United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Fiscal Year Ended September 30, 1998
Commission File Number 1-3880
National Fuel Gas Company
(Exact name of registrant as specified in its charter)
New Jersey 13-1086010
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Lafayette Square 14203
Buffalo, New York (Zip Code)
(Address of principal executive offices)
(716) 857-6980
Registrant's telephone number, including area code
-----------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each
exchange
Title of each class on which registered
Common Stock, $1 Par Value, and New York Stock Exchange
Common Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act:
None
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
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates of
the registrant amounted to $1,686,072,000 as of November 30, 1998.
Common Stock, $1 Par Value, outstanding as of November 30, 1998:
38,537,997 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for 1998 are
incorporated by reference into Part I of this report. Portions of the
registrant's definitive Proxy Statement for the Annual Meeting of Shareholders
to be held February 18, 1999 are incorporated by reference into Part III of this
report.
<PAGE>
National Fuel Gas Company
Form 10-K Annual Report
For the Fiscal Year Ended September 30, 1998
Table of Contents Page
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Part I
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Item 1. Business
The Company and its Subsidiaries 19
Rates and Regulation 20
The Utility Segment 21
The Pipeline and Storage Segment 21
The Exploration and Production Segment 22
The International Segment 22
The Other Nonregulated Segment 22
Sources and Availability of Raw Materials 22
Competition 23
Seasonality 24
Capital Expenditures 24
Environmental Matters 25
Miscellaneous 25
Executive Officers of the Company 25
Item 2. Properties
General Information on Facilities 26
Exploration and Production Activities 27
Item 3. Legal Proceedings 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Part II
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Item 5. Market for the Registrant's Common Stock and Related
Shareholder Matters 28
Item 6. Selected Financial Data 29
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 30
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 55
Item 8. Financial Statements and Supplementary Data 55
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 86
Part III
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Item 10. Directors and Executive Officers of the Registrant 86
Item 11. Executive Compensation 86
Item 12. Security Ownership of Certain Beneficial Owners and
Management 86
Item 13. Certain Relationships and Related Transactions 86
Part IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 87
Signatures 90
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This combined Annual Report to Shareholders/Form 10-K 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 combined Annual Report to Shareholders/Form 10-K at Item 7,
"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.
PART I
------
ITEM 1 Business
The Company and its Subsidiaries
National Fuel Gas Company (the Company or Registrant), a registered holding
company under the Public Utility Holding Company Act of 1935, as amended (the
Holding Company Act), was organized under the laws of the State of New Jersey in
1902. The Company is engaged in the business of owning and holding securities
issued by its subsidiary companies. Except as otherwise indicated below, the
Company owns all of the outstanding securities of its subsidiaries. Reference to
"the Company" in this report means the Registrant or the Registrant and its
subsidiaries collectively, as appropriate in the context of the disclosure.
The Company is a diversified energy company consisting of five major
business segments:
1. The Utility segment is carried out by National Fuel Gas Distribution
Corporation (Distribution Corporation), a New York corporation. Distribution
Corporation sells natural gas and provides natural gas transportation services
through a local distribution system located in western New York and northwestern
Pennsylvania (principal metropolitan areas: Buffalo, Niagara Falls and
Jamestown, New York; Erie and Sharon, Pennsylvania).
2. The Pipeline and Storage segment is carried out by National Fuel Gas Supply
Corporation (Supply Corporation), a Pennsylvania corporation, and by Seneca
Independence Pipeline Company (SIP), a Delaware corporation. Supply Corporation
provides interstate natural gas transportation and storage services for
affiliated and nonaffiliated companies through (i) an integrated gas pipeline
system extending from southwestern Pennsylvania to the New York-Canadian border
at the Niagara River, and (ii) 29 underground natural gas storage fields owned
and operated by Supply Corporation and four other underground natural gas
storage fields operated jointly with various major interstate gas pipeline
companies. SIP has a one-third general partnership interest in Independence
Pipeline Company (Independence), a Delaware general partnership. Independence,
after receipt of regulatory approvals and upon securing sufficient customer
interest, plans to construct and operate the Independence Pipeline, a 370-mile
interstate pipeline system which would transport about 900,000 dekatherms per
day (Dth/day) of natural gas from Defiance, Ohio to Leidy, Pennsylvania.
3. The Exploration and Production segment is carried out by Seneca Resources
Corporation (Seneca), a Pennsylvania corporation, and in California, by Seneca's
wholly-owned subsidiary, HarCor Energy, Inc. (HarCor), a Delaware corporation.
Seneca is engaged in the exploration for, and the development and purchase of,
natural gas and oil reserves in the Gulf Coast of Texas, Louisiana, and Alabama,
in California, in Wyoming, and in the Appalachian region of the United States.
4. The International segment is carried out by Horizon Energy Development, Inc.
(Horizon), a New York corporation formed in 1995 to engage in foreign and
domestic energy projects through investments as a sole or substantial owner in
various business entities. These entities include Horizon Energy Holdings, Inc.,
a New York corporation, which owns 100% of Horizon Energy Development B.V.
(Horizon B.V.) (formerly known as Beheer-en-Beleggingsmaatschappij Bruwabel
B.V.). Horizon B.V. is a Dutch company whose principal assets are majority
ownership of (i) Severoceske teplarny, a.s. (SCT), a company with district
heating and power generation operations located in the northern part of the
Czech Republic; (ii) Prvni severozapadni teplarenska, a.s. (PSZT), a wholesale
power and district heating company that is located in close proximity to SCT;
and (iii) Teplarna Kromeriz, a.s., a district heating company located in the
southeast region of the Czech Republic.
5. The Other Nonregulated segment is carried out by the following subsidiaries:
* National Fuel Resources, Inc. (NFR), a New York corporation engaged in the
marketing and brokerage of natural gas and electricity, and the performance of
energy management services for utilities and end-users located in the
northeastern United States;
* Upstate Energy, Inc. (Upstate) (formerly known as Niagara Energy Trading
Inc.), a New York corporation formed in July 1997 to engage in wholesale natural
gas marketing and other energy-related activities;
* Niagara Independence Marketing Company (NIM), a Delaware corporation, owns a
one-third general partnership interest in DirectLink Gas Marketing Company
(DirectLink), a Delaware general partnership which will engage in natural gas
marketing and related businesses, in part by subscribing for firm transportation
capacity on the Independence Pipeline (see Pipeline and Storage segment
discussion below);
* Leidy Hub, Inc. (Leidy), a New York corporation formed to provide various
natural gas hub services to customers in the eastern United States through a 50%
ownership of Ellisburg-Leidy Northeast Hub Company (a Pennsylvania general
partnership);
* Seneca is also engaged in the marketing of timber from its Pennsylvania land
holdings;
* Highland Land & Minerals, Inc. (Highland), a Pennsylvania corporation which
operates several sawmills and kilns in Pennsylvania;
* Data-Track Account Services, Inc. (Data-Track), a New York corporation which
provides collection services (principally issuing collection notices) for the
Company's subsidiaries; and
* Utility Constructors, Inc. (UCI), a Pennsylvania corporation which
discontinued its operations (primarily pipeline construction) in 1995 and whose
affairs are being wound down.
Financial information about each of the Company's business segments can
be found in Item 8 at Note I - Business Segment Information. No single customer,
or group of customers under common control, accounted for more than 10% of the
Company's consolidated revenues in 1998. All references to years in this report
are to the Company's fiscal year ended September 30 unless otherwise noted.
The discussion of the Company's business segments as contained in the
Letter to Shareholders, which is included on pages 4 to 16 of the paper copy of
the Company's combined Annual Report to Shareholders/Form 10-K, is included in
this electronic filing as Exhibit 13 and is incorporated herein by reference.
Rates and Regulation
The Company is subject to regulation by the Securities and Exchange Commission
(SEC) under the broad regulatory provisions of the Holding Company Act,
including provisions relating to issuance of securities, sales and acquisitions
of securities and utility assets, intra-Company transactions and limitations on
diversification. The SEC and Congress have recommended legislation to repeal
conditionally the Holding Company Act, in conjunction with legislation which
would allow the various state regulatory commissions to have access to such
books and records of companies in a holding company system as would be necessary
for effective regulation, and allow for federal audit authority and oversight of
affiliate transactions. However, the additional proposed access to Company books
and records by state regulatory commissions would correspondingly increase the
amount of regulatory burden at the state level. In addition, recent SEC rule
changes have reduced the number of applications required to be filed under the
Holding Company Act, exempted some routine financings and expanded
diversification opportunities. The Company is unable to predict at this time
what the ultimate outcome of legislative and/or regulatory changes will be, and
therefore what the impact on the Company might be.1
The Utility segment's rates, services and other matters are regulated
by the State of New York Public Service Commission (PSC) with respect to
services provided within New York, and by the Pennsylvania Public Utility
Commission (PaPUC) with respect to services provided within Pennsylvania. For
additional discussion of the Utility segment's rates and regulation, see Item 7
under the heading "Rate Matters," and Item 8 at Note B-Regulatory Matters.
The Pipeline and Storage segment's rates, services and other matters
are regulated by the Federal Energy Regulatory Commission (FERC). SIP is not
itself regulated by the FERC, but its sole business will be the ownership of an
interest in Independence, whose rates, services and other matters will be
regulated by the FERC. For additional discussion of the Pipeline and Storage
segment's rates and regulation, see Item 7 under the heading "Rate Matters," and
Item 8 at Note B-Regulatory Matters.
The discussion under Item 8 at Note B-Regulatory Matters, includes a
description of the regulatory assets and liabilities reflected on the Company's
Consolidated Balance Sheets in accordance with applicable accounting standards.
To the extent that the criteria set forth in such accounting standards are not
met by the operations of the Utility segment or the Pipeline and Storage
segment, as the case may be, the related regulatory assets and liabilities would
be eliminated from the Company's Consolidated Balance Sheets and such accounting
treatment would be discontinued.
In the International segment, rates charged for the sale of thermal
energy and electric energy at the retail level are subject to regulation and
audit in the Czech Republic by the Czech Ministry of Finance. The regulation of
electric energy rates at the retail level indirectly impacts the rates charged
by the International segment for its electric energy sales at the wholesale
level.
In addition, the Company and its subsidiaries are subject to the same
federal, state and local regulations on various subjects as other companies
doing similar business in the same locations.
The Utility Segment
The Utility segment contributed approximately 115.3% of the Company's operating
income before income taxes in 1998.
Additional discussion of the Utility segment appears in the Letter to
Shareholders contained in this combined Annual Report to Shareholders/Form 10-K,
below under the headings "Sources and Availability of Raw Materials" and
"Competition," in Item 7 "MD&A," and in Item 8 at Notes B-Regulatory Matters,
H-Commitments and Contingencies and I-Business Segment Information.
The Pipeline and Storage Segment
The Pipeline and Storage segment contributed approximately 66.2% of the
Company's operating income before income taxes in 1998.
Supply Corporation currently has service agreements for substantially
all of its firm transportation capacity, which totals approximately 1,943
million cubic feet (MMcf) per day. The Utility segment has contracted for
approximately 1,126 MMcf per day or 58% of that capacity until 2003 and
continuing year-to-year thereafter. An additional 25% of Supply Corporation's
firm transportation capacity is subject to firm contracts with nonaffiliated
customers until 2003 or later.
Supply Corporation has available for sale to customers approximately
62.8 billion cubic feet (Bcf) of firm storage capacity. The Utility segment has
contracted for 26.0 Bcf or 41% of that capacity, in service agreements with
remaining initial terms of approximately 5 to 8 years and continuing
year-to-year thereafter: 23.3 Bcf - 5 years; 2.0 Bcf - 8 years and 0.7 Bcf - 6
years. Nonaffiliated customers have contracted for the remaining 36.8 Bcf or 59%
of firm storage capacity; 12.1 Bcf or 19% of total storage capacity is
contracted by nonaffiliated customers until 2003 or later. Supply Corporation
has been successful in marketing and obtaining executed contracts for storage
service (at discounted rates) as it becomes available and expects to continue to
do so.1
Independence has filed with the FERC signed precedent agreements
providing for firm transportation service totaling about 629,000 Dth/day for
ten years, out of total proposed transportation capacity of about 900,000
Dth/day. The customer for 500,000 Dth/day of that total is DirectLink, which is
owned by the sponsors of the Independence Pipeline, including NIM.
Additional discussion of the Pipeline and Storage segment appears in
the Letter to Shareholders contained in this combined Annual Report to
Shareholders/Form 10-K, below under the headings "Sources and Availability of
Raw Materials" and "Competition," Item 7 "MD&A," and Item 8 at Notes
B-Regulatory Matters and I-Business Segment Information.
The Exploration and Production Segment
The Exploration and Production segment incurred an operating loss before income
taxes as a result of the oil and gas asset impairment it recorded in 1998. The
impact of this segment's operating loss in relation to total operating income
before income taxes in 1998 was negative 86.4%.
Additional discussion of the Exploration and Production segment appears
in the Letter to Shareholders contained in this combined Annual Report to
Shareholders/Form 10-K, below under the heading "Competition," Item 7 "MD&A,"
and Item 8 at Notes A-Summary of Significant Accounting Policies, F-Financial
Instruments, I-Business Segment Information, J-Stock Acquisitions and
M-Supplementary Information for Oil and Gas Producing Activities.
The International Segment
The International segment contributed approximately 2.0% of the Company's
operating income before income taxes in 1998.
Additional discussion of the International segment appears in the
Letter to Shareholders contained in this combined Annual Report to
Shareholders/Form 10-K, below under the heading "Sources and Availability of Raw
Materials" and "Competition," Item 7 "MD&A," and Item 8 at Notes F-Financial
Instruments, I-Business Segment Information and J-Stock Acquisitions.
The Other Nonregulated Segment
The Other Nonregulated segment contributed approximately 5.0% of the Company's
operating income before income taxes in 1998. The impact of the Corporate
operation's operating loss in relation to total operating income before income
taxes in 1998 was negative 2.1%.
Additional discussion of the Other Nonregulated segment appears in the
Letter to Shareholders contained in this combined Annual Report to
Shareholders/Form 10-K, below under the headings "Sources and Availability of
Raw Materials" and "Competition," Item 7 "MD&A," and Item 8 at Notes F-Financial
Instruments and I-Business Segment Information.
Sources and Availability of Raw Materials
Natural gas is the principal raw material for the Utility segment and some of
the subsidiaries in the Other Nonregulated segment, as discussed below. In 1998,
the Utility segment purchased 117.2 Bcf of gas. Gas purchases from various
producers and marketers in the southwestern United States under long-term (two
years or longer) contracts accounted for 71% of these purchases. Purchases of
gas in Canada and the United States on the spot market (contracts of less than a
year) accounted for 24% of the Utility segment's 1998 gas purchases. Gas
purchases from Southern Company Energy Marketing L.P. and Dynegy Marketing and
Trade (both southwest gas under long-term contracts) represented 12% and 20%,
respectively, of total 1998 gas purchases by the Utility segment. No other
producer or marketer provided the Utility segment with 10% or more of its gas
requirements in 1998.
Supply Corporation transports and stores gas owned by its customers,
whose gas originates in the southwestern and Appalachian regions of the United
States as well as in Canada. SIP, through Independence, proposes to transport
natural gas produced in Canada and in the midwestern United States.
The Exploration and Production segment seeks to discover and
produce raw materials (natural gas, oil and hydrocarbon liquids) as described in
the Letter to Shareholders contained in this combined Annual Report to
Shareholders/Form 10-K, Item 7 "MD&A" and Item 8 at Notes I-Business Segment
Information and M - Supplementary Information for Oil and Gas Producing
Activities.
Coal is the principal raw material for the International segment,
constituting 57% of the cost of materials needed to operate the boilers which
produce steam or hot water. Natural gas, oil and limestone combined account for
the remaining 43% of such materials. Coal is purchased and delivered directly
from the Mostecka Uhelna Spolecnost, a.s. mine for Horizon's largest coal-fired
plant under a contract where price and quantity are renegotiated each year.
Based on the current extraction rate, this mine has proven reserves through
2030. Natural gas is imported by the Czech Republic government from Russia and
the North Sea and is transported through the government-owned pipeline system
and purchased by the International segment from two of the eight regional gas
distribution companies. Oil is also imported. This segment purchases oil from
domestic and foreign refineries.
The Other Nonregulated segment needs natural gas for its marketing and
Leidy's hub services, but is indifferent as to the source. Highland and Seneca's
timber operations rely to a large degree upon timber located on Seneca's lands,
so that source and availability are not issues.
Competition
Competition in the natural gas industry exists among providers of natural gas,
as well as between natural gas and other sources of energy. The continuing
deregulation of the natural gas industry should enhance the competitive position
of natural gas relative to other energy sources by removing some of the
regulatory impediments to adding customers and responding to market forces.1 In
addition, the environmental advantages of natural gas compared with other fuels
should increase the role of natural gas as an energy source.1 Moreover, natural
gas is abundantly available in North America, which makes it a dependable
alternative to imported oil.
The electric industry is moving toward a more competitive environment
as a result of the Federal Energy Policy Act of 1992 and initiatives undertaken
by the FERC and various states. It is unclear at this point what impact this
restructuring will have on the Company.1
The Company competes on the basis of price, service and reliability,
product performance and other factors. Sources and providers of energy, other
than those described under this "Competition" heading, do not compete with the
Company to any significant extent.
Competition: The Utility Segment
The changes precipitated by the FERC's restructuring of the gas industry in
Order No. 636 are redefining the roles of the gas utility industry and the state
regulatory commissions. State restructuring initiatives are under way, with
regulators in both New York and Pennsylvania promoting retail competition for
natural gas supply purchases. However, the Utility segment's traditional
distribution function remains largely unchanged. For further discussion of state
restructuring initiatives refer to Item 7 under the heading "Rate Matters."
Competition for large-volume customers continues with local producers
or pipeline companies attempting to sell or transport gas directly to end-users
located within the Utility segment's service territories (i.e., bypass). In
addition, competition continues with fuel oil suppliers, and may increase with
electric utilities making retail energy sales.1
The Utility segment is now better able to compete, through its
unbundled flexible services, in its most vulnerable markets (the large
commercial and industrial markets). The Utility segment continues to (i) develop
or promote new sources and uses of natural gas and/or new services, rates and
contracts and (ii) emphasize and provide high quality service to its customers.
