscal 2000.1 The Company anticipates financing
these expenditures with short-term borrowings.1
Horizon B.V.'s investment in the Czech Republic is valued in Czech
Korunas, and as such, this investment is subject to currency exchange risk when
the Czech Korunas are translated into U.S. Dollars. During the nine months ended
June 30, 1998, the Czech Koruna increased in value in relation to
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
the U.S. dollar, resulting in a $1.0 million positive adjustment to the
Cumulative Translation Adjustment. Further valuation changes to the Czech Koruna
would result in corresponding positive or negative adjustments to the Cumulative
Translation Adjustment. Management cannot predict whether the Czech Koruna will
increase or decrease in value against the U.S. Dollar.1
Other Nonregulated
- ------------------
Other Nonregulated capital expenditures consisted primarily of
equipment and timber purchases for Highland's existing sawmill and kiln
operations as well as the purchase of a new sawmill in Brookville, Pennsylvania.
The capital expenditures also included the purchase of furniture, equipment and
computer hardware and software for the office location of the NFR's gas
marketing operation.
Other
- -----
Other cash provided by or used in investing activities primarily
reflects cash received on the sale of various subsidiaries investments in
property, plant and equipment, cash received on the sale of the Company's
interest in Enerchange, L.L.C., a natural gas hub partnership, and cash used to
make an initial investment in Independence Pipeline Company.
The capital expenditure programs of the Company's subsidiaries are
under continuous review. The amounts are subject to modification for
opportunities in the natural gas industry such as the acquisition of attractive
oil and gas properties or storage facilities and the expansion of transmission
line capacities. While the majority of capital expenditures in the Utility
segment are necessitated by the continued need for replacement and upgrading of
mains and service lines, the magnitude of future capital expenditures in the
Company's other business segments depends, to a large degree, upon market
conditions.1
Financing Cash Flow.
Consolidated short-term debt increased by $109.5 million during the
first nine months of fiscal 1998. The Company continues to consider short-term
bank loans and commercial paper important sources of cash for temporarily
financing capital expenditures and investments in corporations and/or
partnerships, gas-in-storage inventory, unrecovered purchased gas costs,
exploration and development expenditures and other working capital needs. In
addition, the Company considers 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.
At June 30, 1998, the Company had authorization from the SEC under a
shelf registration filed pursuant to the Securities Act of 1933, to issue and
sell up to $200.0 million of debentures and/or medium-term notes. In March 1998,
the Company obtained authorization from the SEC, under the Public Utility
Holding Company Act of 1935, to issue, in the aggregate, long-term debt
securities and equity securities amounting to $2.0 billion during the order's
authorization period, which extends to December 31, 2002.
In May 1998, the Company issued $200.0 million of 6.303% medium-term
notes due to mature in May 2008. After deducting underwriting discounts and
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
commissions, the net proceeds to the Company amounted to $198.8 million. The
Company used the proceeds to reduce short-term debt which resulted from
acquisition activities in the International and Exploration and Production
segments.
The Company's indenture contains covenants which limit, among other
things, the incurrence of funded debt. Funded debt basically is indebtedness
maturing more than one year after the date of issuance. Because of the
impairment of oil and gas properties recorded by the Company in March 1998,
these covenants will restrict the Company's ability to issue substantial amounts
of additional funded debt, with certain exceptions, until the third quarter of
fiscal 1999. This will not, however, limit the Company's issuance of funded debt
to refund existing funded debt.
The Company has adequate financing resources available to meet
expected operating and capital requirements.1 At June 30, 1998, the Company had
regulatory authorizations and unused short-term credit lines that would have
permitted it to borrow an additional $548.1 million of short-term debt.
Seneca has entered into certain price swap agreements to manage 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, 1998, Seneca utilized natural gas
and crude oil swap agreements with notional amounts of 6.0 equivalent Bcf and
219,000 equivalent bbl, respectively. These hedging activities resulted in the
recognition of a pretax gain of approximately $0.9 million. For the nine months
ended June 30, 1998, Seneca utilized natural gas and crude oil swap agreements
with notional amounts of 19.1 equivalent Bcf and 672,000 equivalent bbl,
respectively. These hedging activities resulted in the recognition of a pretax
loss of approximately $6.9 million. These hedging gains or losses are offset by
lower or higher prices received for actual natural gas and crude oil production.
At June 30, 1998, Seneca had natural gas swap agreements outstanding
with a notional amount of approximately 27.9 equivalent Bcf at prices ranging
from $2.00 per Mcf to $2.84 per Mcf. The weighted average fixed price of these
swap agreements is approximately $2.31 per Mcf.