Competition: The Pipeline and Storage Segment
Supply Corporation competes for market growth in the natural gas market with
other pipeline companies transporting gas in the northeastern United States and
with other companies providing gas storage services. Supply Corporation has some
unique characteristics which enhance its competitive position. Its facilities
are located adjacent to Canada and the northeastern United States, and provide
part of the link between gas-consuming regions of the eastern United States and
gas-producing regions of Canada and the southwestern, southern and midwestern
regions of the United States. This location offers the opportunity for increased
transportation and storage services in the future.1
SIP, through Independence, is competing for customers with other
proposed pipeline projects which would bring natural gas from the Chicago area
to the growing Northeast and Mid-Atlantic U.S. markets. In combination with
expansion projects of Transcontinental Gas Pipe Line Corporation and ANR
Pipeline Company, Independence intends to provide the least-cost path for this
service and will access the storage and market hub at Leidy, Pennsylvania.1 It
is likely that not all of the proposed pipelines will go forward, and that the
first project built will have an advantage over other proposed projects.1
Independence is attempting to be the first of the proposed projects approved by
the FERC and the first built.1 Independence will also create opportunities for
increased transportation and storage services by Supply Corporation.1
Competition: The Exploration and Production Segment
The Exploration and Production segment competes with other gas and oil producers
and marketers with respect to its sales of oil and gas. The Exploration and
Production segment also competes, by competitive bidding and otherwise, with
other oil and gas exploration and production companies of various sizes for
leases and drilling rights for exploration and development prospects.
To compete in this environment, the Exploration and Production segment
originates and acts as operator on most prospects, minimizes risk of exploratory
efforts through partnership-type arrangements, applies the latest technology for
both exploratory studies and drilling operations and focuses on market niches
that suit its size, operating expertise and financial criteria.
Competition: The International Segment
Horizon competes with other entities seeking to develop foreign and domestic
energy projects. Horizon, through SCT and PSZT, faces competition in the sales
of thermal energy to large industrial customers. Currently, electric energy
sales are made to local distribution companies. The Czech Ministry of Finance
has announced plans to privatize the local distribution companies. While it is
expected that these plans will increase competition at the retail level of the
electric energy market, it is unclear at this point what impact this
privatization will have on the wholesale electric energy market.1 Both SCT and
PSZT sell electricity at the wholesale level.
Competition: The Other Nonregulated Segment
In the Other Nonregulated segment, NFR, Upstate and NIM, through DirectLink,
compete with other marketers and energy management services providers. Leidy
competes with other natural gas hub service providers. Highland competes with
other sawmills in northwestern Pennsylvania.
Seasonality
Variations in weather conditions can materially affect the volume of gas
delivered by the Utility segment, as virtually all of its residential and
commercial customers use gas for space heating. The effect on the Utility
segment in New York is mitigated by a weather normalization clause which is
designed to adjust the rates of retail customers to reflect the impact of
deviations from normal weather. Weather that is more than 2.2% warmer than
normal results in a surcharge being added to customers' current bills, while
weather that is more than 2.2% colder than normal results in a refund being
credited to customers' current bills. In the International segment, district
heating operations in the Czech Republic are also subject to the seasonality of
weather.
Volumes transported and stored by Supply Corporation may vary
materially depending on weather, without materially affecting its earnings.
Supply Corporation's rates are based on a straight fixed-variable rate design
which allows recovery of all fixed costs in fixed monthly reservation charges.
Variable charges based on volumes are designed only to reimburse the variable
costs caused by actual transportation or storage of gas.
Capital Expenditures
A discussion of capital expenditures by business segment is included in Item 7
under the heading "Investing Cash Flow," subheading "Capital Expenditures and
Other Investing Activities."
Environmental Matters
A discussion of material environmental matters involving the Company is included
in Item 8, Note H-Commitments and Contingencies.
Miscellaneous
The Company had a total of 3,944 full-time employees at September 30, 1998,
2,554 employees in all of its U.S. operations and 1,390 employees in its
International segment. This is an increase of 56% from the 2,524 total employed
at September 30, 1997. Most of the increase (1,356 employees) occurred in the
International segment.
Agreements covering employees in collective bargaining units in New
York were renegotiated in November 1997, effective December 1997, and are
scheduled to expire in February 2001. Agreements covering most employees in
collective bargaining units in Pennsylvania were renegotiated early, effective
November 1998, and are scheduled to expire in April and May 2003.
The Company has numerous municipal franchises under which it uses
public roads and certain other rights-of-way and public property for the
location of facilities. When necessary, the Company renews such franchises.
<TABLE>
<CAPTION>
Executive Officers of the Company(1)
Age as of Current Company Date Elected To
Name 9/30/98 Positions Current Positions
---- --------- --------------- -----------------
<S> <C> <C> <C>
Bernard J. Kennedy 67 Chairman of the
Board of Directors. March 21, 1989
Chief Executive
Officer. August 1, 1988
President. January 1, 1987
Director. March 29, 1978
Philip C. Ackerman 54 Director. March 16, 1994
Senior Vice President. June 1, 1989
President of
Distribution Corporation. October 1, 1995
Executive Vice President
of Supply Corporation. October 1, 1994
President of Horizon. September 13, 1995
President of certain
other subsidiaries of
the Company from prior
to 1993.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Age as of Current Company Date Elected To
Name 9/30/98 Positions Current Positions
---- --------- --------------- -----------------
<S> <C> <C> <C>
Richard Hare 60 President of Supply
Corporation. June 1, 1989
Senior Vice President of
Penn-York Energy Corpor-
ation until its merger
into Supply Corporation
on July 1, 1994. June 1, 1989
President of SIP. September 22, 1997
James A. Beck 51 President of Seneca. October 1, 1996(2)
President of Upstate. July 18, 1997
President of NIM. September 22, 1997
President of Highland. March 11, 1998
Joseph P. Pawlowski 57 Treasurer. December 11, 1980
Senior Vice President of
Distribution Corporation. February 20, 1992
Treasurer of
Distribution Corporation. January 1, 1981
Treasurer of
Supply Corporation. June 1, 1985
Secretary of
Supply Corporation. October 1, 1995
Treasurer of SIP. September 22, 1997
Officer of certain other
subsidiaries of the
Company from prior
to 1993.
Gerald T. Wehrlin 60 Controller. December 11, 1980
Senior Vice President of
Distribution Corporation. April 1, 1991
Controller of Seneca. September 1, 1981
Secretary and Treasurer
of Leidy. September 1, 1993
Vice President
of Horizon. February 21, 1997(3)
Officer of certain other
subsidiaries of the
Company from prior to
1993.
Walter E. DeForest 57 Senior Vice President of
Distribution Corporation. August 1, 1993
President of Leidy. September 1, 1993
Bruce H. Hale 49 Senior Vice President of February 21, 1997,
Supply Corporation. and from February
21, 1992 through
December 31,
1992(4)
Vice President of Horizon. September 13, 1995
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Age as of Current Company Date Elected To
Name 9/30/98 Positions Current Positions
---- --------- --------------- -----------------
<S> <C> <C> <C>
Dennis J. Seeley 55 Senior Vice President of
Distribution Corporation. February 21, 1997
and from April 1,
1991 through
February 18,
1993(5)
David F. Smith 45 Senior Vice President of
Distribution Corporation. January 1, 1993
Secretary of
Distribution Corporation. June 20, 1986
Officer of certain other
subsidiaries of the
Company from prior
to 1993.
</TABLE>
(1) The Company has been advised that there are no family relationships
among any of the officers listed, and that there is no arrangement or
understanding among any one of them and any other persons pursuant to
which he was elected as an officer.
(2) Vice President of Seneca from January 1, 1994 through April 30, 1995,
Executive Vice President of Seneca from May 1, 1995 through September
30, 1996.
(3) Secretary and Treasurer of Horizon from September 13, 1995 through
February 21, 1997.
(4) Senior Vice President of Distribution Corporation from April 1, 1991
through February 20, 1992, and again from January 1, 1993 through
February 21, 1997.
(5) Senior Vice President of Supply Corporation from January 1, 1993 through
February 21, 1997.
ITEM 2 PROPERTIES
General Information on Facilities
The investment of the Company in net property, plant and equipment was $2.2
billion at September 30, 1998. Approximately 61% of this investment is in the
Utility and Pipeline and Storage segments, which are primarily located in
western New York and western Pennsylvania. The remaining investment in property,
plant and equipment is mainly in the Exploration and Production segment (28%),
which is primarily located in the Gulf Coast, southwestern, western and
Appalachian regions of the United States, and in the International segment (9%)
which is located in the Czech Republic. During the past five years, the Company
has made significant additions to plant in order to expand and improve
transmission and distribution facilities for both retail and transportation
customers, to augment the reserve base of oil and gas, and to purchase district
heating and power generation facilities in the Czech Republic. Net plant has
increased $767.3 million, or 52%, since 1993.
The Utility segment has the largest net investment in property, plant
and equipment, compared with the Company's other business segments. Its net
investment in its gas distribution network (including 14,784 miles of
distribution pipeline) and its services represent approximately 58% and 28%,
respectively, of the Utility segment's net investment of $906.8 million.
The Pipeline and Storage segment represents a net investment of $461.0
million in transmission and storage facilities at September 30, 1998.
Transmission pipeline, with a net cost of $145.7 million, represents 32% of this
segment's total net investment and includes 2,646 miles of pipeline required to
move large volumes of gas throughout its service area. Storage facilities
consist of 33 storage fields, 4 of which are jointly operated with certain
pipeline suppliers, and 490 miles of pipeline. Net investment in storage
facilities includes $88.6 million of gas stored underground-noncurrent,
representing the cost of the gas required to maintain pressure levels for normal
operating purposes as well as gas maintained for system balancing and other
purposes, including that needed for no-notice transportation service. The
Pipeline and Storage segment has 31 compressor stations with 70,550 installed
compressor horsepower.
The Exploration and Production segment had a net investment in
properties amounting to $638.9 million at September 30, 1998. Of this amount,
Seneca's net investment in oil and gas properties in the Gulf Coast/West Coast
regions was $592.9 million, and Seneca's net investment in oil and gas
properties in the Appalachian region aggregated $46.0 million.
The International segment had a net investment in properties amounting
to $202.6 million at September 30, 1998. PSZT's net investment in district
heating and electric generation facilities was $145.7 million; SCT's net
investment in district heating and electric generation facilities was $55.9
million; and Teplarna Kromeriz's net investment in district heating facilities
was approximately $1.0 million.
The Utility and Pipeline and Storage segments' facilities provided the
capacity to meet its fiscal 1998 peak day sendout, including transportation
service, of 1,727 MMcf, which occurred on December 31, 1997. Withdrawals from
storage provided approximately 33% of the requirements on that day.
Company maps, which are included on the inside front cover and on page
1 of the paper copy of this combined Annual Report to Shareholders/Form 10-K,
are narratively described in the Appendix to this electronic filing and are
incorporated herein by reference.
Exploration and Production Activities
The information that follows is disclosed in accordance with SEC regulations,
and relates to the Company's oil and gas producing activities. A further
discussion of oil and gas producing activities is included in Item 8, Note
M-Supplementary Information for Oil and Gas Producing Activities. Note M sets
forth proved developed and undeveloped reserve information for Seneca. Seneca's
oil and gas reserves reported in Note M as of September 30, 1998, were estimated
by Seneca's qualified geologists and engineers and were audited by independent
petroleum engineers from Ralph E. Davis, Inc. Seneca reports its oil and gas
reserve information, on an annual basis, to the Energy Information
Administration (EIA). The basis of reporting Seneca's reserves to the EIA is
identical to that reported in Note M.
Supply Corporation holds reserves (not included in Note M) related to
held for future use storage wells. Information on such reserves is included on
Supply Corporation's Form 2 "Annual Report of Natural Gas Companies" filed with
the FERC.
The following is a summary of certain oil and gas information taken
from Seneca's records:
Production
For the Year Ended September 30 1998 1997 1996
- ------------------------------- ---- ---- ----
Average Sales Price per Mcf of Gas* $ 2.45 $ 2.60 $ 2.35
Average Sales Price per Barrel of Oil* $12.15 $20.63 $19.50
Average Production (Lifting) Cost per Mcf
Equivalent of Gas and Oil Produced $ 0.45 $ 0.35 $ 0.31
*Prices do not reflect gains or losses from hedging activities.
Productive Wells
At September 30, 1998 Gas Oil
- --------------------- --- ---
Productive Wells - gross 1,925 877
- net 1,821 833
Developed and Undeveloped Acreage
At September 30, 1998
- ---------------------
Developed Acreage - gross 639,768
- net 558,501
Undeveloped Acreage - gross 926,587
- net 701,241
Drilling Activity
Productive Dry
----------------- ------------------
For the Year Ended September 30 1998 1997 1996 1998 1997 1996
- ------------------------------- ---- ---- ---- ---- ---- ----
Net Wells Completed - Exploratory 10.72 4.21 4.22 4.97 3.49 7.35
- Development 14.11 1.84 8.02 2.00 1.60 0
Present Activities
At September 30, 1998
- ---------------------
Wells in Process of Drilling - gross 18.00
- net 14.22
South Lost Hills Waterflood Program
In Seneca's South Lost Hills Field (acquired in 1998 as part of the HarCor and
Bakersfield Energy Resources, Inc. acquisitions) a waterflood project was
initiated in 1996 on Ellis lease in the Diatomite reservior for pressure
maintenance and recovery enhancement purposes. Currently there are 29 injectors
and 86 producers in the program. The total injection and production from this
waterflood project are 10,000 barrels of water per day and 400 barrels of oil
per day, respectively. Expansion of the current project is being evaluated by a
reservior simulation program.
ITEM 3 Legal Proceedings
None
ITEM 4 Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth quarter
of 1998.
PART II
-------
ITEM 5 Market for the Registrant's Common Stock and Related Shareholder
Matters
Information regarding the market for the Registrant's common stock and related
shareholder matters appears in Note D-Capitalization and Note L-Market for
Common Stock and Related Shareholder Matters (unaudited), under Item 8 of this
combined Annual Report to Shareholders/Form 10-K, and reference is made thereto.
On July 1, 1998, the Company issued 700 unregistered shares of Company
common stock to the seven non-employee directors of the Company, 100 shares to
each such director. These shares were issued as partial consideration for the
directors' service as directors during the quarter ended September 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.
<PAGE>
ITEM 6 Selected Financial Data
<TABLE>
<CAPTION>
Year Ended September 30: 1998 1997 1996 1995 1994
- ----------------------- ---- ---- ---- ---- ----
Summary of Operations (Thousands)
<S> <C> <C> <C> <C> <C>
Operating Revenues $1,248,000 $1,265,812 $1,208,017 $975,496 $1,141,324
---------- ---------- ---------- -------- ----------
Operating Expenses:
Purchased Gas 441,746 528,610 477,357 351,094 497,687
Fuel Used in Heat and
Electric Generation 37,592 1,489 - - -
Operation and Maintenance 320,014 286,537 309,206 292,505 291,390
Property, Franchise and Other
Taxes 92,817 100,549 99,456 91,837 103,788
Depreciation, Depletion and
Amortization 118,880 111,650 98,231 71,782 74,764
Impairment of Oil and Gas
Producing Properties 128,996 - - - -
Income Taxes 24,024 68,674 66,321 43,879 47,792
---------- ---------- ---------- -------- ----------
1,164,069 1,097,509 1,050,571 851,097 1,015,421
---------- ---------- ---------- -------- ----------
Operating Income 83,931 168,303 157,446 124,399 125,903
Other Income 35,870 3,196 3,869 5,378 3,656
---------- ---------- ---------- -------- ----------
Income Before Interest Charges
and Minority Interest in
Foreign Subsidiaries 119,801 171,499 161,315 129,777 129,559
Interest Charges 85,284 56,811 56,644 53,883 47,124
---------- ---------- ---------- -------- ----------
Minority Interest in Foreign
Subsidiaries (2,213) - - - -
---------- ---------- ---------- -------- ----------
Income Before Cumulative Effect 32,304 114,688 104,671 75,894 82,435
Cumulative Effect of Changes in
Accounting (9,116) - - - 3,237
---------- ---------- ---------- -------- ----------
Net Income Available for Common
Stock $ 23,188 $ 114,688 $ 104,671 $ 75,894 $ 85,672
========== ========== ========== ======== ==========
Per Common Share Data
Basic Earnings Per Common Share $0.61** $3.01 $2.78 $2.03 $2.32*
Diluted Earnings per Common Share $0.60** $2.98 $2.77 $2.03 $2.31*
Dividends Declared $1.77 $1.71 $1.65 $1.60 $1.56
Dividends Paid $1.76 $1.70 $1.64 $1.59 $1.55
Dividend Rate at Year-End $1.80 $1.74 $1.68 $1.62 $1.58
At September 30:
Number of Common Shareholders 23,743 20,267 21,640 21,429 22,465
========== ========== ========== ======== ==========
Net Property, Plant and Equipment (Thousands)
Utility $ 906,754 $ 889,216 $ 855,161 $ 822,764 $ 787,794
Pipeline and Storage 460,952 450,865 452,305 463,647 443,622
Exploration and Production 638,886 443,164 375,958 339,950 295,418
International 202,590 942 1,274 70 -
Other Nonregulated 38,946 35,168 24,893 22,620 18,579
Corporate 9 11 15 131 137
---------- ---------- ---------- ---------- ----------
Total Net Plant $2,248,137 $1,819,366 $1,709,606 $1,649,182 $1,545,550
========== ========== ========== ========== ==========
Total Assets (Thousands) $2,684,459 $2,267,331 $2,149,772 $2,036,823 $1,980,806
========== ========== ========== ========== ==========
Capitalization (Thousands)
Common Stock Equity $ 890,085 $ 913,704 $ 855,998 $ 800,588 $ 780,288
Long-Term Debt, Net of Current
Portion 692,669 581,640 574,000 474,000 462,500
---------- ---------- ---------- ---------- ----------
Total Capitalization $1,582,754 $1,495,344 $1,429,998 $1,274,588 $1,242,788
========== ========== ========== ========== ==========
</TABLE>
* 1994 includes Cumulative Effect of Changes in Accounting of $0.09 (basic and
diluted), which resulted from the adoption of SFAS 109, "Accounting for
Income Taxes" and SFAS 112, "Employers' Accounting for Postemployment
Benefits."
** 1998 includes oil and gas asset impairment of ($2.06) basic, ($2.04) diluted
and cumulative effect of a change in depletion methods of ($0.24) basic and
diluted. Refer to further discussion of these items in Notes to Financial
Statements, Note A - Summary of Significant Accounting Policies.
ITEM 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
1998 Compared with 1997
National Fuel's earnings were $23.2 million, or $0.61 per common share ($0.60
per common share on a diluted basis), in 1998. These earnings include a 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 which reduced earnings by $9.1
million (after tax). Without these two non-cash items, earnings for the fiscal
year ended September 30, 1998 would have been $111.4 million, or $2.91 per
common share ($2.88 per common share on a diluted basis). This compares with
earnings of $114.7 million, or $3.01 per common share ($2.98 per common share on
a diluted basis), in 1997. The earnings for 1998 also reflect a net $5.0 million
of after tax income from the settlement of the primary issues relating to IRS
audits of years 1977-1994.
The earnings decrease in 1998 was attributable to lower earnings of the
Company's Utility and Exploration and Production segments, offset in part by
higher earnings in the Pipeline and Storage, International (which incurred a
loss in 1997) and Other Nonregulated segments.
Utility earnings decreased as a result of the impact of warmer weather
in 1998 compared with 1997, and the consequent overall lower usage per account.
In addition, the Utility segment incurred interest expense, net of related rate
recovery, in connection with the settlement of the primary issues relating to
the previously referred to settlement of the IRS audits. Partly offsetting these
negative impacts to earnings was the Utility segment's continued decrease in
operation and maintenance (O&M) expense.
In the Exploration and Production segment, earnings are down mainly
because of low oil prices and decreased gas production. In addition, earnings
were impacted as a result of higher interest costs related to Seneca's
acquisition activities in 1998. (Refer to further discussion of acquisition
activities under "Investing Cash Flow," subheading "Exploration and
Production.") These circumstances more than offset the positive contribution to
earnings that resulted from higher oil production, higher gas prices (after
hedging) and Seneca's portion of interest income related to the previously
mentioned settlement of IRS audits.
In the Pipeline and Storage segment, earnings are up mainly due to
Supply Corporation's portion of interest income from the previously mentioned
settlement of IRS audits. Additional income tax expense related to certain
unsettled issues were also recorded. Also contributing to Supply Corporation's
earnings for the year was a buyout of a firm transportation agreement by a
customer in the amount of $2.5 million. However, lower revenue from unbundled
pipeline sales and open access transportation partly offset these positive
earnings.
The International segment realized 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
SCT in 1997, and increased its ownership during 1998 to 82.7% by September 30,
1998. Horizon also invested in PSZT during 1998 and owned an 86.2% interest at
September 30, 1998.
The Other Nonregulated segment's earnings are up mainly because of
higher earnings in the timber operations, offset in part by higher expenses in
the natural gas marketing operations.
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). Due
to significant declines in oil prices in 1998, 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 1998 by $79.1 million
($2.06 per common share, basic; $2.04 per common share, diluted).
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 matching of oil and gas revenues and
depletion expense and is the preferable method used by oil and gas producing
companies. Seneca's recent acquisition activities have increased its scope of
operations in relation to National Fuel's operations. Consequently, the change
in method was warranted. The units of production method was applied
retroactively to prior years to determine the cumulative effect through October
1, 1997. This cumulative effect reduced earnings for 1998 by $9.1 million, net
of income tax ($0.24 per common share, basic and diluted). Depletion of oil and
gas properties for 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 1998 by $1.4 million ($0.04 per
common share, basic and diluted).
1997 Compared with 1996
National Fuel's earnings were $114.7 million, or $3.01 per common share ($2.98
per common share on a diluted basis), in 1997. This compares with earnings of
$104.7 million, or $2.78 per common share ($2.77 per common share on a diluted
basis), in 1996.
The earnings increase in 1997 was attributable to higher earnings of
the Company's Utility and Pipeline and Storage segments, as well as a reduction
in losses of its International segment, partly offset by lower earnings of the
Exploration and Production segment and a loss in the Other Nonregulated segment
compared with income in 1996.
Utility earnings increased as a result of new rates effective in
October 1996 and lower O&M expense. Partly offsetting these positive impacts to
earnings was warmer weather in 1997 compared with 1996, as well as the inclusion
in 1996 earnings of a downward revision of estimated purchased gas costs for
1995. The Pipeline and Storage segment earnings increase was attributable to
higher revenue from unbundled pipeline sales and open access transportation, as
well as lower O&M expense for the year. In the International segment, net losses
in 1997 were significantly less than in 1996. The 1996 losses included expenses
associated with the Company's withdrawal from participation in an international
power project. Exploration and Production earnings decreased as a result of
higher operation and depletion expense, which more than offset increased
revenues resulting from increased prices and a slight increase in production.
The Other Nonregulated segment's loss in 1997 resulted primarily from increased
depletion expenses in this segment's timber operations related to cutting timber
with a higher cost.
<PAGE>
Operating Revenues
Year Ended September 30 (thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Utility
Retail Revenues:
Residential $ 612,647 $ 709,968 $ 678,395
Commercial 123,807 167,338 165,824
Industrial 18,068 22,412 25,648
- -----------------------------------------------------------------------------
754,522 899,718 869,867
- -----------------------------------------------------------------------------
Off-System Sales 44,479 43,857 30,907
Transportation 62,844 49,285 49,180
Other 9,335 (1,494) 4,372
- -----------------------------------------------------------------------------
871,180 991,366 954,326
- -----------------------------------------------------------------------------
Pipeline and Storage
Storage Service 63,505 64,221 67,975
Transportation 94,347 92,858 92,401
Other 13,131 15,615 16,177
- -----------------------------------------------------------------------------
170,983 172,694 176,553
- -----------------------------------------------------------------------------
Exploration and Production 124,272 119,260 114,462
- -----------------------------------------------------------------------------
International 76,259 1,910 286
- -----------------------------------------------------------------------------
Other Nonregulated 106,527 82,005 68,644
- -----------------------------------------------------------------------------
Less: Intersegment Revenues 101,221 101,423 106,254
- -----------------------------------------------------------------------------
Total Operating Revenues $1,248,000 $1,265,812 $1,208,017
=============================================================================
Operating Income (Loss) Before Income
Taxes
Year Ended September 30 (thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Utility $124,482 $123,856 $115,257
Pipeline and Storage 71,510 73,523 72,914
Exploration and Production (93,266) 42,694 46,408
International 2,136 (2,987) (14,281)
Other Nonregulated 5,347 2,244 5,700
Corporate (2,254) (2,353) (2,231)
- -----------------------------------------------------------------------------
Total Operating Income Before Income
Taxes $107,955 $236,977 $223,767
=============================================================================
System Natural Gas Volumes
Year Ended September 30 (billion cubic feet) 1998 1997 1996
- -------------------------------------------------------------------------
Utility Gas Sales
Residential 71.7 85.7 90.7
Commercial 16.4 22.6 24.9
Industrial 4.3 5.1 6.0
Off-System 16.2 14.1 11.1
- -------------------------------------------------------------------------
108.6 127.5 132.7
- -------------------------------------------------------------------------
Non-Utility Gas Sales
Production (equivalent billion cubic feet) 52.2 50.0 49.2
- -------------------------------------------------------------------------
Total Gas Sales 160.8 177.5 181.9
- -------------------------------------------------------------------------
Transportation
Utility 60.4 57.9 58.2
Pipeline and Storage 313.1 300.3 325.0
Nonregulated 0.8 0.5 0.6
- -------------------------------------------------------------------------
374.3 358.7 383.8
- -------------------------------------------------------------------------
Marketing Volumes 26.4 21.0 20.2
- -------------------------------------------------------------------------
Less Intra and Intersegment Volumes:
Transportation 140.8 151.9 157.7
Production 4.1 4.3 4.8
Gas Sales - - 0.8
Marketing - - 0.1
- -------------------------------------------------------------------------
144.9 156.2 163.4
- -------------------------------------------------------------------------
Total System Natural Gas Volumes 416.6 401.0 422.5
=========================================================================
<PAGE>
Utility
Operating Revenues
1998 Compared with 1997
Operating revenues for the Utility segment decreased $120.2 million in 1998
compared with 1997. This decrease primarily reflects the recovery of lower gas
costs which resulted from a decrease in gas sales (an 18.9 billion cubic feet
(Bcf) decrease for 1998) and a decrease in the average cost of purchased gas
(see discussion of purchased gas below under the heading "Purchased Gas"). 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 which was on average 13.8% warmer than the
prior year (see Degree Days table below). The switch to new aggregator services
is discussed further in the "Rate Matters" section that follows.
As of September 30, 1998, Distribution Corporation's 1996 rate
settlement with the State of New York Public Service Commission (PSC) expired.
As part of this rate settlement, Distribution Corporation had put into effect a
$7.2 million annual base rate increase in its New York jurisdiction on October
1, 1997. However, this rate settlement also provided that earnings above a 12%
return on equity (determined on a cumulative basis over the three years ended
September 30, 1998) are to be shared equally between shareholders and customers.
As a result of this sharing mechanism, Distribution Corporation has determined
that the refund due customers is $10.7 million (of which $7.7 million was
recorded in 1998 and $3.0 million was recorded in 1997). These amounts are
included as a reduction of other operating revenues in 1998 and 1997,
respectively.
Also as part of the 1996 rate settlement, Distribution Corporation
was allowed to utilize certain refunds from upstream pipeline companies and
certain credits (referred to as the "refund pool") to offset certain specific
expense items. In September 1998, Distribution Corporation recognized $7.9
million of the refund pool as other operating revenue and recorded an equal
amount of O&M expense in accordance with the settlement agreement.
In addition, 1998 other operating revenues include $6.0 million of
revenue recorded in Distribution Corporation's New York jurisdiction related to
the previously mentioned recent settlement of IRS audits. This $6.0 million
represents the rate recovery (through the above noted refund pool) of interest
expense as allowed by the 1996 rate settlement with the PSC.
1997 Compared with 1996
Operating revenues increased $37.0 million in 1997 compared with 1996. Despite
lower gas sales (mainly due to weather that was, on average, 5.6% warmer than
the prior year), revenues increased primarily because of the pass through of
increased gas costs and a general base rate increase of $7.2 million in
Distribution Corporation's New York jurisdiction effective October 1, 1996. Gas
costs were up due to a 7% increase in the average costs of purchased gas (see
discussion of purchased gas below under the heading "Purchased Gas"). Other
operating revenues in 1997 were reduced by a $3.0 million refund provision to
the Utility's customers for a 50% sharing of earnings over a 12% return on
equity as discussed above.
Operating Income
1998 Compared with 1997
Operating income before income taxes for the Utility segment increased $0.6
million in 1998 compared with 1997. Excluding the $6.0 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 $5.4 million for
the year ended September 30, 1998. The decrease in operating income before
income taxes 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 experienced a decrease in O&M expense. This decrease is a result of
management's continued emphasis on controlling costs. Also contributing to this
decrease, 1997 O&M expense included $0.9 million of expenses associated with an
early retirement offer to certain Pennsylvania operating union employees in
1997.
In October 1998, the Company announced an early retirement offer to
certain salaried, non-union hourly and union employees of Distribution
Corporation. The estimated expense to be recorded by the Utility segment in 1999
related to this offer is $4.3 million to $4.7 million.1
The impact of weather on Distribution Corporation's New York rate
jurisdiction is tempered by a weather normalization clause (WNC). The WNC in New
York, which covers the eight-month period from October through May, has had a
stabilizing effect on pretax operating income and earnings for the New York rate
jurisdiction. In addition, in periods of colder than normal weather, the WNC
benefits Distribution Corporation's New York customers. In 1998, the WNC in New
York preserved pretax operating income of $12.1 million as weather, overall, was
warmer than normal for the period of October 1997 through May 1998. Since the
Pennsylvania rate jurisdiction does not have a WNC, uncontrollable weather
variations directly impact pretax operating income and earnings. In the
Pennsylvania service territory, weather was 15.7% warmer than 1997 and 13.4%
warmer than normal. The Pennsylvania jurisdiction's warmer weather in 1998
compared with 1997 lowered pretax operating income by approximately $6.2
million.
1997 Compared with 1996
Operating income before income taxes increased $8.6 million in 1997 compared
with 1996. The increase resulted primarily from the increases in 1997 revenue
discussed above, combined with lower O&M expense. These items were partly offset
by certain purchased gas costs adjustments, totaling $4.2 million, associated
with lost and unaccounted-for gas in Distribution Corporation's New York
jurisdiction that lowered purchased gas expense in 1996. O&M expense decreased
primarily as a result of an early retirement offer to certain salaried,
non-union hourly and union employees of Distribution Corporation that was
effective October 1, 1996. The 1996 results included expenses for this
retirement offer of $6.4 million. O&M expense in 1997 included $0.9 million of
expense for the 1997 early retirement offer mentioned above. O&M expense also
decreased as a result of management's continued emphasis on controlling costs.
In 1997, the WNC in New York resulted in a benefit to customers of $0.2
million as weather, overall, was colder than normal for the period of October
1996 through May 1997. In the Pennsylvania service territory, weather in 1997
was 5.5% warmer than 1996 and 2.8% colder than normal. The Pennsylvania
jurisdiction's warmer weather in 1997 compared with 1996 lowered pretax
operating income by approximately $3.2 million.
Degree Days
Percent (Warmer) Colder
-----------------------
Than
-----------------------
Year Ended September 30 Normal Actual Normal Prior Year
- -------------------------------------------------------------------------------
1998: Buffalo 6,689 5,914 (11.6%) (12.9%)
Erie 6,223 5,389 (13.4%) (15.7%)
- -------------------------------------------------------------------------------
1997: Buffalo 6,690 6,793 1.5% (5.7%)
Erie 6,223 6,395 2.8% (5.5%)
- -------------------------------------------------------------------------------
1996: Buffalo 6,728 7,203 7.1% 16.5%
Erie 6,258 6,764 8.1% 17.1%
- ------------------------------------------------------------------------------
Purchased Gas
The cost of purchased gas is by far the Company's single largest operating
expense. Annual variations in purchased gas costs can be attributed directly to
changes in gas sales volumes, the price of gas purchased and the operation of
purchased gas adjustment clauses.
Currently, Distribution Corporation has contracted for long-term firm
transportation capacity with Supply Corporation and six other upstream pipeline
companies, for long-term gas supplies with a combination of producers and
marketers and for storage service with Supply Corporation and three
nonaffiliated companies. In addition, Distribution Corporation can satisfy a
portion of its gas requirements through spot market purchases. Changes in
wellhead prices have a direct impact on the cost of purchased gas. Distribution
Corporation's average cost of purchased gas, including the cost of
transportation and storage, was $4.13 per thousand cubic feet (Mcf) in 1998, a
decrease of 3% from the average cost of $4.26 per Mcf in 1997. The average cost
of purchased gas in 1997 was 7% higher than the $3.98 per Mcf in 1996.
Pipeline and Storage
Operating Revenues
1998 Compared with 1997
Operating revenues decreased $1.7 million in 1998 compared with 1997. The
decrease resulted primarily from lower revenues from unbundled pipeline sales
and open access transportation (a decrease of $2.1 million), lower storage
service revenues (a decrease of $0.7 million), and lower cashout revenue (a cash
resolution of a gas imbalance whereby a customer pays Supply Corporation for gas
it receives in excess of amounts delivered into Supply Corporation's system by
the customer's shipper). Cashout revenues decreased by $1.1 million. However,
there is no earnings impact as cashout revenue is offset by an equal amount of
purchased gas expense. These decreases were partially offset by an increase in
transportation demand charges (approximately $1.8 million) stemming from the
1998 Niagara Expansion Project (see further discussion under "Investing Cash
Flow," subheading "Pipeline and Storage").
Transportation volumes in this segment increased 12.8 Bcf. Generally,
volume fluctuations do not have a significant impact on earnings as a result of
Supply Corporation's straight fixed-variable (SFV) rate design. However, as
mentioned above, the increase in capacity stemming from the 1998 Niagara
Expansion Project contributed to higher demand charge revenue.
1997 Compared with 1996
Operating revenues decreased $3.9 million in 1997 compared with 1996. The 1996
revenues reflected a rate increase which was retroactive to June 1, 1995. The
retroactive rates added approximately $2.0 million to revenues in 1996 that
related to 1995. The corresponding decrease in 1997 primarily impacted storage
service revenues, which decreased by $3.8 million. In addition to the
retroactive rate impact, storage service revenues decreased as a result of
customers opting for more flexible services at discounted rates. A slight
increase in transportation revenues primarily reflects an increase in surcharge
adjustments. Other operating revenues decreased slightly as higher revenues from
unbundled pipeline sales and open access transportation (an increase of $3.3
million) was more than offset by lower cashout revenue (a decrease of $3.7
million).
Operating Income
1998 Compared with 1997
Operating income before income taxes for the Pipeline and Storage segment
decreased $2.0 million in 1998 compared with 1997. As discussed above, the
decrease is primarily attributable to lower revenue from unbundled pipeline
sales and open access transportation and lower storage service revenues, offset
in part by higher transportation demand charges. There also was an increase in
O&M expense resulting primarily from the establishment of reserves for
preliminary survey and investigation costs associated with the 1999 Niagara
Expansion and Green Canyon projects. The 1999 Niagara Expansion project is
discussed further under "Investing Cash Flow," subheading "Pipeline and
Storage". The reserve related to the Green Canyon project (a natural gas
gathering project offshore and onshore Louisiana) was established due to the
lack of interest at this time by potential customers. 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. Partially
offsetting these increases in O&M expense was 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 Storage Project to the Independence Pipeline
Company (the Independence Pipeline project is discussed further under "Investing
Cash Flow," subheading "Pipeline and Storage"). Another decrease to O&M expense
stems from the fact that 1997 O&M expense included $1.0 million of expenses
associated with an early retirement offer to certain Pennsylvania operating
union employees.
In October 1998, the Company announced an early retirement offer to
certain salaried, non-union hourly and union employees of Supply Corporation.
The estimated expense to be recorded by the Pipeline and Storage segment in 1999
related to this offer is $0.7 million to $1.0 million.
1997 Compared with 1996
Operating income before income taxes increased $0.6 million in 1997 compared
with 1996. This slight increase primarily reflects lower O&M expenses (including
labor) combined with higher revenues related to unbundled pipeline sales and
open access transportation. The cost of an early retirement offer to certain
Pennsylvania operating union employees in 1997 resulted in $1.0 million of
additional operating expenses. However, such expenses were $0.8 million less
than the expenses associated with a 1996 early retirement offer. Partly
offsetting these increases was the retroactive rate effect recorded in 1996 and
lower storage service revenues, as discussed above.
Exploration and Production
Operating Revenues
1998 Compared with 1997
Operating revenues increased $5.0 million in 1998 compared with 1997. The main
reason for the increase was the $4.9 million in revenues related to the gas
processing plant that was acquired as part of the HarCor and Bakersfield Energy
Resources (BER) acquisitions in 1998 (see further discussion of these
acquisitions under "Investing Cash Flow," subheading "Exploration and
Production"). While this gas processing plant contributed a large amount of
revenue, this revenue was basically offset by an equal amount of expense.
Gas production revenues, net of hedging activities, decreased $1.1
million as a result of decreased production, offset in part by higher gas prices
(after hedging) (the weighted average gas price after hedging increased $0.09
per Mcf). Refer to the tables below for production and price information. The
gas production declines were mainly due to the shut-in of production during the
Gulf hurricane season and tropical storms, as well as the expected decline in
production of West Cameron 552 and delays in drilling due to lack of rig
availability in the first half of the year. Oil production revenues, net of
hedging activities, were basically even with the prior year as increased
production was offset by lower oil prices (after hedging). The weighted average
oil price after hedging decreased $4.92 per barrel (bbl). The increase in oil
production was mainly the result of West Coast production from the properties
acquired in the Whittier, HarCor and BER acquisitions.