Seneca also had crude oil swap agreements outstanding at June 30,
1998 with a notional amount of 354,000 equivalent bbl at prices ranging from
$17.50 per bbl to $20.56 per bbl. The weighted average fixed price of these swap
agreements is approximately $19.35 per bbl.
NFR participates in the natural gas futures market to manage a
portion of the market risk associated with fluctuations in the price of natural
gas. Such futures are not held for trading purposes. During the quarter ended
June 30, 1998, NFR recognized a minimal pretax gain related to such futures
contracts. For the nine months ended June 30, 1998, NFR recorded a pretax gain
of approximately $1.3 million. Since these futures contracts qualify and have
been designated as hedges, any gains or losses resulting from market price
changes are substantially offset by the related commodity transaction.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
At June 30, 1998, NFR had long positions in the futures market
amounting to a notional amount of 9.3 Bcf at prices ranging from $2.04 per Mcf
to $2.96 per Mcf. The weighted average contract price of these futures contracts
is approximately $2.48 per Mcf. NFR had short positions in the futures market
amounting to a notional amount of 2.9 Bcf at prices ranging from $2.11 per Mcf
to $2.77 per Mcf. The weighted average contract price of these futures contracts
is approximately $2.51 per Mcf.
In addition, the Company has SEC authority to enter into certain
hedging transactions related to its borrowings. For further discussion, refer to
Note 4 - Derivative Financial Instruments.
The Company's credit risk is the risk of loss that the Company would
incur as a result of nonperformance by counterparties pursuant to the terms of
their contractual obligations related to derivative financial instruments. 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.1 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 change materially the Company's present liquidity
position, nor have a material adverse effect on the financial condition of the
Company at this time.1
RATE MATTERS
Utility Operation.
New York Jurisdiction
- ---------------------
In November 1995, Distribution Corporation filed in its New York jurisdiction a
request for an annual 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 and October 1, 1997, Distribution Corporation received
annual base rate increases of $7.2 million. 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. As a result of this sharing mechanism, Distribution Corporation
recorded an estimated cumulative refund provision to its customers of $3.0
million ($2.0 million after-tax) during the fourth quarter of 1997. An
additional $4.9 million ($3.2 million after-tax) was accrued during the nine
months ended June 30, 1998. The final amount owed to customers, if any, will not
be known until the conclusion of the settlement period. Recently, management has
been meeting with the PSC staff and other interested parties on modifying and/or
extending the current
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
two-year rate settlement that ends on September 30, 1998. The Company cannot
predict the outcome at this time.
By an order issued on September 4, 1997, the PSC directed the state's
local distribution companies (LDCs) to file a "plan for competition" addressing
issues relating to disposition of upstream assets in light of anticipated growth
in small volume transportation conversions. On April 1, 1998, Distribution
Corporation filed its plan. Distribution Corporation's plan responds to
questions posed by the PSC on such issues as upstream capacity contracts,
encouraging competition, assessing strandable costs and designing remedies, if
necessary. In addition, Distribution Corporation explained that, in order to
assure reliability, maintain operational flexibility and avoid stranded costs,
upstream capacity currently held for sales obligations should be allocated to
marketers serving customers converting to transportation service. This
proceeding remains pending before the PSC.
On April 3, 1998, Distribution Corporation filed comments in a PSC
generic proceeding addressing gas transportation rates for electric generators.
This case arose in response to concerns by the PSC regarding the effects of gas
transportation costs on electric rates ultimately paid by retail customers.
Distribution Corporation argued, among other things, that the current rate
setting policy, established in 1991, should remain unchanged for LDCs facing
competitive bypass threats. Distribution Corporation believes that the PSC may
be focusing its attention on transfer pricing arrangements between gas and
electric divisions of combination utilities. Staff for the PSC has informally
expressed that existing generation and co-generation contracts will not be
disturbed by the outcome of this proceeding.
The PSC issued a notice on April 7, 1998 that it is considering the
revision of its regulations governing the operation of the Gas Adjustment Clause
(GAC). As described by the PSC, the revised rules would allow the GAC to more
accurately reflect gas prices. The revised rules would also allow LDCs to
recover risk management costs through the GAC. On June 5, 1998, Distribution
Corporation filed comments in the GAC docket raising several concerns with the
PSC's proposed revisions.