1997 Compared with 1996
Operating revenues increased $4.8 million in 1997 compared with 1996. Gas
production revenues, net of hedging activities, increased $2.2 million as a
result of higher prices (after hedging) (the weighted average gas price after
hedging increased $0.07 per Mcf) slightly offset by decreased natural gas
production. Oil production revenues, net of hedging activities, increased $2.8
million as a result of increases in oil production offset in part by lower oil
prices (after hedging). The weighted average oil price after hedging decreased
$0.06 per bbl. The increase in oil production was the result of a full year of
production in 1997 at Vermilion 252 compared with only seven months in 1996.
Refer to tables below for production and price information.
Production Volumes
Year Ended September 30 1998 1997 1996
- ---------------------------------------------------------------
Gas Production
(million cubic feet)
Gulf Coast 29,461 32,377 32,355
West Coast 2,146 1,135 990
Appalachia 4,867 5,074 5,422
- ---------------------------------------------------------------
36,474 38,586 38,767
===============================================================
Oil Production
(thousands of barrels)
Gulf Coast 1,228 1,404 1,195
West Coast 1,376 490 533
Appalachia 10 8 14
- ---------------------------------------------------------------
2,614 1,902 1,742
===============================================================
Average Prices
Year Ended September 30 1998 1997 1996
- ---------------------------------------------------------------
Average Gas Price/Mcf
Gulf Coast $2.40 $2.60 $2.33
West Coast $2.14 $1.79 $1.25
Appalachia $2.88 $2.79 $2.65
Weighted Average $2.45 $2.60 $2.35
Weighted Average After Hedging $2.27 $2.18 $2.11
- ---------------------------------------------------------------
Average Oil Price/bbl
Gulf Coast $14.69 $21.37 $20.45
West Coast* $ 9.85 $18.49 $17.41
Appalachia $16.80 $21.28 $18.43
Weighted Average $12.15 $20.63 $19.50
Weighted Average After Hedging $13.03 $17.95 $18.01
- --------------------------------------------------------------
*1998 includes high gravity oil which generally sells for a lower price.
Seneca utilizes price swap agreements to manage a portion of the market
risk associated with fluctuations in the price of natural gas and crude oil.
Refer to further discussion of these hedging activities under "Market Risk
Sensitive Instruments" and in Note F - Financial Instruments in Item 8 of this
report.
The following summarizes Seneca's settlements under price swap
agreements during 1998, 1997 and 1996:
Year Ended September 30 (thousands of dollars) 1998 1997 1996
- -------------------------------------------------------------------------------
Natural Gas Price Swap Agreements:
Notional Quantities - Equivalent Bcf 26.4 24.9 23.0
Gain (Loss) ($6,375) ($16,387) ($9,231)
Crude Oil Price Swap Agreements:
Notional Quantities - Equivalent bbls 901,000 1,371,500 1,071,000
Gain (Loss) $2,299 ($5,090) ($2,606)
- -------------------------------------------------------------------------------
Operating Income
1998 Compared with 1997
The Exploration and Production segment experienced an operating loss before
taxes of $93.3 million compared with operating income before taxes of $42.7
million in 1997, a negative variation of $136.0 million. Excluding the $129.0
million non-cash impairment of this segment's oil and gas assets, as discussed
previously, this segment had operating income before taxes of $35.7 million, a
decrease of $7.0 million compared with the prior year. This decrease resulted
from lower gas production revenues, net of hedging, as discussed above and
higher lease operating expense. The increase in lease operating expenses stems
from the additional operating costs of the Whittier, HarCor and BER properties.
As previously discussed, Seneca changed its method of depletion for oil and gas
producing properties from the gross revenue method to the units of production
method. Depletion of oil and gas properties for 1998 has been computed under the
units of production method which resulted in depletion expense that was $2.3
million less than it would have been under the gross revenue method.
1997 Compared with 1996
Operating income before income taxes decreased $3.7 million in 1997 compared
with 1996. This decrease reflects higher depletion expense and higher operating
expenses (lease operating expenses, salary expenses and production taxes) due to
increased activities, which more than offset the increase in revenues, discussed
above.
International
Operating Revenues
1998 Compared with 1997
Operating revenues increased $74.3 million in 1998 compared with 1997. The
increase primarily reflects 100% of the revenues of SCT and PSZT for 1998.
Horizon acquired a 34% equity interest in SCT in April 1997, subsequently
increasing that interest to 36.8% by September 30, 1997 (and thus accounted for
its investment in SCT under the equity method in 1997). During 1998, Horizon
increased its ownership in SCT to 82.7% as of September 30, 1998. In February
1998, Horizon acquired a 75.3% equity interest in PSZT and subsequently
increased its ownership interest to 86.2% as of September 30, 1998. The
consolidation method was used to account for the investments in SCT and PSZT
during 1998.
Heating and Electric Sales of SCT and PSZT
Year Ended September 30, 1998 (thousands of dollars)
Volumes Revenues
----------------------------------------- --------
Heating Sales 6,870,921 Gigajoules*(6.5 Bcf Equivalent) $47,953
Electricity Sales 763,823 Megawatt hours $22,772
*Gigajoules = one billion joules. A joule is a unit of energy.
1997 Compared with 1996
Operating revenues increased $1.6 million in 1997 compared with 1996. This
increase represents twelve months of operations in 1997 of Teplarna Kromeriz, a
small district heating plant located in the Czech Republic. There were only
three months of reported operations in 1996.
Operating Income
1998 Compared with 1997
Operating income before income taxes for the International segment increased
$5.1 million in 1998 compared with 1997. The current year reflects 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 September 1998. The
minority interests in SCT and PSZT are shown separately on the Consolidated
Statement of Income after operating results. In 1997, Horizon had a 36.8% equity
interest in SCT and thus recorded its share of SCT's operating results below the
operating income line in "Other Income."
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.1 The
Company expects that rates charged for the sale of thermal energy and electric
energy at the retail level will be subject to regulation and audit in the Czech
Republic by the Czech Ministry of Finance.1
1997 Compared with 1996
Operating losses before income taxes for the International segment decreased
from $14.3 million in 1996 to $3.0 million in 1997. This decrease in operating
losses relates primarily to $9.0 million of nonrecurring expenses incurred in
1996 by Horizon, relating to its withdrawal from participation in an
international power project in August 1996. In 1997, Horizon sold its right to
this power project for approximately $2.8 million, including cash proceeds and
the assumption of certain liabilities by the purchaser.
Other Nonregulated
Operating Revenues
1998 Compared with 1997
Operating revenues increased $24.5 million in 1998 compared with 1997. This
increase reflects higher operating revenues from NFR, the Company's gas
marketing subsidiary, and the Company's timber operations. NFR's operating
revenues increased because of an increase in marketing volumes. Partially
offsetting this, NFR recognized a pretax gain on exchange-traded futures and
options of approximately $1.3 million in 1998 compared to a pretax gain of
approximately $1.7 million in 1997. Refer to further discussion of the Company's
hedging activities under "Market Risk Sensitive Instruments" and in Note F -
Financial Instruments in Item 8 of this report. Operating revenues for the
timber operations increased as a result of higher timber sales by Seneca and
increased lumber sales resulting from Highland's purchase in 1998 of two new
lumber mills. Highland also had a full year of production from the mill it
purchased in January 1997.
1997 Compared with 1996
Operating revenues increased $13.4 million in 1997 compared with 1996. The
increase primarily reflects higher operating revenues from NFR and Highland.
NFR's operating revenues increased largely because of higher natural gas prices
and an increase in marketing volumes. Also, NFR recognized a pretax gain on
exchange-traded futures and options of approximately $1.7 million during 1997
compared to a pretax gain of approximately $1.0 million in 1996. Refer to
further discussion of the Company's hedging activities under "Market Risk
Sensitive Instruments" and in Note F - Financial Instruments in Item 8 of this
report. Highland's operating revenues increased as a result of increased lumber
sales resulting from the operation of a new lumber mill beginning in January
1997.
Operating Income
1998 Compared with 1997
Operating income before income taxes increased $3.1 million in 1998 compared
with 1997. This increase resulted from an increase in pretax operating income
from the timber operations due to increased revenues discussed above offset in
part by lower pretax operating income of NFR. NFR's increase in operating
revenue noted above was substantially offset by increased gas costs. In
addition, NFR had an increase in O&M expense, resulting from expansion of its
customer base into new market areas.
1997 Compared with 1996
Operating income before income taxes decreased $3.5 million in 1997 compared
with 1996. This decrease was principally due to a pretax loss in the timber
operations as a result of increased depletion expense related to cutting timber
with a higher cost.
Income Taxes, Other Income and Interest Charges
Income Taxes
Income taxes decreased $44.7 million in 1998 primarily as a result of a decrease
in pretax income. Income taxes increased $2.4 million in 1997 primarily as a
result of an increase in pretax income. For further discussion of income taxes,
refer to Note C Income Taxes in Item 8 of this report.
Other Income
Other income increased $32.7 million in 1998 and decreased $0.7 million in 1997.
The 1998 increase in other income is primarily due to $18.5 million of interest
income which resulted from the current year settlement of IRS audits. The 1998
increase is also due to a gain, net of hedging, of $5.1 million associated with
U.S. dollar denominated debt carried on the balance sheet of PSZT (see further
discussion regarding this PSZT debt in Note D - Capitalization and Note F -
Financial Instruments in Item 8 of this report), as well as $1.3 million of
interest income on temporary cash investments of SCT and PSZT. In addition,
other income in 1998 increased from a buyout of a firm transportation agreement
by a Pipeline and Storage segment customer in the amount of $2.5 million.
The 1997 decrease resulted, in part, from certain nonrecurring items
recorded in 1996 for Supply Corporation, including a gain on disposition of
property, as well as interest income related to a retroactive rate settlement.
In addition, the 1997 decrease reflects losses from Leidy Hub's equity
investment in various gas hub partnerships and losses from Horizon's equity
investment in SCT. The SCT losses relate to the period April 1997 (when Horizon
made its initial equity investment in SCT) through September 30, 1997. Since SCT
is a heating utility, it typically experiences losses during the summer months.
Interest Charges
Interest on long-term debt increased $11.0 million in 1998 and $1.3 million in
1997. The increase in 1998 and 1997 can be attributed to a higher average amount
of long-term debt outstanding, offset slightly by a lower average interest rate.
In 1998, long-term debt balances grew significantly as a result of the stock
acquisitions of SCT, PSZT and HarCor combined with the Whittier and BER asset
purchases. These acquisitions and asset purchases are discussed further under
"Investing Cash Flow," subheadings "International" and "Exploration and
Production."
Other interest charges increased $17.5 million in 1998 and decreased
$1.1 million in 1997. The increase in 1998 resulted primarily 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). In
addition, the increase in other interest for 1998 resulted from an increase in
the average amount of short-term debt outstanding. Short-term debt was initially
utilized to fund the acquisition activities in the International and Exploration
and Production segments, as mentioned above, until a portion was replaced with
long-term debt in May 1998. Furthermore, short-term debt was used to repay the
long-term debt that matured in 1998. The decrease in 1997 resulted primarily
from lower interest expense on Amounts Payable to Customers offset in part by
higher interest on short-term borrowings because of higher average amounts
outstanding.
Capital Resources and Liquidity
The primary sources and uses of cash during the last three years are summarized
in the following condensed statement of cash flows:
Sources (Uses) of Cash
Year Ended September 30 (in millions) 1998 1997 1996
- ----------------------------------------------------------------------
Provided by Operating Activities $253.0 $294.7 $168.5
Capital Expenditures (393.2) (214.0) (171.6)
Investment in Subsidiaries,
Net of Cash Acquired (112.0) (21.1) -
Other Investing Activities 2.1 1.4 (1.4)
Short-Term Debt, Net Change 229.4 (107.3) 52.1
Long-Term Debt, Net Change 94.9 98.2 11.2
Issuance of Common Stock 7.9 7.1 9.0
Common Stock Dividends (67.0) (64.3) (61.2)
Dividends Paid to Minority
Interest (0.3) - -
Effect of Exchange Rates on Cash 1.6 - -
- ----------------------------------------------------------------------
Net Increase (Decrease) in Cash
and Temporary Cash Investments $16.4 $(5.3) $6.6
======================================================================
Operating Cash Flow
Internally generated cash from operating activities consists of net income
available for common stock, adjusted for noncash expenses, noncash income and
changes in operating assets and liabilities. Noncash items include 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 Pipeline and
Storage segments may vary substantially from year to year because of the impact
of rate cases. In the Utility segment, supplier refunds, over- or
under-recovered purchased gas costs and weather also significantly impact cash
flow. The Company considers supplier refunds and over-recovered purchased gas
costs as a substitute for short-term borrowings. The impact of weather on cash
flow is tempered in the Utility segment's New York rate jurisdiction by its WNC
and in the Pipeline and Storage segment by Supply Corporation's SFV rate design.
Net cash provided by operating activities totaled $253.0 million in
1998, a decrease of $41.7 million compared with the $294.7 million provided by
operating activities in 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) and an increase in interest payments (primarily related to the recent
settlement of IRS audits). Also, the Utility segment received a large refund
from an upstream pipeline company in 1997 which did not recur in 1998. A portion
of this refund was passed back to customers in 1998. These decreases to cash
were partially offset by lower cash payments for gas purchases.
The Exploration and Production segment experienced a decrease in cash
provided by operating activities. Lower cash receipts from the sale of oil and
gas combined with higher operating costs (primarily due to the Whittier, HarCor
and BER acquisitions) were partially offset by 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.
Partly offsetting the decreases discussed above, the International and
Pipeline and Storage segments experienced increases in cash provided by
operating activities. The International segment benefitted from the results of
operations of SCT and PSZT while the Pipeline and Storage segment experienced an
increase in cash provided by operating activities primarily because of interest
income resulting from the aforementioned IRS settlement combined with cash
received from a customer resulting from a buyout of a firm transportation
agreement. Higher operating costs partially offset the increases to cash
provided by operating activities in the Pipeline and Storage segment.
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 equity investments in corporations (stock
acquisitions) and/or partnerships. Such investments are treated separately in
the Statement of Cash Flows and discussed further in the segment discussion
below.
The Company's capital expenditures and other investments totaled
$520.7 million in 1998. The table below presents these capital expenditures and
other investments by business segment:
Year Ended September 30, 1998 (in millions)
- -------------------------------------------
Total Capital
Expenditures
Capital Other and Other
Expenditures Investments Investments
------------ ----------- -----------
Utility $ 50.7 $ - $ 50.7
Pipeline and Storage 23.7 5.5 29.2
Exploration and Production 293.9 32.6(1) 326.5
International 14.7 89.4(2) 104.1
Other Nonregulated 10.2 - 10.2
------ ------ ------
$393.2 $127.5 $520.7
====== ====== ======
(1) Investment, net of cash acquired = $29.8 million.
(2) Investments, net of cash acquired = $82.2 million.
Utility
The majority 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 majority of the Pipeline and Storage capital expenditures were made for
additions, improvements and replacements to this segment's transmission and
storage systems. Approximately $4.2 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
November 1998, Supply Corporation began transportation service for an additional
23,000 Dth per day of firm winter only capacity. 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) made a $5.5 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
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 $141.0 million. This acquisition is included in the
Exploration and Production capital expenditure amount in the table above.
In May and June 1998, Seneca acquired the oil and gas properties
located in the South Lost Hills Field in the San Joaquin Valley near
Bakersfield, California, that were owned 75% by HarCor and 25% by BER. 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
The acquisition of HarCor's portion of these properties was completed
in May 1998 through a tender offer (an offer of $2.00 per share) for the
outstanding shares of HarCor. Approximately 95% of the outstanding shares of
HarCor common stock were tendered in accordance with the tender offer. The
common stock that was not purchased pursuant to the tender offer was converted
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 $32.6
million. The stock acquisition resulted in the assumption of approximately $64.7
million of long-term debt at the date of acquisition (refer to Note D -
Capitalization in Item 8 of this report).
The acquisition of BER's portion of these properties was completed in
June 1998 through an asset purchase. The purchase price was approximately $30.0
million. This acquisition is included in the Exploration and Production capital
expenditure amount in the table above.
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 725 Bcf equivalent, of which 55%
is oil and 45% is gas.
Other Exploration and Production segment capital expenditures
included approximately $98.6 million on the offshore program in the Gulf of
Mexico, including offshore drilling expenditures, offshore construction and
lease acquisition costs. Offshore exploratory drilling was concentrated on High
Island 179, High Island A354, High Island A356, Vermilion 309, Eugene Island 47
and South Marsh 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 three federal lease tracts in the Gulf of
Mexico combined with the acquisition of a 50% interest in Vermilion 253.
The remaining $24.3 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.
International
In fiscal 1998, Horizon acquired additional shares of SCT thereby increasing its
equity interest in SCT to 82.7% as of September 30, 1998. The cost of acquiring
these additional shares was approximately $24.9 million. This stock acquisition
resulted in the assumption of approximately $5.1 million of long-term debt at
the date of acquisition (refer to Note D - Capitalization in Item 8 of this
report).
In February 1998, Horizon acquired a 75.3% equity interest in PSZT and
subsequently increased its ownership interest to 86.2% as of September 30, 1998.
The cost of acquiring the shares of PSZT was approximately $64.5 million. This
stock acquisition resulted in the assumption of approximately $59.2 million of
long-term debt (refer to Note D - Capitalization in Item 8 of this report) and
$4.3 million of short-term debt at the date of acquisition.
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.
Other Nonregulated
Other Nonregulated capital expenditures consisted primarily of timber purchases
by the northeast division of Seneca as well as equipment purchases by Highland
for its existing sawmill and kiln operations and the purchase of two new
sawmills in Pennsylvania. The capital expenditures also included the purchase of
furniture, equipment and computer hardware and software for NFR's gas marketing
operations.
Other Investing Activities
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.
Estimated Capital Expenditures and Other Investments
The Company's estimated capital expenditures for the next three years are:1
Year Ended September 30 (in millions) 1999 2000 2001
- --------------------------------------------------------------------
Utility $48.9 $47.9 $46.9
Pipeline and Storage 27.0 20.5 20.5
Exploration and Production 92.0 126.1 128.8
International 35.6 5.8 5.5
Other Nonregulated 0.9 0.8 0.8
- --------------------------------------------------------------------
$204.4 $201.1 $202.5
====================================================================
Estimated capital expenditures for the Utility segment during the next
three years will be concentrated in the areas of main improvements, replacements
and extensions, service line replacements and, to a minor extent, the
installation of new services.1
Estimated capital expenditures for the Pipeline and Storage segment in
1998 will be concentrated in the reconditioning of storage wells and the
replacement of storage and transmission lines.1
Estimated capital expenditures in 1999 for the Exploration and
Production segment are significantly lower than capital spending in 1998 as the
Company will be focusing on managing existing properties and reducing debt
balances.1 The 1999 budget includes approximately $23.1 million for development
drilling, facilities construction and recompletions related to the properties
acquired in the HarCor, Whittier and BER acquisitions. Approximately $34.0
million has been budgeted for offshore exploratory drilling, development
drilling and facilities construction. The budget also includes $5.8 million for
lease acquisitions and $12.6 million for geological and geophysical
expenditures.