New York's gas industry restructuring effort continues to develop at a
slow pace. As of July 15, 1998, 35,811 small volume customers across the state
chose aggregator services over their utility. In Distribution Corporation's
service territory, 4,572 small volume customers (out of over 500,000) are
purchasing gas from fifteen aggregators, for a total annual load of just over
3.6 Bcf. The Distribution Corporation's marketing affiliate, NFR, is one of the
participating aggregators.
Pennsylvania Jurisdiction
- -------------------------
Distribution Corporation currently does not have a rate case on file
with the Pennsylvania Public Utility Commission (PaPUC). Management will
continue to monitor its financial position in the Pennsylvania jurisdiction to
determine the necessity of filing
a rate case in the future.
Effective October 1, 1997, Distribution Corporation commenced a PaPUC
approved customer choice pilot program called Energy Select. Energy Select,
which will last until April 1, 1999, allows approximately 19,000 small
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
commercial and residential customers of Distribution Corporation in the greater
Sharon, Pennsylvania area to purchase gas supplies from qualified, participating
non-utility suppliers (or marketers) of gas. Distribution Corporation is not a
supplier of gas in this pilot. 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. NFR is a participating
supplier in Energy Select.
A gas restructuring bill (Senate Bill No. 943) was introduced in the
Pennsylvania General Assembly proposing to amend the Public Utility Code to
allow all retail customers, including residential, the ability to choose their
own gas supplier. Senate Bill No. 943 was not enacted into law in 1997. However,
in December 1997, the Chairman of the PaPUC convened a collaborative of gas
industry interests to develop a consensus bill using Senate Bill No. 943 as the
starting point. As a member of the utility interest group, Distribution
Corporation is and will continue to be an active participant in the
collaborative. The Company is not able to predict the outcome of the bill.
Base rate adjustments in both the New York and Pennsylvania
jurisdictions do not reflect the recovery of purchased gas costs. Such costs are
recovered through operation of the purchased gas adjustment clauses of the
regulatory authorities having jurisdiction.
Pipeline and Storage. Supply Corporation currently does not have a rate case on
file with the FERC. Its last case was settled with the FERC in February 1996. As
part of that settlement, Supply Corporation agreed not to seek recovery of
revenues related to certain terminated service from storage customers until
April 1, 2000, as long as the terminations were not greater than approximately
30% of the terminable service. 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
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 may be in the range of $13.7
million to $14.7 million.1 At June 30, 1998, Distribution Corporation has
recorded the minimum liability of $13.7 million. The approximate 50% increase in
the liability since September 30, 1997 mainly relates to changing circumstances
and revised estimates for one particular former manufactured gas plant site. The
ultimate cost to Distribution Corporation with respect to the remediation of all
sites will depend on such factors as the remediation plan selected, the extent
of the site contamination, the number of additional
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
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.
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 1997 Form 10-K.
New Accounting Pronouncements. In 1998, the Financial Accounting Standards Board
issued new pronouncements that will impact the Company: Statement of Financial
Accounting Standards (SFAS) No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits" and SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." For further discussion refer to Note 1 -
"Summary of Significant Accounting Policies."
Year 2000. The Company is in the process of preparing all of its computer
systems to be Year 2000 compliant. Management has completed a detailed analysis
of its computer systems to identify the systems that could be affected and has
developed a conversion plan to resolve the issue. For various vendor supplied
software, the Company is in the process of obtaining upgrades that are Year 2000
compliant. For internally developed software, changes to such software are being
made and tested. The cost of upgrading both vendor supplied and internally
developed systems is being expensed as incurred. Management estimates that such
cost will total approximately $2.2 million, of which approximately $1.0 million
has been incurred to date and $1.2 million remains to be spent.1 The Company's
goal is to have its computer systems Year 2000 compliant early in calendar
1999.1 However, the Company has no control over the systems of third parties
with whom it interfaces. While major third parties have been put on notice that
the Company expects their products and services to perform as expected after
January 1, 2000, the Company cannot predict the potential adverse consequences
to the Company that could result if such third parties are not Year 2000
compliant.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
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- --------------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectations, beliefs or
projections will result or be achieved or accomplished. In addition to other
factors and matters discussed elsewhere herein, the following are important
factors that, in the view of the Company, could cause actual results to differ
materially from those discussed in the forward-looking 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
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 instrument
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
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- -----------------------------------------------------------------------
Results of Operations (Cont.)
----------------------------
16. Changes in accounting principles and/or the application of such principles
to the Company
17. Unanticipated problems related to the Company's internal Year 2000
initiative as well as potential adverse consequences related to third party
Year 2000 compliance.