Estimated capital expenditures for the International segment will be
concentrated in the process of reconstructing boilers at the heating plant of
PSZT to comply with certain clean air standards mandated by the Czech Republic
government. Approximately $33.0 million is budgeted for this reconstruction.
The Company's other investments in 1999 will be concentrated in the
Pipeline and Storage segment and the International segment. In the Pipeline and
Storage segment, the Company plans to invest an additional $5.0 - $10.0 million
in the Independence Pipeline Company.1 Additional spending in 1999 and beyond
would depend on such factors as Federal Energy Regulatory Commission (FERC)
approval and customer interest in the project.1 In the International segment, it
is expected that SCT will spend approximately $6.0 million to increase its
equity investment in one of its subsidiaries.1
The Company continuously evaluates capital expenditures and other
investments. The amounts are subject to modification for opportunities such as
the acquisition of attractive oil and gas properties, timber 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 or other investments in the Company's other business
segments depends, to a large degree, upon market conditions.1
Financing Cash Flow
In order to meet the Company's capital requirements, cash from external sources
must periodically be obtained through short-term bank loans and commercial
paper, as well as through issuances of long-term debt and equity securities. The
Company expects these traditional sources of cash to continue to supplement its
internally generated cash during the next several years.1
In May 1998, the Company issued $200.0 million of 6.303% medium-term
notes due in May 2008. After reflecting underwriting discounts and commissions,
the net proceeds to the Company amounted to $198.8 million. Such proceeds were
used to reduce short-term borrowings arising from acquisition activities in the
International and Exploration and Production segments.
The Company's embedded cost of long-term debt was 6.9% at September 30,
1998 and 1997.
Consolidated short-term debt increased $233.9 million during 1998
($229.4 million after reflecting $4.5 million of short-term borrowings assumed
as part of the PSZT acquisition and subsequently repaid). 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 September 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 periods, which extends to December 31, 2002.
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 producing properties recorded by the Company in March
1998, these covenants will restrict the Company's ability to issue additional
funded debt, with certain exceptions, until at least the third quarter of fiscal
1999.1 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 September 30, 1998, the Company had
regulatory authorizations and unused short-term credit lines that would have
permitted it to borrow an additional $423.7 million of short-term debt.
The Company is involved in litigation arising in the normal course of
its business. In addition to the regulatory matters discussed in Note B -
Regulatory Matters, in Item 8 of this report, the Company is involved in other
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 other regulatory matters could have a material effect on
earnings and cash flows in the year of resolution, neither such litigation nor
these other regulatory matters are expected to materially change the Company's
present liquidity position nor have a material adverse effect on the financial
condition of the Company at this time.1
Market Risk Sensitive Instruments
Energy Commodity Price Risk
Certain of the Company's nonregulated subsidiaries (primarily Seneca and NFR)
utilize various derivative financial instruments (derivatives), including price
swap agreements and exchange-traded futures and options, as part of the
Company's overall energy commodity price risk management strategy. Under this
strategy, the Company manages a portion of the market risk associated with
fluctuations in the price of natural gas and crude oil, thereby providing more
stability to operating results. The derivatives entered into by the Company's
nonregulated subsidiaries are not held for trading purposes. These subsidiaries
have operating procedures in place that are administered by experienced
management to monitor compliance with their risk management policies.
The following tables disclose natural gas and crude oil price swap
information by expected maturity dates for agreements in which Seneca receives a
fixed price in exchange for paying a variable price as quoted in "Inside FERC"
or on the New York Mercantile Exchange. Notional amounts (quantities) are used
to calculate the contractual payments to be exchanged under the contract. The
tables do not reflect the earnings impact of the physical transactions that are
expected to offset the financial gains and losses arising from the use of the
price swap agreements. The weighted average variable prices represent the prices
as of September 30, 1998. At September 30, 1998, Seneca had not entered into any
natural gas price swap agreements extending beyond 2000 nor had it entered into
any crude oil price swap agreements extending beyond 1999.
Natural Gas Price Swap Agreements
- ---------------------------------
Expected
Maturity Dates
--------------
1999 2000 Total
---- ---- -----
Notional Quantities (Equivalent Bcf) 18.7 3.1 21.8
Weighted Average Fixed Rate (per Mcf) $2.34 $2.37 $2.34
Weighted Average Variable Rate (per Mcf) $1.66 $1.66 $1.66
Crude Oil Price Swap Agreements
- -------------------------------
Expected
Maturity Dates
--------------
1999
----
Notional Quantities (Equivalent bbls) 135,000
Weighted Average Fixed Rate (per bbl) $19.86
Weighted Average Variable Rate (per bbl) $14.97
At September 30, 1998, Seneca would have had to pay the respective
counterparties to its natural gas price swap agreements an aggregate of
approximately $1.4 million to terminate the natural gas price swap agreements
outstanding at that date. Seneca would have received an aggregate of
approximately $0.4 million from the counterparties to its crude oil price swap
agreements to terminate the crude oil price swap agreements outstanding at
September 30, 1998.
The Company is exposed to credit risk on the price swap agreements that
Seneca has entered into. 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. To mitigate such credit risk, before
entering into a price swap agreement with a new counterparty, management
performs a credit check and prepares a report indicating the results of the
credit investigation. This report must be approved by Seneca's board of
directors after which a Master Swap Agreement is executed between Seneca and the
counterparty. On an ongoing basis, periodic reports are prepared by management
to monitor counterparty credit exposure. Considering the procedures in place,
the Company does not anticipate any material impact to its financial position,
results of operations, or cash flows as a result of nonperformance by
counterparties.1
The following table discloses the net notional quantities, weighted
average contract prices and weighted average settlement prices by expected
maturity date for exchange-traded futures contracts utilized to manage natural
gas price risk. These futures contracts have been entered into by NFR. The table
does not reflect the earnings impact of the physical transactions that are
expected to offset the financial gains and losses arising from the use of the
futures contracts. At September 30, 1998, NFR held no futures contracts with
maturity dates extending beyond 2000.
Exchange-Traded Futures Contracts
- ---------------------------------
Expected
Maturity Dates
--------------
1999 2000 Total
---- ---- -----
Contract Volumes Purchased (Equivalent Bcf) 11.1 3.2 14.3
Weighted Average Contract Price
(per Mcf) $2.50 $2.58 $2.52
Weighted Average Settlement Price
(per Mcf) $2.59 $2.55 $2.58
The following table discloses the net notional quantities and weighted
average strike prices by expected maturity dates for exchange-traded options
utilized to manage natural gas price risk. These options have been entered into
by NFR. The table does not reflect the earnings impact of the physical
transactions that would offset any financial gains or losses that might arise if
an option were to be exercised. At September 30, 1998, NFR held no options with
maturity dates extending beyond 1999.
Exchange-Traded Options
- -----------------------
Expected
Maturity Dates
--------------
1999
----
Option Volumes Purchased (Sold)(Equivalent Bcf) (2.3)
Weighted Average Strike Price
(per Mcf) $2.91
At September 30, 1998, NFR would have received approximately $0.4
million to settle the exchange-traded futures outstanding at that date. NFR had
an unrealized gain of approximately $0.1 million related to its exchange-traded
options outstanding at September 30, 1998. This unrealized gain consisted mostly
of premiums received on the exchange-traded options it had sold.
Exchange Rate Risk
Horizon'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 1998, the Czech koruna
increased in value in relation to the U.S. dollar, resulting in a $9.4 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
PSZT had U.S. dollar denominated debt in the amount of $50.6 million at
September 30, 1998. Since the functional currency of PSZT is the Czech koruna
and this debt had to be repaid in U.S. dollars, a change in exchange rates
between the Czech koruna and the U.S. dollar would increase or decrease the
amount of Czech koruna required to repay the debt, resulting in a corresponding
gain or loss to be recognized in the income statement. From the acquisition of
PSZT in February 1998 through September 30, 1998, PSZT recognized a pretax gain
of approximately $7.2 million, which is included in Other Income in the
Consolidated Statement of Income. To eliminate future exchange rate risk on the
U.S. dollar denominated debt, PSZT bought a $50.6 million U.S. dollar forward
contract at an exchange rate of 31.54 CZK per dollar on September 3, 1998. The
purpose of the forward contract was to hedge against the exchange rate risk
associated with the U.S. dollar denominated debt. At September 30, 1998, the
fair value of this forward contract was $(2.1) million, representing the loss on
the contract as of September 30, 1998. The loss was recorded as an accrued
liability on the Consolidated Balance Sheets with the offset being Other Income
in the Consolidated Statement of Income. Upon maturing on December 3, 1998, the
final loss recognized on this forward contract was $2.0 million. With the
maturity of this forward contract, PSZT simultaneously converted the $50.6
million of U.S. dollar denominated debt into a loan denominated in CZK, thus
eliminating further exchange rate risk.
Interest Rate Risk
The Company's exposure to interest rate risk primarily consists of short-term
debt instruments. At September 30, 1998, this included short-term bank loans and
commercial paper totaling $326.3 million. The interest rate on the short-term
bank loans and commercial paper approximated 5.6%.
The following table presents the principal cash repayments and related
weighted average interest rates by expected maturity date for the Company's
long-term fixed rate debt as well as the other debt of certain of the Company's
subsidiaries. The interest rates for the variable rate debt are based on those
in effect at September 30, 1998:
<PAGE>
<TABLE>
<CAPTION>
Principal Amounts by
Expected Maturity Dates
-----------------------------------------------------
(millions of dollars) 1999 2000 2001 2002 2003 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
National Fuel Gas Company
<S> <C> <C> <C> <C> <C> <C> <C>
Long-Term Fixed Rate Debt $150 $50 $- $- $- $574 $774
Weighted Average Interest
Rate Paid 6.1% 6.6% -% -% -% 7.0% 6.8%
Fair Value = $830.5 million
HarCor
Long-Term Fixed Rate Debt $62.6 $- $- $- $- $- $62.6
Weighted Average Interest
Rate Paid 14.9% -% -% -% -% -% 14.9%
Fair Value = $62.6 million
PSZT
Long-Term Fixed Rate Debt $- $9.9 $- $- $- $- $9.9
Weighted Average Interest
Rate Paid -% 13.0% -% -% -% -% 13.0%
Fair Value = $9.9 million
Long-Term Variable Rate
Debt $- $7.6 $10.1 $10.1 $10.1 $12.7 $50.6
Weighted Average Interest
Rate Paid -% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
Fair Value = $50.6 million
SCT
Long-Term Variable Rate
Debt $0.5 $0.5 $0.5 $0.6 $0.7 $1.7 $4.5
Weighted Average Interest
Rate Paid 14.7% 14.7% 14.7% 14.7% 14.7% 14.7% 14.7%
Fair Value = $4.5 million
Other Notes
Long-Term Debt* $3.8 $2.4 $1.8 $- $- $- $8.0
Weighted Average Interest
Rate Paid 7.1% 7.4% 6.9% -% -% -% 7.1%
Fair Value = $8.0 million
</TABLE>
*$0.4 million is variable rate debt; $7.6 million is fixed rate debt.
Rate Matters
Utility
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 (the 1996 settlement) with the parties in
this rate proceeding was approved by the State of New York Public Service
Commission (PSC). Effective October 1, 1996 and October 1, 1997, Distribution
Corporation received annual base rate increases of $7.2 million. As part of the
1996 settlement, earnings above a 12% return on equity (excluding certain items
and determined on a cumulative basis over the three years ending September 30,
1998) are to be shared equally between shareholders and customers. As a result
of this sharing mechanism, Distribution Corporation has determined that the
refund due customers as of September 30, 1998 is $10.7 million (of which $7.7
million was recorded in 1998 and $3.0 million was recorded in 1997).
On October 21, 1998, the PSC approved a rate plan for Distribution
Corporation for the period beginning October 1, 1998 and ending September 30,
2000. The plan is the result of a settlement agreement entered into by
Distribution Corporation, Staff for the PSC (Staff), Multiple Intervenors (an
advocate for large industrial customers) and the State Consumer Protection
Board. Under the plan, Distribution Corporation's rates are reduced by $7.2
million, or 1.1%. In addition, customers will receive up to $6.0 million in bill
credits, disbursed volumetrically over the two year term, reflecting a
pre-determined share of excess earnings under the 1996 settlement described
above. The remaining amount, if any, will be passed back to customers as
determined by the PSC. An allowed return on equity of 12%, above which 50% of
additional earnings are shared with the customers, is maintained from the 1996
settlement. Finally, the rate plan also provides that $7.2 million of 1999
revenues will be set aside in a special reserve to be applied against
Distribution Corporation's incremental costs resulting from the PSC's gas
restructuring effort further described below.
On November 3, 1998, the PSC issued Policy Statement Concerning the
----------------------------------
Future of the Natural Gas Industry in New York State and Order Terminating
- --------------------------------------------------------------------------------
Capacity Assignment (Policy Statement). The Policy Statement sets forth the
- --------------------
PSC's "vision" on "how best to ensure a competitive market for natural gas in
New York." That vision includes the following goals:
(1) Effective competition in the gas supply market for retail
customers;
(2) Downward pressure on customer gas prices;
(3) Increased customer choice of gas suppliers and service options;
(4) A provider of last resort (not necessarily the utility)
(5) Continuation of reliable service and maintenance of operations
procedures that treat all participants fairly;
(6) Sufficient and accurate information for customers to use in making
informed decisions;
(7) The availability of information that permits adequate oversight of
the market to ensure fair competition; and
(8) Coordination of Federal and State policies affecting gas supply
and distribution in New York State.
The Policy Statement provides that the most effective way to establish
a competitive market in gas supply is "for local distribution companies to cease
selling gas." The PSC hopes to accomplish that objective over a three-to-seven
year transition period, taking into account "statutory requirements" and the
individual needs of each local distribution company (LDC). The Policy Statement
directs Staff to schedule "discussions" with each LDC on an "individualized plan
that would effectuate our vision." In preparation for negotiations, LDCs will be
required to address issues such as a strategy to hold new capacity contracts to
a minimum, a long-term rate plan with a goal of reducing or freezing rates, and
a plan for further unbundling. In addition, Staff will hold collaborative
sessions with multiple parties to discuss generic issues including reliability
and market power regulation.
The PSC's Order Terminating Capacity Assignment, included with the
----------------------------------------
Policy Statement, directs the state's LDCs to file proposed tariffs, by no later
than February 1, 1999, revising the current requirement that suppliers take
assignment of an allocation of upstream capacity for each customer that elects
to purchase gas from a supplier other than the LDC. Although the order states
that the so-called "mandatory assignment" feature of aggregation service is
terminated effective April 1, 1999, LDCs are permitted to show that their
individual circumstances may warrant continuation of the requirement. The order
also recognizes that LDCs with intermediate pipelines, like Distribution
Corporation, could present "unique cost and reliability issues which require
further consideration." The order provides that to the extent all or part of an
LDC's mandatory assignment authority is indeed terminated, there will be a
reasonable opportunity to recover stranded costs.1
Distribution Corporation plans to work cooperatively with the PSC to
develop a plan which maximizes customer choice options while preserving
reliability and the Distribution Corporation's financial objectives.1 Toward
that end, Distribution Corporation believes that it must remain a merchant. At
this time, current laws provide that LDCs are obligated to provide merchant
service to qualified applicants. While the outcome of these PSC proceedings
cannot be determined, the Company believes that changes, if any, will be
implemented incrementally over a number of years.1
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 the 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. On September 24, 1998, the PSC issued a proposal for
a "basic gas-for-electric-generation-service tariff" developed by Staff based on
its own analysis and input received from interested parties. The proposal sets a
minimum rate based on presumed costs and allows additional charges for
incremental costs and, to a minor extent, market factors. Numerous parties,
including Distribution Corporation, filed comments on October 27, 1998 opposing
the Staff proposal or recommending significant changes. Staff's proposal, if
adopted, may diminish Distribution Corporation's ability to capture future
gas-fired generation load opportunities.1 It would not, however, affect existing
contracts with generation customers.
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.
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
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.
On October 30, 1998, Distribution Corporation filed a System Wide
Energy Select proposal with the PaPUC, requesting an effective date of December
29, 1998. This program proposes to expand the Energy Select pilot program
described above to apply across Distribution Corporation's entire Pennsylvania
service territory. The plan borrows many features of the Energy Select pilot,
but several important changes are proposed. Most significantly, the new program
would include Distribution Corporation as a choice for retail consumers, in
furtherance of Distribution Corporation's objective to remain a merchant. Also
departing from the pilot scheme, Distribution Corporation proposes to undertake
its role as supplier of last resort, and will maintain customer contact by
providing a billing service on its own behalf and, as an option, for
participating suppliers. Finally, the System Wide Energy Select filing proposes
a comprehensive solution for the appropriate disposition of upstream capacity
requirements. If approved, the program would assure traditional levels of supply
and operational reliability while providing an economic means for reduction of
long-term capacity obligations. At this juncture, the Company is not able to
predict the PaPUC's determination on the System Wide Energy Select proposal.
A gas restructuring bill (Senate Bill No. 943) was introduced in the
Pennsylvania General Assembly in 1997 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 has not yet been enacted into law.
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.1 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. Supply Corporation has been successful in marketing and
obtaining executed contracts for such terminated storage service (at discounted
rates) and expects to continue obtaining executed contracts for additional
terminated storage service as it arises.1
Other Matters
Environmental Matters
It is the Company's policy to accrue estimated environmental clean-up costs
(investigation and remediation) when such amounts can reasonably be estimated
and it is probable that the Company will be required to incur such costs.
Distribution Corporation has estimated its clean-up costs related to former
manufactured gas plant sites and third party waste disposal sites will be in the
range of $12.4 million to $13.4 million.1 At September 30, 1998, Distribution
Corporation has recorded the minimum liability of $12.4 million. The Company is
currently not aware of any material additional exposure to environmental
liabilities. However, adverse changes in environmental regulations or other
factors could 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 September 30, 1998 includes related regulatory assets in the
amount of approximately $12.4 million.
The Company is subject to various federal, state and local laws and
regulations relating to the protection of the environment. The Company has
established procedures for the ongoing evaluation of its operations to identify
potential environmental exposures and assure compliance with regulatory policies
and procedures.
For further discussion refer to Note H - Commitments and Contingencies
under the heading "Environmental Matters" in Item 8 of this report.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). For a discussion of SFAS 130 and
SFAS 133 and their impact on the Company, see disclosure in Note A Summary of
Significant Accounting Policies in Item 8 of this report.
Year 2000
Numerous information technology computer systems, software programs and
semiconductors are not capable of recognizing dates after the Year 2000 because
such systems use only two digits to refer to a particular year. Such systems may
read dates in the Year 2000 and thereafter as if those dates represent the year
1900 or thereafter and in certain instances, such systems may fail to function
properly.