The Company disclaims any obligation to update any forward-looking
statements to reflect events or circumstances after the date hereof.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Not applicable.
Part II. Other Information
- ---------------------------
Item 2. Changes in Securities
- ------------------------------
On April 1, 1998, the Company issued 700 unregistered shares of Company
common stock to the seven non-employee directors of the Company. These shares
were issued as partial consideration for the directors' service as directors
during the quarter ended June 30, 1998, pursuant to the Company's Retainer
Policy for Non-Employee Directors.
These transactions were exempt from registration by Section 4(2) of the
Securities Act of 1933, as amended, as transactions not involving any public
offering.
Item 5. Other Information
- --------------------------
Rule 14a-4(c) of the Securities and Exchange Commission's proxy rules
allows the Company to use discretionary voting authority to vote on a matter
coming before an annual meeting of stockholders which is not included in the
Company's proxy statement, if the Company does not have notice of the matter at
least 45 days before the date on which the Company first mailed its proxy
materials for the prior year's annual meeting of stockholders. In addition,
discretionary voting authority may generally also be used if the Company
receives timely notice of such matter (as described in the preceeding sentence)
and if, in the proxy statement, the Company describes the nature of such matter
and how the Company intends to exercise its discretion to vote on such matter.
Accordingly, for the 1999 Annual Meeting of Stockholders, which is scheduled to
be held on or about February 18, 1999, any such notice must be submitted to the
Company at the principal offices of the Company on or before November 16, 1998.
This requirement is separate and apart from the Securities and Exchange
Commission's requirements that a stockholder must meet in order to have a
stockholder proposal included in the Company's proxy statement and form of
proxy. As described in the Company's proxy statement for its 1998 Annual
Meeting, specific proposals of stockholders intended to be presented at the 1999
Annual Meeting of Stockholders must be received at the principal offices of the
Company no later than September 2, 1998 in order to be considered for inclusion
in the Company's proxy materials relating to that meeting.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
Exhibit
Number Description of Exhibit
------- ----------------------
(3i) Certificate of Amendment of Restated
Certificate of Incorporation dated April 2, 1998
(12) Statements regarding Computation of Ratios:
Ratio of Earnings to Fixed Charges for the
Twelve Months Ended June 30, 1998 and the
Fiscal Years Ended September 30, 1993
through 1997.
(27.1) Financial Data Schedule for the Nine Months Ended
June 30, 1998.
(99) National Fuel Gas Company Consolidated Statement
of Income for the Twelve Months Ended June 30,
1998 and 1997.
(b) Reports on Form 8-K
Report on Form 8-K was filed on May 1, 1998.
Date of Report - April 29, 1998
Item 7 - Financial Statements and Exhibits
Exhibit - News Release of the Company Dated
April 29, 1998
<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 14, 1998
<PAGE>
EXHIBIT INDEX
(Form 10Q)
Exhibit 3(i) Certificate of Ammendment of Restated
Certificate of Incorporation dated April 2, 1998
Exhibit 12 Statements regarding Computation of Ratios:
Ratio of Earnings to Fixed Charges for the Twelve
Months Ended June 30, 1998 and the Fiscal Years Ended
September 30, 1993 through 1997.
Exhibit 27 Financial Data Schedule for the Nine Months Ended June 30, 1998.
Exhibit 99 National Fuel Gas Company Consolidated Statement of Income for
the Twelve Months Ended June 30, 1998 and 1997.
F I L E D
APR 3, 1998
Donna R. Hooks
Secretary of State
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
NATIONAL FUEL GAS COMPANY
DATED: April 2, 1998
The undersigned corporation, National Fuel Gas Company, having adopted
amendments to its certificate of incorporation, as heretofore restated and
amended (the "Restated and Amended Certificate"), pursuant to Section 14A:9-4(3)
of the New Jersey Business Corporation Act, hereby certifies as follows:
1. Name. The name of the corporation is NATIONAL FUEL GAS COMPANY
(the "Corporation").
2. Amendments. The Restated and Amended Certificate is further
amended in the following two respects: (i) Article FOURTH thereof is amended to
increase the number of authorized shares of common stock, par value $1.00 per
share, from 100,000,000 to 200,000,000 (the "Common Stock Amendment:); and (ii)
Article FOURTH thereof is further amended by deleting the provisions therein for
the former 3,200,000 shares of preferred stock, par value $25 per share, and
substituting therefor provisions establishing a new class of preferred stock,
consisting of 10,000,000 shares of preferred stock, par value $1.00 per share,
and correlative amendments are made to Articles FIFTH and SIXTH thereof to
reflect the newly created class of preferred stock (the "Preferred Stock
Amendment" and, collectively with the Common Stock Amendment, the "Amendments").
The text of the Amendments, in combined form, is annexed hereto as Appendix A.
3. Date of Shareholder Adoption. The date of adoption of these
Amendments by the shareholders of the Corporation was February 26, 1998.
4. Shares Entitled to Vote. The number of shares of the Corporation
entitled to vote on the Amendments was 38,237,435 shares of common stock, par
value $1.00 per share.
<PAGE>
5. Vote on Amendments. (A) the number of shares voted for and against
the Common Stock Amendment were as follows:
FOR - 29,700,741 Common Shares
AGAINST - 2,265,428 Common Shares
(B) The number of shares voted for and against the Preferred
Stock Amendment and the number of abstentions were as follows:
FOR - 18,323,995 Common Shares
AGAINST - 8,874,937 Common Shares
6. Effective Date. The Amendments shall become effective on the date of
filing.
IN WITNESS WHEREOF, the undersigned corporation has caused this
Certificate to be executed on its behalf by its duly authorized officer as of
the date first above written.
NATIONAL FUEL GAS COMPANY
By: /s/ P. C. Ackerman
P. C. Ackerman
Senior Vice President
<PAGE>
Appendix A
I. Article Fourth of the Restated Certificate of Incorporation
of National Fuel Gas Company is hereby amended in its entirety to read as
follows:
FOURTH: The total authorized capital stock of this corporation
shall consist of Ten Million (10,000,000) shares of Preferred Stock having the
par value of One Dollar ($1.00) per share and Two Hundred Million (200,000,000)
shares of Common Stock having the par value of One Dollar ($1.00) per share.
The designations and relative rights, powers, preferences and
limitations of the different classes of capital stock of this corporation, are
as follows:
1. Characteristics of Common Stock and Preferred Stock.
The Board of Directors shall have the authority to amend this
Certificate of Incorporation from time to time to divide the shares of the
Preferred Stock into one or more series and to determine the designation, the
number, and the special and relative rights, powers, preferences and limitations
of the shares of each series so created. For illustrative purposes only, the
foregoing power of the Board of Directors shall include, but shall not be
limited to, the determination of the following terms:
(a) the maximum number of shares to constitute each
such series, which may subsequently be increased or decreased (but not below the
number of shares of such series then outstanding) by resolution of the Board of
Directors, the distinctive designation thereof and the stated value thereof if
different from the par value thereof;
(b) whether the shares of each such series shall
have voting rights and, if such shares are given voting rights, the terms of
such voting rights, subject to the provisions of paragraph 7 hereof;
(c) the dividend rate or rates, if any, on the
shares of each such series or the manner in which such rate or rates shall be
determined, the conditions and dates upon which such dividends shall be payable,
the preference or relation that such dividends shall bear to the dividends
payable on any other class or classes or any other series of capital stock
(including whether such dividends shall be participating or non-participating
with respect to any other class or classes or any other series of capital
stock), whether such dividends shall be cumulative or noncumulative, and if
cumulative, the date or dates from which any such dividends shall be cumulative;
(d) whether the shares of each such series shall be
subject to redemption, and, if made subject to redemption, the time or times,
<PAGE>
price or prices and other terms, limitations, restrictions or conditions of such
redemption, including whether such redemption shall be made at the election of
the corporation or the holders of such shares;
(e) the relative amounts, and the relative rights or
preferences, if any, of payment in respect of shares of each such series which
the holders of shares of each such series shall be entitled to receive upon the
voluntary or involuntary liquidation, dissolution or winding-up of the
corporation, including whether such rights shall be limited or participating
with respect to shares of any other class or classes or any other series of
capital stock upon the voluntary or involuntary liquidation, dissolution or
winding up of the corporation;
(f) whether or not the shares of each such series
shall be subject to the operation of a retirement or sinking fund and, if so,
the terms and provisions relative to the operation of such retirement or sinking
fund;
(g) whether or not the shares of each such series
shall be convertible into, or exchangeable for, shares of any other class or
classes or any other series of capital stock, or other securities, whether or
not issued by the corporation, and if so convertible or exchangeable, the price
or prices or the rate or rates of conversion or exchange, the method, if any, of
adjusting any such price or prices or rate or rates and whether such shares
shall be convertible or exchangeable at the election of the corporation or the
holders of such shares;
(h) the limitations and restrictions, if any, to be
effective while any shares of each such series are outstanding, upon the payment
of dividends or the making of other distributions on, and upon the purchase,
redemption or other acquisition by the corporation of, the Common Stock or any
other class or classes or any other series of capital stock of the corporation
ranking junior to the shares of such series either as to dividends or upon
liquidation, dissolution or winding-up of the corporation;
(i) the conditions or restrictions, if any, to be
effective while any shares of each such series are outstanding, upon the
creation of indebtedness of the corporation or upon the issuance of any
additional stock (including additional shares of such series or of any other
class) ranking on a parity with or prior to the shares of such series as to
dividends or distribution of assets upon liquidation, dissolution or winding-up
of the corporation; and
(j) any other preference, relative, participating,
optional or other special rights, and the qualifications, limitations or
restrictions thereof, as shall not be inconsistent with law, this Article FOURTH
or any amendment creating such series.