State of Readiness
The Company anticipates that the majority of its systems will be Year 2000 ready
by March 31, 1999, and that the remaining systems (i.e. primarily those for
which implementation is being deferred until after the 1998-1999 heating season)
will be Year 2000 ready by April 30, 1999.1 Following the completion of an
early-impact analysis study, a formal project manager at the Company was
designated to spearhead the Year 2000 remediation effort. The methodology
adopted by the Company to address the Year 2000 issue is a combination of
methods recommended by respected industry consultants and efforts tailored to
meet the Company's specific needs. The Company's Year 2000 plan addresses five
primary areas.
A. Mainframe Corporate Business Applications Developed and Maintained by the
Company: A detailed plan and impact analysis was conducted in 1996-1997 to
determine the extent of Year 2000 implications on the Company's mainframe-based
computer systems. The remediation and testing in this area are 98 percent
complete and are expected to be fully completed by December 31, 1998.1
B. Personal Computer Business Applications Software Developed and Supported by
the Company: The Company has retained a consulting firm to perform a detailed
impact analysis of the personal computer business application systems supported
by the Company's Information Services Department. The firm is in the process of
correcting Year 2000 problems identified by its analysis. Certain applications
identified by the consulting firm as potentially problematic have been retired
and replaced with Year 2000 compliant applications. The required changes and
testing for these applications are 90 percent complete and are expected to be
finished by March 31, 1999.1
C. Vendor-Supplied Software, Hardware, and Services for Corporate Business
Applications Supported by the Company: This category includes all mainframe
infrastructure products as well as all PC client / server software and hardware.
The Company has sent letters to its vendors asking if their products and
services will continue to perform as expected after January 1, 2000. These
vendors are responsible for approximately 200 products and services associated
with corporate computer applications. The Company has received responses from
all vendors which the Company believes supply critical hardware, software,
date-sensitive embedded chips and related computer services. The Company expects
to complete testing and implementation of the vendor-supplied Year 2000
compliant products and services by April 30, 1999.1
D. Vendor-Supplied Products and Services Used on a Corporate Wide Basis: This
category includes the critical products and services that are used by multiple
departments within the Company including all products containing embedded chips
which might be date sensitive. The Company has sent letters to the primary
vendors who provide these products and services to the Company, requesting Year
2000 compliance plans. The Company is monitoring their responses and
incorporating them into the Company's overall Year 2000 project and contingency
plans. The Company expects to complete testing and implementation of the
products and services of these vendors by March 31, 1999 (reference is made to
the "Risks" section below).1
E. User-Department Maintained Business Applications: The Company uses certain
business software applications that were either built in-house or
vendor-supplied and subsequently maintained by individual departments of the
Company. The scope of such applications includes, but is not limited to,
spreadsheets, databases, vendor provided products and services and embedded
process controls. A corporate wide Year 2000 task force is in place and has
established a process to identify and resolve Year 2000 problems in this area.
This task force meets on a monthly basis to coordinate ongoing activities and
report on the project status. Providers of critical products and services have
been identified and the Company has sent letters requesting their Year 2000
compliance plans. Responses are being monitored and incorporated into the Year
2000 planning of the various departments. All applications and services under
this category are expected to be Year 2000 ready by April 30, 1999.1
Cost
The cost of upgrading both vendor supplied and internally developed systems and
services is being expensed as incurred. Management estimates that such cost will
total approximately $2.2 million, of which approximately $1.3 million has been
incurred to date and $0.9 million remains to be spent.1
Risks
The Company's main concern is to ensure the safe and reliable production and
delivery of natural gas and Company-provided services to its customers. Based on
the efforts discussed above, the Company expects to be able to operate its own
facilities without interruption and continue normal operation in Year 2000 and
beyond.1 However, the Company has no control over the systems and services used
by third parties with whom it interfaces. While the Company has placed its major
third parties on notice that the Company expects their products and services to
perform as expected after January 1, 2000, the Company cannot predict with
accuracy the actual adverse consequences to the Company that could result if
such third parties are not Year 2000 compliant.1 The widespread failure of
electric, telecommunication, and upstream gas supply could potentially affect
gas service to utility customers, and the Company is pursuing contingency plans
to avoid such disruptions.
The majority of the devices which control the Company's physical
delivery system are not susceptible to Year 2000 problems because they do not
contain micro-processors. The Company has conducted an extensive review of its
existing micro processors (embedded technology) and is replacing non-Year 2000
compliant hardware. The Company expects to complete these replacements by April
30, 1999.1
Distribution Corporation is subject to regulatory review by both the
PSC and the PaPUC. Both of these regulatory bodies have issued orders concerning
the Year 2000 issue, and both have established dates in 1999 by which
jurisdictional utilities must have taken the necessary steps to ensure that its
critical systems are Year 2000 ready. In the event Distribution Corporation
fails to meet the requirements of those orders, it may be subject to the
imposition of fines or formal enforcement actions by the regulatory bodies.
Contingency Planning
The Company formed its Corporate Year 2000 task force in mid-1997. The primary
function of this group is to: (1) raise awareness of the Year 2000 issue within
the Company, (2) facilitate identification and remediation of Year 2000
potential problems within the Company, and (3) facilitate and develop corporate
contingency plans. The group is comprised of middle to senior level managers and
Company executives. The Company's main thrust at present in contingency planning
is identification and prioritization of the potential risks posed by Year 2000
failures outside of the Company's control. All departments and subsidiaries have
submitted lists of potential risks, which are now being prioritized, in relation
to the overall corporation, in the order of human safety, reliability/delivery
of Company services and administrative services. The Company has existing
disaster/contingency plans to deal with operational gas supply or delivery
problems, loss of the corporate data center, and loss of the corporate customer
telephone centers. These plans are being reviewed to address failures resulting
from Year 2000 problems created or occurring outside of the Company (i.e. loss
of electricity, telephone service, etc.). The Company expects to have its Year
2000 contingency plans completed by mid-September 1999.1 The Company has
selected this date as opposed to one in early 1999 so that the contingency plans
are current and operational and that the Company will be able to use them
immediately, if required.1
Effects of Inflation
Although the rate of inflation has been relatively low over the past few years,
and thus has benefited both the Company and its customers, the Company's
operations remain sensitive to increases in the rate of inflation because of its
capital spending and the regulated nature of a significant portion of its
business.
Safe Harbor for Forward-Looking Statements
The Company is including the following cautionary statement in this combined
Annual Report to Shareholders/Form 10-K to make applicable and take advantage of
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995 for any forward-looking statements made by, or on behalf of, the Company.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance, and underlying assumptions and
other statements which are other than statements of historical facts. From time
to time, the Company may publish or otherwise make available forward-looking
statements of this nature. All such subsequent forward-looking statements,
whether written or oral and whether made by or on behalf of the Company, are
also expressly qualified by these cautionary statements. Certain statements
contained herein, including those which are designated with a "1", are
forward-looking statements and accordingly involve risks and uncertainties which
could cause actual results or outcomes to differ materially from those expressed
in the forward-looking statements. The forward-looking statements contained
herein are based on various assumptions, many of which are based, in turn, upon
further assumptions. The Company's expectations, beliefs and projections are
expressed in good faith and are believed by the Company to have a reasonable
basis, including without limitation, management's examination of historical
operating trends, data contained in the Company's records and other data
available from third parties, 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 instruments;
13. Regarding foreign operations - changes in foreign trade and monetary
policies, laws and regulations related to foreign operations, political and
governmental changes, inflation and exchange rates, taxes and operating
conditions;
14. Significant changes in tax rates or policies or in rates of inflation or
interest;
15. Significant changes in the Company's relationship with its employees and
the potential adverse effects if labor disputes or grievances were to
occur;
16. Changes in accounting principles and/or the application of such principles
to the Company; and/or
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 7A Quantitative and Qualitative Disclosure About Market Risk
Refer to the "Market Rate Sensitive Instruments" section in Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
ITEM 8 Financial Statements and Supplementary Data
Index to Financial Statements
- -----------------------------
Page
----
Financial Statements:
Report of Independent Accountants 56
Consolidated Statements of Income and Earnings Reinvested
in the Business, three years ended September 30, 1998 57
Consolidated Balance Sheets at September 30, 1998 and 1997 58-59
Consolidated Statement of Cash Flows, three years ended
September 30, 1998 60
Notes to Consolidated Financial Statements 61
Financial Statement Schedules:
For the three years ended September 30, 1998
II-Valuation and Qualifying Accounts 86
All other schedules are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or Notes thereto.
Supplementary Data
- ------------------
Supplementary data that is included in Note K - Quarterly Financial Data
(unaudited) and Note M - Supplementary Information for Oil and Gas Producing
Activities, appears under this Item, and reference is made thereto.
Report of Management
- --------------------
Management is responsible for the preparation and integrity of the Company's
financial statements. The financial statements have been prepared in accordance
with generally accepted accounting principles and necessarily include some
amounts that are based on management's best estimates and judgment.
The Company maintains a system of internal accounting and
administrative controls and an ongoing program of internal audits that
management believes provide reasonable assurance that assets are safeguarded and
that transactions are properly recorded and executed in accordance with
management's authorization. The Company's financial statements have been
examined by our independent accountants, PricewaterhouseCoopers LLP, which also
conducts a review of internal controls to the extent required by generally
accepted auditing standards.
The Audit Committee of the Board of Directors, composed solely of
outside directors, meets with management, internal auditors and
PricewaterhouseCoopers LLP to review planned audit scope and results and to
discuss other matters affecting internal accounting controls and financial
reporting. The independent accountants have direct access to the Audit Committee
and periodically meet with it without management representatives present.
<PAGE>
Report of Independent Accountants
---------------------------------
To the Board of Directors
and Shareholders of
National Fuel Gas Company
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
National Fuel Gas Company and its subsidiaries at September 30, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended September 30, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note A to the consolidated financial statements, the
Company changed its method of depletion for oil and gas properties in 1998.
PricewaterhouseCoopers LLP
Buffalo, New York
October 27, 1998
<PAGE>
National Fuel Gas Company
-------------------------
Consolidated Statements of Income and Earnings
----------------------------------------------
Reinvested in the Business
--------------------------
Year Ended September 30 (Thousands of
Dollars, Except Per Common Share Amounts) 1998 1997 1996
---- ---- ----
Income
Operating Revenues $1,248,000 $1,265,812 $1,208,017
---------- ---------- ----------
Operating Expenses
Purchased Gas 441,746 528,610 477,357
Fuel Used in Heat and Electric Generation 37,592 1,489 244
Operation 294,221 260,839 282,551
Maintenance 25,793 25,698 26,411
Property, Franchise and Other Taxes 92,817 100,549 99,456
Depreciation, Depletion and Amortization 118,880 111,650 98,231
Impairment of Oil and Gas Producing
Properties 128,996 - -
Income Taxes 24,024 68,674 66,321
---------- ---------- ----------
1,164,069 1,097,509 1,050,571
---------- ---------- ----------
Operating Income 83,931 168,303 157,446
Other Income 35,870 3,196 3,869
---------- ---------- ----------
Income Before Interest Charges and
Minority Interest in Foreign Subsidiaries 119,801 171,499 161,315
---------- ---------- ----------
Interest Charges
Interest on Long-Term Debt 53,154 42,131 40,872
Other Interest 32,130 14,680 15,772
---------- ---------- ----------
85,284 56,811 56,644
---------- ---------- ----------
Minority Interest in Foreign Subsidiaries (2,213) - -
---------- ---------- ----------
Income Before Cumulative Effect 32,304 114,688 104,671
Cumulative Effect of Change in
Accounting for Depletion (9,116) - -
---------- ---------- ----------
Net Income Available for Common Stock 23,188 114,688 104,671
Earnings Reinvested in the Business
Balance at Beginning of Year 472,595 422,874 380,123
---------- ---------- ----------
495,783 537,562 484,794
Dividends on Common Stock 67,671 64,967 61,920
---------- ---------- ----------
Balance at End of Year $ 428,112 $ 472,595 $ 422,874
========== ========== ==========
Basic Earnings Per Common Share:
Income Before Cumulative Effect $0.85 $3.01 $2.78
Cumulative Effect of Change in Accounting
For Depletion (0.24) - -
----- ----- -----
Net Income Available for Common Stock $0.61 $3.01 $2.78
===== ===== =====
Diluted Earnings Per Common Share:
Income Before Cumulative Effect $0.84 $2.98 $2.77
Cumulative Effect of Change in Accounting
For Depletion (0.24) - -
----- ----- -----
Net Income Available for Common Stock $0.60 $2.98 $2.77
===== ===== =====
Weighted Average Common Shares Outstanding:
Used in Basic Calculation 38,316,397 38,083,514 37,613,305
========== ========== ==========
Used in Diluted Calculation 38,703,526 38,440,018 37,825,453
========== ========== ==========
See Notes to Consolidated Financial Statements
<PAGE>
National Fuel Gas Company
-------------------------
Consolidated Balance Sheets
---------------------------
At September 30 (Thousands of Dollars) 1998 1997
---- ----
Assets
Property, Plant and Equipment $3,186,853 $2,668,478
Less - Accumulated Depreciation,
Depletion and Amortization 938,716 849,112
---------- ----------
2,248,137 1,819,366
---------- ----------
Current Assets
Cash and Temporary Cash Investments 30,437 14,039
Receivables - Net 82,336 107,417
Unbilled Utility Revenue 15,403 20,433
Gas Stored Underground 31,661 29,856
Materials and Supplies - at average cost 24,609 19,115
Unrecovered Purchased Gas Costs 6,316 -
Prepayments 19,755 17,807
---------- ----------
210,517 208,667
---------- ----------
Other Assets
Recoverable Future Taxes 88,303 91,011
Unamortized Debt Expense 22,295 23,394
Other Regulatory Assets 41,735 48,350
Investment in Unconsolidated Foreign Subsidiary - 18,887
Deferred Charges 8,619 12,025
Other 64,853 45,631
---------- ----------
225,805 239,298
---------- ----------
$2,684,459 $2,267,331
========== ==========
See Notes to Consolidated Financial Statements
<PAGE>
National Fuel Gas Company
-------------------------
Consolidated Balance Sheets
---------------------------
At September 30 (Thousands of Dollars) 1998 1997
---- ----
Capitalization and Liabilities
Capitalization:
Common Stock Equity
Common Stock, $1 Par Value
Authorized - 200,000,000 Shares; Issued and
Outstanding - 38,468,795 Shares and 38,165,888
Shares, Respectively $ 38,469 $ 38,166
Paid In Capital 416,239 405,028
Earnings Reinvested in the Business 428,112 472,595
Cumulative Translation Adjustment 7,265 (2,085)
---------- ----------
Total Common Stock Equity 890,085 913,704
Long-Term Debt, Net of Current Portion 692,669 581,640
---------- ----------
Total Capitalization 1,582,754 1,495,344
---------- ----------
Minority Interest in Foreign Subsidiaries 25,479 -
---------- ----------
Current and Accrued Liabilities
Notes Payable to Banks and
Commercial Paper 326,300 92,400
Current Portion of Long-Term Debt 216,929 103,359
Accounts Payable 59,933 74,105
Amounts Payable to Customers 5,781 10,516
Other Accruals and Current Liabilities 80,480 83,793
---------- ----------
689,423 364,173
---------- ----------
Deferred Credits
Accumulated Deferred Income Taxes 258,222 288,555
Taxes Refundable to Customers 18,404 19,427
Unamortized Investment Tax Credit 11,372 12,041
Other Deferred Credits 98,805 87,791
---------- ----------
386,803 407,814
---------- ----------
Commitments and Contingencies - -
---------- ----------
$2,684,459 $2,267,331
========== ==========
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
National Fuel Gas Company
-------------------------
Consolidated Statement of Cash Flows
------------------------------------
Year Ended September 30 (Thousands of Dollars) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating Activities
Net Income Available for Common Stock $ 23,188 $114,688 $104,671
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Cumulative Effect of a Change in Accounting
for Depletion 9,116 - -
Impairment of Oil and Gas Producing Properties 128,996 - -
Depreciation, Depletion and Amortization 118,880 111,650 98,231
Deferred Income Taxes (26,237) 3,800 3,907
Minority Interest in Foreign Subsidiaries 2,213 - -
Other (6,378) 8,030 4,540
Change in:
Receivables and Unbilled Utility Revenue 45,200 (10,332) (20,747)
Gas Stored Underground and Materials and Supplies (1,271) 7,300 (6,308)
Unrecovered Purchased Gas Costs (6,316) - -
Prepayments 829 10,065 1,881
Accounts Payable (24,975) 9,495 10,768
Amounts Payable to Customers (4,735) 5,898 (46,383)
Other Accruals and Current Liabilities (15,481) 4,113 18,200
Other Assets 36 (2,856) (7,667)
Other Liabilities 9,913 32,811 7,376
-------- -------- --------
Net Cash Provided by Operating Activities 252,978 294,662 168,469
-------- -------- --------
Investing Activities
Capital Expenditures (393,233) (214,001) (171,567)
Investment in Subsidiaries, Net of Cash Acquired (111,966) (21,075) -
Other 2,130 1,429 (1,366)
-------- --------- --------
Net Cash Used in Investing Activities (503,069) (233,647) (172,933)
-------- --------- --------
Financing Activities
Change in Notes Payable to Banks and Commercial
Paper 229,387 (107,300) 52,100
Net Proceeds from Issuance of Long-Term Debt 198,750 99,500 99,650
Reduction of Long-Term Debt (103,867) (1,310) (88,500)
Proceeds from Issuance of Common Stock 7,853 7,074 8,956
Dividends Paid on Common Stock (66,959) (64,260) (61,179)
Dividends Paid to Minority Interest (253) - -
-------- -------- --------
Net Cash Provided by (Used in) Financing Activities 264,911 (66,296) 11,027
-------- -------- --------
Effect of Exchange Rates on Cash 1,578 - -
-------- -------- --------
Net Increase (Decrease) in Cash and
Temporary Cash Investments 16,398 (5,281) 6,563
Cash and Temporary Cash Investments at Beginning of Year 14,039 19,320 12,757
-------- -------- --------
Cash and Temporary Cash Investments at End of Year $ 30,437 $ 14,039 $ 19,320
======== ======== ========
See Notes to Consolidated Financial Statements
<PAGE>
National Fuel Gas Company
Notes to Consolidated Financial Statements
Note A - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its majority owned subsidiaries. The equity method is used to account for the
Company's investment in minority owned entities. All significant intercompany
balances and transactions have been eliminated where appropriate.
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassification
Certain prior year amounts have been reclassified to conform with current year
presentation.
Regulation
Two of the Company's principal subsidiaries, Distribution Corporation and Supply
Corporation, are subject to regulation by state and federal authorities having
jurisdiction. Distribution Corporation and Supply Corporation have accounting
policies which conform to generally accepted accounting principles, as applied
to regulated enterprises, and are in accordance with the accounting requirements
and ratemaking practices of the regulatory authorities. Reference is made to
Note B - Regulatory Matters for further discussion.