Each share of Common Stock shall be equal in all respects to
every other share of the Common Stock. The Common Stock shall be subject to the
express terms of the Preferred Stock and any series thereof.
<PAGE>
2. Dividends on Preferred Stock.
No holder of outstanding shares of any series of the Preferred
Stock shall be entitled to receive any dividends thereon other than the
dividends provided therefor pursuant to paragraph 1 hereof.
3. Redemption and Repurchase of Preferred Stock
If, on or before the redemption date with respect to any
shares of any series of Preferred Stock that are subject to redemption, as fixed
or determined pursuant to paragraph 1 hereof, this corporation shall deposit
with a bank, trust company or other financial institution monies necessary for
the redemption of such shares, then, notwithstanding that any certificate for
such shares so redeemed shall not have been surrendered for cancellation, from
and after such redemption date, all rights and preferences with respect to such
shares so redeemed shall forthwith on such redemption date cease and terminate,
except only the right of the holders thereof to receive, out of the monies so
deposited, the amount payable upon redemption of such shares, without interest.
Any such monies so deposited by this corporation and unclaimed at the end of six
(6) years from such redemption date shall be repaid to this corporation upon its
request, after which repayment the holders of the shares so called for
redemption shall look only to this corporation for the payment thereof.
Nothing herein contained shall limit any legal right of this
corporation to purchase or otherwise acquire any shares of the Preferred Stock
to the extent permitted by law. All or any shares of Preferred Stock at any time
redeemed, purchased or otherwise acquired by this corporation may thereafter, in
the discretion of the Board of Directors, be reissued or otherwise disposed of
at any time or from time to time, to the extent and in the manner now or
hereafter permitted by law.
4. Dividends on Common Stock
Subject to the rights and preferences of each series of
Preferred Stock, as determined pursuant to paragraph 1 hereof, such dividends
(payable in cash, stock or otherwise) as may be determined by the Board of
Directors may be declared and paid on the Common Stock, but only out of funds
legally available for the payment of such dividends.
5. Distributions on Common Stock.
In the event of any liquidation, dissolution or winding up of
this corporation, and subject to the rights and preferences of each series of
Preferred Stock, as determined pursuant to paragraph 1 hereof, all assets and
funds of this corporation remaining after paying or providing for the payment of
<PAGE>
all creditors of this corporation shall be divided among and paid to the holders
of the Common Stock according to their respective shares.
6. Preemptive Rights.
No holder of shares of any stock of this corporation of any
class now or hereafter authorized shall have any right as such holder to
purchase, subscribe for or otherwise acquire any shares of stock of this
corporation of any class now or hereafter authorized, or any securities
convertible into or exchangeable for any such shares, or any warrants or other
instruments evidencing rights or options to subscribe for, purchase or otherwise
acquire any such shares, whether such shares, certificates, securities, warrants
or other instruments be unissued or issued and thereafter acquired by this
corporation and whether such shares and other instruments be issued for cash,
property, services, or by way of dividends or otherwise.
7. Voting Rights.
At all meetings of the stockholders of this corporation, the
holders of shares of Common Stock shall be entitled to one vote for each share
of Common Stock held by them respectively except as otherwise expressly provided
herein. The holders of shares of Preferred Stock shall have no right to vote and
shall not be entitled to notice of any meeting of stockholders of this
corporation nor to participate in any such meeting except as otherwise expressly
provided herein or in any amendment creating a series of Preferred Stock and
except for those purposes, if any, for which said rights cannot be denied or
waived under mandatory provisions of law that shall be controlling. If, and to
the extent that, the shares of any series of Preferred Stock are provided voting
rights in accordance with the provisions hereof, including the provision of such
voting rights in any amendment creating such series, each holder of shares of
such series of Preferred Stock shall be entitled to one vote for each
outstanding share of such series of Preferred Stock held by such holder.
8. Reclassification, etc.
From time to time, and without limitation of other rights and
powers of this corporation as provided by law, this corporation may reclassify
its capital stock and may create or authorize one or more classes or kinds of
stock ranking prior to or on a parity with or subordinate to the Preferred Stock
or may increase the authorized amount of the Preferred Stock or of the Common
Stock or of any other class of stock of this corporation or may amend, alter,
change or repeal any of the rights, privileges, terms and conditions of shares
of the Preferred Stock or of any series thereof then outstanding or of shares of
the Common Stock or of any other class of stock of this corporation, upon such
vote, given at a meeting called for that purpose, of its stockholders then
entitled to vote thereon as may be provided by law; provided that the consent of
the holders of shares of the Preferred Stock (or of any series thereof) required
by the provisions of any amendment creating any series of Preferred Stock or by
<PAGE>
applicable law, if any such consent be so required, shall have been obtained;
and provided further that the rights, privileges, terms and conditions of shares
of Common Stock shall not be subject to amendment, alteration, change or repeal
without such vote (given by written consent, or by vote at a meeting called for
that purpose), of the holders of Common Stock as may be provided by law.
9. Consideration for Shares
To the extent permitted by law, this corporation may, at any
time, and from time to time, issue and dispose of any of the authorized and
unissued shares of the Preferred Stock and Common Stock for such consideration
as may be fixed by the Board of Directors, or as may be determined in accordance
with a general formula established by the Board of Directors, or at not less
than such minimum consideration as the Board of Directors may authorize.
II. Paragraph 4(k) of Article FIFTH of the Restated
Certificate of Incorporation of the National Fuel Gas Company is hereby amended
in its entirety to read as follows:
(k) "Subsidiary" shall mean any corporation a majority of the
voting shares of which are at the time owned by this corporation or by other
subsidiaries of this corporation or by this corporation and other subsidiaries
of this corporation.
III. The phrase "voting separately as a class, pursuant to
paragraph 10 of Article FOURTH hereof" in the first paragraph of Article SIXTH
of the Restated Certificate of Incorporation of National Fuel Gas Company is
hereby deleted and replaced by the words "voting separately from the Common
Stock as provided in any amendment creating any series of Preferred Stock".
IV. The last paragraph of Article SIXTH of the Restated
Certificate of Incorporation of National Fuel Gas Company is hereby amended in
its entirety to read as follows:
Notwithstanding the foregoing and except as otherwise provided
by law, whenever the holders of shares of Preferred Stock shall have the right,
voting separately from the Common Stock, to elect directors of this corporation,
the number, election, term of office, filling of vacancies and other features of
such directorships shall be governed by the terms and provisions of any
amendment creating any series of Preferred Stock; and such directors so elected
shall not be divided into classes pursuant to this Article SIXTH. During the
prescribed term of office of any such directors, the Board of Directors shall
consist of such directors in addition to the number of directors determined as
provided in the first paragraph of this Article SIXTH.
EXHIBIT 12
<TABLE>
<CAPTION>
COMPUTATION OF RATIO OF
EARNINGS TO FIXED CHARGES
UNAUDITED
For the Twelve Fiscal Year Ended September 30
Months Ended ---------------------------------------------------------
June 30, 1998 1997 1996 1995 1994 1993
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS:
Income Before Interest Charges and Minority Interest
in Foreign Subsidiaries (2) $115,130 $169,783 $159,599 $128,061 $127,885 $125,742
Allowance for Borrowed Funds Used in Construction 142 346 205 195 209 174
Federal Income Tax 61,707 57,807 55,148 30,522 36,630 21,148
State Income Tax 7,271 7,067 7,266 4,905 6,309 2,979
Deferred Inc. Taxes - Net (3) (44,933) 3,800 3,907 8,452 4,853 16,919
Investment Tax Credit - Net (623) (665) (665) (672) (682) (693)
Rentals (1) 4,874 5,328 5,640 5,422 5,730 5,621
--------------------------------------------------------------------------
$143,568 $243,466 $231,100 $176,885 $180,934 $171,890
==========================================================================
FIXED CHARGES:
Interest & Amortization of Premium and
Discount of Funded Debt $48,980 $42,131 $40,872 $40,896 $36,699 $38,507
Interest on Commercial Paper and
Short-Term Notes Payable 10,840 8,808 7,872 6,745 5,599 7,465
Other Interest (2) 16,954 4,502 6,389 4,721 3,361 4,727
Rentals (1) 4,874 5,328 5,640 5,422 5,730 5,621
--------------------------------------------------------------------------
$81,648 $60,769 $60,773 $57,784 $51,389 $56,320
==========================================================================
RATIO OF EARNINGS TO FIXED CHARGES 1.76 4.01 3.80 3.06 3.52 3.05
</TABLE>
Notes:
(1) Rentals shown above represent the portion of all rentals (other than
delay rentals) deemed representative of the interest factor.