In the International segment, rates charged for the sale of thermal
energy and electric energy at the retail level are subject to regulation and
audit in the Czech Republic by the Czech Ministry of Finance. The regulation of
electric energy rates at the retail level indirectly impacts the rates charged
by the International segment for its electric energy sales at the wholesale
level.
Revenues
Revenues are recorded as bills are rendered, except that service supplied but
not billed is reported as "Unbilled Utility Revenue" and is included in
operating revenues for the year in which service is furnished.
Unrecovered Purchased Gas Costs and Refunds
Distribution Corporation's rate schedules contain clauses that permit adjustment
of revenues to reflect price changes from the cost of purchased gas included in
base rates. Differences between amounts currently recoverable and actual
adjustment clause revenues, as well as other price changes and pipeline and
storage company refunds not yet includable in adjustment clause rates, are
deferred and accounted for as either unrecovered purchased gas costs or amounts
payable to customers.
Distribution Corporation's rate settlements with the State of New York
Public Service Commission (PSC) include provisions for a sharing of earnings
over a specified rate of return on equity. Estimated refund liabilities are
recorded over the term of the settlements which reflect management's current
estimate of such refunds. Reference is made to Note B - Regulatory Matters for
further discussion.
Property, Plant and Equipment
The principal assets, consisting primarily of gas plant in service, are recorded
at the historical cost when originally devoted to service in the regulated
businesses, as required by regulatory authorities. Such cost includes an
Allowance for Funds Used During Construction (AFUDC), which is defined in
applicable regulatory systems of accounts as the net cost of borrowed funds used
for construction purposes and a reasonable rate on other funds when so used. The
rates used in the calculation of AFUDC are determined in accordance with
guidelines established by regulatory authorities.
Included in property, plant and equipment is the cost of gas stored
underground - noncurrent, representing the volume of gas required to maintain
pressure levels for normal operating purposes as well as gas volumes maintained
for system balancing and other purposes, including those needed for no-notice
transportation service.
Maintenance and repairs of property and replacements of minor items of
property are charged directly to maintenance expense. The original cost of the
regulated subsidiaries' property, plant and equipment retired, and the cost of
removal less salvage, are charged to accumulated depreciation.
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 properties, net of related income tax effect (the full-cost
ceiling). Future net revenues are estimated based on end-of-period 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.
Due to significant declines in oil prices in 1998, 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 1998 by $79.1
million ($2.06 per common share, basic; $2.04 per common share, diluted).
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization are computed by application of either
the straight-line method or the units of production method, in amounts
sufficient to recover costs over the estimated service lives of property in
service, and for oil and gas properties, based on quantities produced in
relation to proved reserves (see discussion of change in method of depletion for
oil and gas properties below). The costs of unevaluated oil and gas properties
are excluded from this computation. For timber properties, depletion, determined
on a property by property basis, is charged to operations based on the annual
amount of timber cut in relation to the total amount of recoverable timber. The
provisions for depreciation, depletion and amortization, as a percentage of
average depreciable property were 4.4% in 1998, 4.6% in 1997 and 4.4% in 1996.
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 matching of oil and gas
revenues and depletion expense and is the preferable method used by oil and gas
producing companies. Seneca's recent acquisition activities have increased its
scope of operations in relation to those of the Company. Consequently, the
change in method was warranted. 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 1998 by $9.1 million, net
of income tax. Depletion of oil and gas properties for 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 1998
by $1.4 million ($0.04 per common share, basic and diluted).
Pro forma amounts for 1998, 1997 and 1996 shown below, assume the
retroactive application of the new depletion method.
Year Ended
September 30
----------------------------------
1998 1997 1996
----- ---- ----
Net Income (Thousands):
As reported $ 23,188 $114,688 $104,671
Pro forma $ 32,304 $113,022 $102,655
Earnings Per Common Share:
Basic - As reported $0.61 $3.01 $2.78
Basic - Pro forma $0.85 $2.97 $2.73
Diluted - As reported $0.60 $2.98 $2.77
Diluted - Pro forma $0.84 $2.94 $2.71
Gas Stored Underground - Current
Gas stored underground - current is carried at lower of cost or market, on a
last-in, first-out (LIFO) method. Under present regulatory practice, the
liquidation of a LIFO layer is reflected in future gas cost adjustment clauses.
Based upon the average price of spot market gas purchased in September 1998,
including transportation costs, the current cost of replacing the inventory of
gas stored underground-current exceeded the amount stated on a LIFO basis by
approximately $21.2 million at September 30, 1998.
Unamortized Debt Expense
Costs associated with the issuance of debt by the Company are deferred and
amortized over the lives of the related issues. Costs associated with the
reacquisition of debt related to rate-regulated subsidiaries are deferred and
amortized over the remaining life of the issue or the life of the replacement
debt in order to match regulatory treatment.
Foreign Currency Translation
The functional currency for the Company's foreign operations is the Czech
koruna. The translation from the Czech koruna to U. S. dollars is performed for
balance sheet accounts by using current exchange ratios in effect at the balance
sheet date, and for revenue and expense accounts by using an average exchange
rate during the period. The resultant translation adjustment is reported as a
Cumulative Translation Adjustment, a separate component of Common Stock Equity.
Income Taxes
The Company and its domestic subsidiaries file a consolidated federal income tax
return. Investment Tax Credit, prior to its repeal in 1986, was deferred and is
being amortized over the estimated useful lives of the related property, as
required by regulatory authorities having jurisdiction.
Financial Instruments
Seneca and NFR utilize price swap agreements as well as exchange-traded futures
and options, respectively, to manage a portion of the market risk associated
with fluctuations in the price of natural gas and crude oil. Gains or losses
from the price swap agreements are accrued in operating revenues on the
Consolidated Statement of Income at the contract settlement dates. Gains or
losses from exchange-traded futures and options 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 on the
Consolidated Statement of Income. Reference is made to Note F - Financial
Instruments for further discussion.
In the International segment, PSZT has purchased a forward contract to
hedge against the exchange rate risk associated with U.S. dollar denominated
debt. Exchange rate gains or losses related to the U.S. dollar denominated debt
are recorded in Other Income on the Consolidated Statement of Income on a
monthly basis. Gains or losses related to the forward contract are recorded in
Other Income on the Consolidated Statement of Income as an offset to the gains
or losses recognized on the U.S. dollar denominated debt. Reference is made to
Note F - Financial Instruments for further discussion.
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. Interest paid in 1998, 1997 and 1996 was
$46.2 million, $52.4 million and $54.8 million, respectively. Income taxes paid
in 1998, 1997 and 1996 were $64.5 million, $69.2 million and $60.8 million,
respectively. In 1998, the Company received a $22.4 million refund of taxes and
interest from the Internal Revenue Service stemming from the settlement of the
primary issues of audits of years 1977 - 1994. In addition, the Company received
$2.2 million in tax refunds issued to SCT and PSZT by the Czech Ministry of
Finance.
Details of the SCT, PSZT and HarCor stock acquisitions during 1998 are
as follows (dollars in millions):
SCT PSZT HarCor Total
--- ---- ------ -----
Assets acquired $66.1 $141.8 $105.6 $313.5
Liabilities assumed (22.3) (77.3) (73.0) (172.6)
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 $63.6 $ 29.8 $112.0
===== ===== ====== ======
Further discussion of these acquisitions can be found at Note J - Stock
Acquisitions.
In 1997, Seneca entered into non-cash investing activities whereby it
issued notes to third parties totaling $12.3 million in connection with the
acquisition of timber properties.
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 (SFAS) No. 128, "Earnings per Share."
New Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board (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) a hedge of the exposure to changes in the fair value
of a recognized asset or liability or a firm commitment (a fair value hedge),
(2) a hedge of the exposure to variable cash flows of a forecasted transaction
(a cash flow hedge), or (3) a hedge of the foreign currency exposure of a net
investment in a foreign operation (a foreign currency hedge), 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 other comprehensive income.
Management has determined that the price swap agreements utilized by
Seneca will qualify as cash flow hedges and that the exchange-traded futures and
options utilized by NFR will qualify as fair value hedges upon implementation of
SFAS 133. At adoption, these hedges will be recorded at fair value on the
Consolidated Balance Sheets as either an asset or liability. In the case of the
price swap agreements, the offset to the asset or liability will be other
comprehensive income, as discussed below. As for the exchange-traded futures and
options, the offset will be recorded as a cumulative effect of change in
accounting item on the Consolidated Statement of Income. Since the
exchange-traded futures and options will have been designated as hedges of firm
commitments, the firm commitments will also be recorded at fair value on the
Consolidated Balance Sheets as either an asset or liability. The offset to this
asset or liability will be the aforementioned cumulative effect of change in
accounting item on the Consolidated Statement of Income.
Management is continuing to evaluate other financial instruments and
contracts which may have embedded derivatives that could be impacted by the
adoption of SFAS 133. The Company plans to adopt SFAS 133 in the first quarter
of fiscal 2000.
Comprehensive Income
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income" (SFAS
130). SFAS 130 establishes standards for reporting and display of comprehensive
income in a full set of general-purpose financial statements. Comprehensive
income, as described in SFAS 130, includes Net Income Available for Common Stock
as well as items under existing accounting standards that are reported as
adjustments to stockholders' equity. Such adjustments to stockholders' equity
currently include foreign currency translation adjustments, minimum pension
liability adjustments and unrealized gains and losses on certain investments in
debt and equity securities. Upon adoption of SFAS 133, certain unrealized gains
or losses on derivative financial instruments will be included as a component of
other comprehensive income in accordance with SFAS 130. The Company will adopt
SFAS 130 in the first quarter of 1999.
Note B - Regulatory Matters
Regulatory Assets and Liabilities
Distribution Corporation and Supply Corporation have incurred various costs and
received various credits which have been reflected as regulatory assets and
liabilities on the Company's Consolidated Balance Sheets. Accounting for such
costs and credits as regulatory assets and liabilities is in accordance with
SFAS 71, "Accounting for the Effect of Certain Types of Regulation" (SFAS 71).
This statement sets forth the application of generally accepted accounting
principles for those companies whose rates are established by or are subject to
approval by an independent third-party regulator. Under SFAS 71, regulated
companies defer costs and credits on the balance sheet as regulatory assets and
liabilities when it is probable that those costs and credits will be allowed in
the rate setting process in a period different from the period in which they
would have been reflected in income by an unregulated company. These deferred
regulatory assets and liabilities are then flowed through the income statement
in the period in which the same amounts are reflected in rates. Distribution
Corporation and Supply Corporation have recorded the following regulatory assets
and liabilities:
At September 30 (Thousands) 1998 1997
---- ----
Regulatory Assets:
Recoverable Future Taxes (Note C) $ 88,303 $ 91,011
Unamortized Debt Expense (Note A) 16,886 18,603
Pension and Post-Retirement Benefit Costs (Note G) 22,483 24,200
Gathering Plant 5,475 7,675
Environmental Clean-up (Note H) 12,394 8,697
Other 1,383 7,778
-------- --------
Total Regulatory Assets 146,924 157,964
-------- --------
Regulatory Liabilities:
Amounts Payable to Customers (Note A) 5,781 10,516
New York Rate Settlement* 19,341 22,232
Taxes Refundable to Customers (Note C) 18,404 19,427
Pension and Post-Retirement
Benefit Costs* (Note G) 20,222 10,446
Other* 1,741 1,538
-------- --------
Total Regulatory Liabilities 65,489 64,159
-------- --------
Net Regulatory Position $ 81,435 $ 93,805
======== ========
* Included in Other Deferred Credits on the Consolidated Balance Sheets.
If for any reason, including deregulation, a change in the method of
regulation, or a change in competitive environment, Distribution Corporation
and/or Supply Corporation ceases to meet the criteria for application of SFAS 71
for all or part of their operations, the regulatory assets and liabilities
related to those portions ceasing to meet such criteria would be eliminated from
the balance sheet and included in income of the period in which the
discontinuance of SFAS 71 occurs. Such amounts would be classified as an
extraordinary item.
New York Rate Settlement
As of September 30, 1998, Distribution Corporation's 1996 rate settlement with
the PSC expired. As part of the 1996 rate settlement, earnings above a 12%
return on equity (determined on a cumulative basis over the three years ended
September 30, 1998) are to be shared equally between shareholders and customers.
As a result of this sharing mechanism, Distribution Corporation has determined
that the refund due customers as of September 30, 1998 is $10.7 million (of
which $3.0 million will be passed back to customers in 1999 and thus is included
as a current liability on the Consolidated Balance Sheet in Amounts Payable to
Customers). An additional $3.0 million will be passed back to customers in 2000
with the remaining amount, if any, to be passed back to customers as determined
by the PSC.
In addition, as part of the 1996 rate settlement, Distribution
Corporation was allowed to accumulate certain refunds from upstream pipeline
companies and certain credits (referred to as the "refund pool") to offset
certain specific expense items. This refund pool had a balance at September 30,
1998 of $6.0 million. Various other regulatory liabilities were also created
through the rate settlement process and amounted to $5.6 million at September
30, 1998.
Note C - Income Taxes
The components of federal and state income taxes included in the Consolidated
Statement of Income are as follows:
Year Ended September 30 (Thousands) 1998 1997 1996
---- ---- ----
Operating Expenses:
Current Income Taxes -
Federal $ 40,740 $ 57,807 $ 55,148
State 6,635 7,067 7,266
Deferred Income Taxes -
Federal (21,687) 2,895 2,160
State (5,997) 905 1,747
Foreign Income Taxes 4,333 - -
-------- -------- --------
24,024 68,674 66,321
Other Income:
Deferred Investment Tax Credit (665) (665) (665)
Minority Interest in Foreign Subsidiaries (1,218) - -
Cumulative Effect of Change in Accounting
for Depletion (5,737) - -
-------- -------- --------
Total Income Taxes $ 16,404 $ 68,009 $ 65,656
======== ======== ========
The U.S. and foreign components of income (loss) before income taxes are as
follows:
Year Ended September 30 (Thousands) 1998 1997 1996
---- ---- ----
U.S. $ 31,127 $184,257 $170,424
Foreign 8,465 (1,560) (97)
-------- -------- --------
$ 39,592 $182,697 $170,327
======== ======== ========
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:
Year Ended September 30 (Thousands) 1998 1997 1996
---- ---- ----
Net Income Available for Common Stock $ 23,188 $114,688 $104,671
Income Tax Expense 16,404 68,009 65,656
-------- -------- --------
Income Before Income Taxes 39,592 182,697 170,327
-------- -------- --------
Income Tax Expense, Computed at Federal
Statutory Rate of 35% 13,857 63,944 59,614
Increase (Reduction) in Taxes Resulting from:
State Income Taxes 986 5,182 5,858
Depreciation 2,186 2,560 2,499
Property Retirements (1,609) (1,320) (1,083)
Keyman Life Insurance (774) (695) (234)
Prior Years Tax Adjustment 2,846 - -
Miscellaneous (1,088) (1,662) (998)
-------- -------- --------
Total Income Taxes $ 16,404 $ 68,009 $ 65,656
======== ======== ========
Significant components of the Company's deferred tax liabilities and
assets were as follows:
At September 30 (Thousands) 1998 1997
---- ----
Deferred Tax Liabilities:
Abandonments $ 15,545 $ 14,241
Accelerated Tax Depreciation 132,138 190,913
Exploration and Intangible Well
Drilling Costs 147,795 117,759
Other 42,109 47,948
-------- --------
Total Deferred Tax Liabilities 337,587 370,861
-------- --------
Deferred Tax Assets:
Capitalized Overheads (22,484) (19,406)
Other (56,881) (62,900)
-------- --------
Total Deferred Tax Assets (79,365) (82,306)
-------- --------
Total Net Deferred Income Taxes $258,222 $288,555
======== ========
Regulatory liabilities representing the reduction of previously
recorded deferred income taxes associated with rate-regulated activities that
are expected to be refundable to customers amounted to $18.4 million and $19.4
million at September 30, 1998 and 1997, respectively. Also, regulatory assets,
representing future amounts collectible from customers, corresponding to
additional deferred income taxes not previously recorded because of prior
ratemaking practices amounted to $88.3 million and $91.0 million at September
30, 1998 and 1997, respectively.
The primary issues related to Internal Revenue Service audits of the
Company for the years 1977-1994 were settled during the current year. Net income
for the year ended September 30, 1998 was increased approximately $5.0 million
as a result of interest, net of tax and other adjustments, related to this
settlement.
<PAGE>
Note D - Capitalization
Summary of Changes in Common Stock Equity
Earnings
Paid Reinvested Cumulative
(Thousands, Except Common Stock In in the Translation
---------------
Per Share Amounts) Shares Amount Capital Business Adjustment
- ------------------ ------ ------ ------- -------- ----------
Balance at
September 30, 1995 37,434 $37,434 $383,031 $380,123 $ -
Net Income Available
for Common Stock 104,671
Dividends Declared
on Common Stock
($1.65 Per Share) (61,920)
Common Stock Issued
Under Stock and
Benefit Plans 418 418 12,241
------ ------- -------- -------- -------
Balance at
September 30, 1996 37,852 37,852 395,272 422,874 -
Net Income Available
for Common Stock 114,688
Dividends Declared
on Common Stock
($1.71 Per Share) (64,967)
Cumulative Translation
Adjustment (2,085)
Common Stock Issued
Under Stock and
Benefit Plans 314 314 9,756
------ ------- -------- -------- -------
Balance at
September 30, 1997 38,166 38,166 405,028 472,595 (2,085)
Net Income Available
for Common Stock 23,188
Dividends Declared on
Common Stock
($1.77 Per Share) (67,671)
Cumulative Translation
Adjustment 9,350
Common Stock Issued
Under Stock and
Benefit Plans 303 303 11,211
------ ------- -------- -------- -------
Balance at
September 30, 1998 38,469 $38,469 $416,239 $428,112* $ 7,265
====== ======= ======== ======== =======
* The availability of consolidated earnings reinvested in the business for
dividends payable in cash is limited under terms of the indentures covering
long-term debt. At September 30, 1998, $353.7 million of accumulated
earnings was free of such limitations.
Common Stock
The Company has various plans which allow shareholders, customers and employees
to purchase shares of Company common stock. The Dividend Reinvestment and Stock
Purchase Plan allows shareholders to reinvest cash dividends and/or make cash
investments in the Company's common stock. The Customer Stock Purchase Plan
provides residential customers the opportunity to acquire shares of Company
common stock without the payment of any brokerage commissions or service charges
in connection with such acquisitions. The 401(k) Plans allow employees the
opportunity to invest in Company common stock, in addition to a variety of other
investment alternatives. At the discretion of the Company, shares purchased
under these plans are either original issue shares purchased directly from the
Company or shares purchased on the open market by an agent.
The Company also has a Director Stock Program under which it issues
shares of Company common stock to its non-employee directors as partial
consideration for their services as directors.