(2) The twelve months ended June 30, 1998 and, fiscal 1997, 1996, 1995, 1994
and 1993 reflect the reclassification of $1,716, $1,716, $1,716, $1,716,
$1,674 and $1,374 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
<PERIOD-TYPE> 09-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,171,854
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 261,103
<TOTAL-DEFERRED-CHARGES> 9,521
<OTHER-ASSETS> 237,739
<TOTAL-ASSETS> 2,680,217
<COMMON> 38,389
<CAPITAL-SURPLUS-PAID-IN> 412,925
<RETAINED-EARNINGS> 448,448
<TOTAL-COMMON-STOCKHOLDERS-EQ> 898,703
0
0
<LONG-TERM-DEBT-NET> 795,968
<SHORT-TERM-NOTES> 143,900
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 58,000
<LONG-TERM-DEBT-CURRENT-PORT> 153,437
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 630,209
<TOT-CAPITALIZATION-AND-LIAB> 2,680,217
<GROSS-OPERATING-REVENUE> 1,076,116
<INCOME-TAX-EXPENSE> 25,085
<OTHER-OPERATING-EXPENSES> 981,252
<TOTAL-OPERATING-EXPENSES> 1,006,337
<OPERATING-INCOME-LOSS> 69,779
<OTHER-INCOME-NET> 32,413
<INCOME-BEFORE-INTEREST-EXPEN> 102,192
<TOTAL-INTEREST-EXPENSE> 63,777
<NET-INCOME> 26,263
0
<EARNINGS-AVAILABLE-FOR-COMM> 26,263
<COMMON-STOCK-DIVIDENDS> 50,410
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 242,624
<EPS-PRIMARY> .69
<EPS-DILUTED> .68
</TABLE>
Exhibit 99
NATIONAL FUEL GAS
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Twelve Months Ended
June 30,
------------------------
1998 1997
(Thousands of Dollars)
INCOME
Operating Revenues $1,233,680 $1,268,231
---------- ----------
Operating Expenses
Purchased Gas 448,221 515,954
Fuel Used in Heat and Electric Generation 26,135 1,607
Operation 287,365 275,266
Maintenance 26,744 24,639
Property, Franchise and Other Taxes 92,729 99,880
Depreciation, Depletion and Amortization 115,616 111,116
Impairment of Oil & Gas Producing Properties 128,996 -
Income Taxes - Net 24,040 73,737
---------- ----------
1,149,846 1,102,199
---------- ----------
Operating Income 83,834 166,032
Other Income 33,013 3,488
---------- ----------
Income Before Interest Charges and Minority
Interest in Foreign Subsidiaries 116,847 169,520
---------- ----------
Interest Charges
Interest on Long-Term Debt 48,980 41,392
Other Interest 29,368 14,246
---------- ----------
78,348 55,638
---------- ----------
Minority Interest in Foreign Subsidiaries (3,036) -
---------- ----------
Income Before Cumulative Effect 35,463 113,882
Cumulative Effect of Change in Accounting
for Depletion (9,116) -
---------- ----------
Net Income Available for Common Stock $ 26,347 $ 113,882
========== ==========
Basic Earnings (Loss) Per Common Share:
Income Before Cumulative Effect $ 0.93 $ 3.00
Cumulative Effect of Change in Accounting
for Depletion (0.24) -
---------- ----------
Net Income Available for Common Stock $ 0.69 $ 3.00
========== ==========
Diluted Earnings (Loss) Per Common Share:
Income Before Cumulative Effect $ 0.92 $ 2.97
Cumulative Effect of Change in Accounting
for Depletion (0.24) -
---------- ----------
Net Income Available for Common Stock $ 0.68 $ 2.97
========== ==========
Weighted Average Common Shares Outstanding:
Used in Basic Calculation 38,242,231 37,991,518
========== ==========
Used in Diluted Calculation 38,649,662 38,312,174
========== ==========