Shareholder Rights Plan
In 1996, the Company's Board of Directors adopted a shareholder rights plan and
declared a dividend of one right (Right) for each share of common stock held by
the shareholders of record on July 31, 1996. The Rights become exercisable ten
days after actions that result or could result in the acquisition by a person or
entity of 10% or more of the Company's voting stock. If the Rights become
exercisable, each Company stockholder, except such an acquirer, will be able to
exercise a Right and receive common stock (or, in certain cases, cash, property
or other securities) of the Company, or common stock of the acquirer, having a
market value equal to twice the Right's then current purchase price. If a Right
were currently exercisable, it would entitle a Company stockholder, other than
an acquirer, to purchase $130 worth of Company common stock (or the common stock
of the acquirer) for $65.
The Company is able to exchange the Rights at an exchange ratio of one
share of common stock per Right. It is also able to redeem, in whole but not in
part, the Rights at a price of $0.01 per Right anytime until ten days after an
acquirer announces that it has acquired or has the right to acquire 10% or more
of the Company's voting stock. In September 1998, the Directors voted to amend
the shareholder rights plan to (i) remove provisions which would prevent newly
elected directors from voting on certain questions including the redemption of
Rights, (ii) allow such questions to be decided by a vote of three quarters of
all the directors and (iii) extend the expiration date of the Rights by two
years to July 31, 2008.
Stock Option and Stock Award Plans
The Company has various stock option and stock award plans which provide or
provided for the issuance of one or more of the following to key employees:
incentive stock options, nonqualified stock options, stock appreciation rights,
restricted stock, performance units or performance shares. Stock options under
all plans have exercise prices equal to the average market price of Company
common stock on the date of grant, and generally no option is exercisable less
than one year or more than ten years after the date of each grant.
The Company follows the disclosure provision of SFAS 123, "Accounting
for Stock-Based Compensation" (SFAS 123), but remains under the expense
recognition provisions of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for its stock option
and stock award plans. For the years ended September 30, 1998, 1997 and 1996, no
compensation expense was recognized for options granted under these plans.
Compensation expense related to stock appreciation rights and restricted stock
under these stock plans was $4.1 million, $8.1 million and $6.7 million for the
years ended September 30, 1998, 1997 and 1996, respectively. Had compensation
expense for stock options granted under the Company's stock option and stock
award plans been determined based on fair value at the grant dates consistent
with the method of SFAS 123, the Company's net income and earnings per share
would have been reduced to the pro forma amounts below:
Year Ended September 30 1998 1997 1996
- -------------------------------------------------------------------------------
Net Income (Thousands):
As reported $23,188 $114,688 $104,671
Pro forma $18,859 $110,506 $104,322
Earnings per Common Share:
Basic - As reported $0.61 $3.01 $2.78
Basic - Pro forma $0.49 $2.90 $2.77
Diluted - As reported $0.60 $2.98 $2.77
Diluted - Pro forma $0.49 $2.87 $2.76
The above 1996 pro forma amount relates only to options granted since
the beginning of 1996. Had SFAS 123 been effective prior to 1996, the fair value
of options granted in 1995 but vesting in 1996 would have further reduced 1996
pro forma net income and earnings per share by $1.0 million and $0.03,
respectively.
Transactions involving option shares for all plans are summarized as
follows:
Number of
Shares Subject Weighted Average
to Option Exercise Price
- -------------------------------------------------------------------------------
Outstanding at September 30, 1995 1,500,290 $27.13
Granted in 1996 487,750 $34.44
Exercised in 1996* (195,321) $22.72
Forfeited in 1996 (19,468) $27.90
- -------------------------------------------------------------------------------
Outstanding at September 30, 1996 1,773,251 $29.62
Granted in 1997 678,750 $39.61
Exercised in 1997* (274,655) $25.80
Forfeited in 1997 (3,000) $36.81
- -------------------------------------------------------------------------------
Outstanding at September 30, 1997 2,174,346 $33.21
Granted in 1998 770,000 $44.44
Exercised in 1998* (205,200) $27.41
Forfeited in 1998 (3,250) $41.63
- -------------------------------------------------------------------------------
Outstanding at September 30, 1998 2,735,896 $36.80
- -------------------------------------------------------------------------------
Option shares exercisable
at September 30, 1998 1,965,896 $33.80
Option shares available for future
grant at September 30, 1998** 837,177
- -------------------------------------------------------------------------------
* In connection with exercising these options, 44,580; 117,326; and 77,679
shares were surrendered and canceled during 1998, 1997 and 1996,
respectively.
** Including shares available for restricted stock grants.
The weighted average fair value per share of options granted in 1998,
1997 and 1996 was $7.91, $7.66 and $5.58, respectively. These weighted average
fair values were estimated on the date of grant using a binomial option pricing
model which is a modification of the Black-Scholes option pricing model, with
the following weighted average assumptions:
Year Ended September 30 1998 1997 1996
---- ---- ----
Quarterly Dividend Yield 0.98% 1.06% 1.22%
Annual Standard Deviation (Volatility) 16.48% 16.76% 15.62%
Risk Free Rate 5.77% 6.58% 6.28%
Expected Term - in Years 5.5 5 5.5
The following table summarizes information about options outstanding at
September 30, 1998:
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------- -----------------------------
Number Weighted Average Weighted Number
Range of Outstanding Remaining Average Exercisable Weighted Average
Exercise Prices at 9/30/98 Contractual Life Exercise Price at 9/30/98 Exercise Price
- --------------- ---------- ---------------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
$18.00 - $25.19 217,720 3.22 years $24.47 217,720 $24.47
$27.94 - $36.75 1,353,776 6.98 years $33.03 1,353,776 $33.03
$41.63 - $44.88 1,164,400 9.02 years $43.49 394,400 $41.63
</TABLE>
Restricted stock is subject to restrictions on vesting and
transferability. Restricted stock awards entitle the participants to full
dividend and voting rights. The market value of restricted stock on the date of
the award is being recorded as compensation expense over the periods during
which the vesting restrictions exist. Certificates for shares of restricted
stock awarded under the Company's stock options and stock award plans are held
by the Company during the periods in which the restrictions on vesting are
effective.
The following table summarizes the awards of restricted stock over the
past three years:
Year Ended September 30 1998 1997 1996
- ------------------------------------------------------------------------------
Shares of Restricted Stock Awarded 7,609 6,300 8,000
Weighted Average Market Price of
Stock on Award Date $44.875 $40.875 $36.81
- ------------------------------------------------------------------------------
As of September 30, 1998, 110,655 shares of non-vested restricted stock
were outstanding. Vesting restrictions will lapse as follows: 1999 - 20,916
shares; 2000 - 28,216 shares; 2001 - 30,523 shares; 2002 - 8,000 shares; 2003 -
8,000 shares; 2004 - 7,000 shares; 2005 - 6,000 shares; and 2006 - 2,000 shares.
Redeemable Preferred Stock
As of September 30, 1998, there were 10,000,000 shares of $1 par value
Cumulative Preferred Stock authorized but unissued.
Long-Term Debt
The outstanding long-term debt is as follows:
At September 30 (Thousands) 1998 1997
---- ----
National Fuel Gas Company:
Debentures:
7-3/4% due February 2004 $125,000 $125,000
Medium-Term Notes:
6.42% due November 1997 - 50,000
6.08% due July 1998 - 50,000
5.58% due March 1999 100,000 100,000
7.25% due July 1999 50,000 50,000
6.60% due February 2000 50,000 50,000
7.395% due March 2023 49,000 49,000
8.48% due July 2024(1) 50,000 50,000
7.375% due June 2025 50,000 50,000
6.214% due August 2027(2) 100,000 100,000
6.303% due May 2008 200,000 -
-------- --------
774,000 674,000
-------- --------
HarCor:
14.875% Senior Secured Notes 62,571 -
-------- --------
PSZT:
8.04% U.S. Dollar Denominated
Debt due
March 2000 - December 2004(3) 50,596 -
13% Debentures due December 1999 9,908 -
-------- --------
60,504 -
-------- --------
SCT:
14.72% Term Loan payable quarterly
through June 2006(4) 4,524 -
-------- --------
Other Notes 7,999 10,999
-------- --------
Total Long-Term Debt 909,598 684,999
Less Current Portion 216,929 103,359
-------- --------
$692,669 $581,640
======== ========
(1) Callable by the Company beginning July 1999 at a redemption price of
106.36%. This price would be effective through July 2000 and would decline
in subsequent years.
(2) Putable by debt holders only on August 12, 2002, at par.
(3) Interest rate is six month LIBOR (London Interbank Offered Rates) plus
2.2%.
(4) Interest rate is six month PRIBOR (Prague Interbank Offered Rate) plus 1%.
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
commissions, the net proceeds to the Company amounted to $198.8 million.
The stock acquisitions of HarCor, PSZT and SCT and subsequent
consolidation of these companies into the Company's consolidated financial
statements accounts for the significant increase in long-term debt of Seneca and
Horizon. These stock acquisitions are discussed further at Note J - Stock
Acquisitions.
The senior secured notes recorded by Seneca as a result of the HarCor
acquisition have a book value of $53.6 million. In accordance with APB 16,
"Business Combinations" (APB 16), the senior secured notes were adjusted to fair
market value on the opening balance sheet to reflect an effective interest rate
of 5.875% and the projected redemption of this debt in 1999. As such, the entire
balance is included in Current Portion of Long-Term Debt on the Consolidated
Balance Sheets at September 30, 1998.
The aggregate principal amounts of long-term debt maturing for the next
five years and thereafter are as follows: $216.9 million in 1999, $70.4 million
in 2000, $12.4 million in 2001, $10.7 million in 2002, $10.8 million in 2003 and
$588.4 million thereafter.
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 additional funded
debt, with certain exceptions, until at least the third quarter of fiscal 1999.
This will not, however, limit the Company's issuance of funded debt to refund
existing funded debt.
Note E - Short-Term Borrowings
The Company has SEC authorization under the Public Utility Holding Company Act
of 1935, as amended, to borrow and have outstanding as much as $750.0 million of
short-term debt at any time.
The Company historically has borrowed short-term either through bank
loans or the issuance of commercial paper. As for the former, the Company
maintains uncommitted or discretionary lines of credit with certain financial
institutions for general corporate purposes. These lines are utilized primarily
as a means of financing, on an interim basis, various working capital
requirements, acquisitions and capital expenditures of the Company, including
the Company's oil and gas exploration and development program and the purchase
and storage of gas. Borrowings under these lines of credit are made at
competitive market rates. These credit lines are revocable at the option of the
financial institutions and are reviewed on an annual basis.
The Company could issue and have outstanding as much as $750.0 million
of commercial paper at any time (or a lesser amount so that short-term
borrowings from all sources do not exceed $750.0 million at any time), but is
not likely to have more than $150.0 million in commercial paper outstanding
because of the terms of the revolving credit arrangement discussed below.
The Company has a 364-day committed revolving credit arrangement with
five commercial banks, under which it may borrow as much as $150.0 million. This
arrangement may be utilized for general corporate purposes, primarily to support
the issuance of commercial paper. The Company pays a fee to maintain this
arrangement, and may borrow through this arrangement under four interest rate
options. If amounts are borrowed under this arrangement, the $750.0 million
available for short-term borrowing by other means is correspondingly reduced. No
borrowings were made under this arrangement during the fiscal year ended
September 30, 1998.
At September 30, 1998, the Company had outstanding notes payable to
banks and commercial paper of $196.3 million and $130.0 million, respectively.
At September 30, 1997, the Company had outstanding notes payable to banks and
commercial paper of $32.4 million and $60.0 million, respectively.
The weighted average interest rate on notes payable to banks was 5.67%
and 6.12% at September 30, 1998 and 1997, respectively. The weighted average
interest rate on commercial paper was 5.60% and 5.64% at September 30, 1998 and
1997, respectively.
Note F - Financial Instruments
Fair Values
The fair market value of the Company's long-term debt is estimated based on
quoted market prices of similar issues having the same remaining maturities,
redemption terms and credit ratings. Based on these criteria, the fair market
value of long-term debt, including current portion, was as follows:
At September 30 (Thousands)
1998 1998 1997 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
Long-Term Debt $909,598 $966,085 $684,999 $704,409
======== ======== ======== ========
The fair value amounts are not intended to reflect principal amounts
that the Company will ultimately be required to pay.
Temporary cash investments, notes payable to banks and commercial paper
are stated at amounts which approximate their fair value due to the short-term
maturities of those financial instruments. Investments in life insurance are
stated at their cash surrender values as discussed below.
Investments
Other assets include cash surrender values of insurance contracts. The cash
surrender values of these insurance contracts amounted to $40.1 million and
$35.7 million at September 30, 1998 and 1997, respectively. The insurance
contracts were established as an informal funding mechanism for various benefit
obligations the Company has to certain employees.
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 its operating results. These agreements
are not held for trading purposes. The price swap agreements call for Seneca to
receive monthly payments from (or make payment 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.
At September 30, 1998, Seneca had natural gas price swap agreements
covering a notional amount of 21.8 Bcf extending through 2000 at a weighted
average fixed rate of $2.34 per Mcf. Seneca also had crude oil price swap
agreements covering a notional amount of 135,000 bbls extending through 1999 at
a weighted average fixed rate of $19.86 per bbl. Seneca had unrecognized losses
of approximately $1.0 million related to these price swap agreements which are
offset by corresponding unrecognized gains from Seneca's anticipated natural gas
and crude oil production over the terms of the price swap agreements.
Seneca recognized net losses of $4.1 million, $21.5 million and $11.8
million related to price swap agreements during 1998, 1997 and 1996,
respectively. As the price swap agreements have been designated as hedges, these
losses were offset by corresponding gains from Seneca's natural gas and crude
oil production.
The Company is exposed to credit risk on the price swap agreements that
Seneca has entered into. 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. To mitigate such credit risk, before
entering into a price swap agreement with a new counterparty, management
performs a credit check and prepares a report indicating the results of the
credit investigation. This report must be approved by Seneca's board of
directors after which a Master Swap Agreement is executed between Seneca and the
counterparty. On an ongoing basis, periodic reports are prepared by management
to monitor counterparty credit exposure. Considering the procedures in place,
the Company does not anticipate any material impact to its financial position,
results of operations, or cash flows as a result of nonperformance by
counterparties.
NFR utilizes exchange-traded futures and options to manage a portion of
the market risk associated with fluctuations in the price of natural gas. Such
futures and options are not held for trading purposes. At September 30, 1998,
NFR had natural gas futures contracts related to gas purchase and sale
commitments covering 14.3 Bcf of gas on a net basis extending through 2000 at a
weighted average contract price of $2.52 per Mcf. NFR also had sold natural gas
options related to gas purchase and sale commitments covering 2.3 Bcf of gas on
a net basis extending through 1999 at a weighted average strike price of $2.91
per Mcf. NFR had unrealized gains of approximately $0.5 million related to these
futures contracts and options. Since these futures contracts and options qualify
and have been designated as hedges, any gains or losses resulting from market
price changes would be substantially offset by the related commodity
transaction.
NFR recognized net gains of $1.3 million, $1.7 million and $1.0 million
related to futures contracts and options during 1998, 1997 and 1996,
respectively. Since these futures contracts and options qualify and have been
designated as hedges, these net gains were substantially offset by the related
commodity transaction.
PSZT purchased a $50.6 million U.S. dollar forward contract at an
exchange rate of 31.54 Czech koruna per U.S. dollar in September 1998. The
purpose of the forward contract is to hedge against the exchange rate risk
associated with PSZT's U.S. dollar denominated debt (reference is made to Note D
- - Capitalization). Since the functional currency of PSZT is the Czech koruna and
this debt must be repaid in U.S. dollars, a change in exchange rates between the
Czech koruna and the U.S. dollar may increase or decrease the amount of Czech
koruna required to repay the debt, resulting in a corresponding gain or loss to
be recognized in the Consolidated Statement of Income. At September 30, 1998,
PSZT had a loss of $2.1 million related to this forward contract. This loss
offset the gain on the U.S. dollar denominated debt from the date of purchase of
the forward contract.
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 year
ended September 30, 1998 and none are currently outstanding.
Note G - Retirement Plan and Other Post-Retirement Benefits
Retirement Plan
The Company has a tax-qualified, noncontributory, defined-benefit retirement
plan (Plan) that covers substantially all domestic employees of the Company. The
Plan uses years of service, age at retirement and earnings of employees to
determine benefits.
The Company's policy is to fund at least an amount necessary to satisfy
the minimum funding requirements of applicable laws and regulations and not more
than the maximum amount deductible for federal income tax purposes. Plan funding
is subject to annual review by management and its consulting actuary. Plan
assets primarily consist of equity and fixed income investments and units in
commingled funds.
For financial reporting purposes, the regulated subsidiaries record the
difference between the amounts of pension cost recoverable in rates and the
amounts of pension cost determined by the actuary under SFAS 87, "Employers'
Accounting for Pensions," as deferred pension assets. The amounts deferred are
expected to be recovered in rates as contributions are made to the Plan. Pension
cost reflects the amount recovered from customers in rates during the year.
Under the PSC's policies, Distribution Corporation segregates the amount of
pension cost collected in rates, but not yet contributed to the pension plan,
into a regulatory liability account. This liability accrues interest at the PSC
mandated interest rate and this interest cost is included in pension cost. For
purposes of disclosure, the liability also remains in the disclosed pension
liability amount because it has not yet been contributed.
Reconciliations of the Benefit Obligation, Plan Assets and Funded
Status, as well as the components of Net Periodic Benefit Cost and the Weighted
Average Assumptions are as follows:
Year Ended September 30 (Thousands) 1998 1997
---- ----
Change in Benefit Obligation
Benefit Obligation at Beginning of Period $462,377 $432,753
Service Cost 10,655 9,988
Interest Cost 35,485 33,532
Amendments - 1,479
Actuarial Loss 52,446 10,336
Benefits Paid (28,713) (25,711)
-------- --------
Benefit Obligation at End of Period $532,250 $462,377
-------- --------
Change in Plan Assets
Fair Value of Assets at Beginning of Period $473,205 $431,828
Actual Return on Plan Assets 59,415 65,790
Employer Contribution 5,486 1,298
Benefits Paid (28,713) (25,711)
-------- --------
Fair Value of Assets at End of Period $509,393 $473,205
-------- --------
Reconciliation of Funded Status
Funded Status $(22,857) $ 10,828
Unrecognized Net Actuarial Gain (12,659) (38,687)
Unrecognized Transition Asset (18,580) (22,296)
Unrecognized Prior Service Cost 11,369 12,435
-------- --------
Accrued Benefit Cost $(42,727) $(37,720)
-------- --------
Weighted Average Assumptions
as of September 30 1998 1997 1996
---- ---- ----
Discount Rate 7.00% 7.75% 8.00%
Expected Return on Plan Assets 8.50% 8.50% 8.50%
Rate of Compensation Increase 5.00% 5.00% 5.00%
Year Ended September 30 (Thousands)
Components of Net Periodic Benefit Cost 1998 1997 1996
---- ---- ----
Service Cost $ 10,655 $ 9,988 $ 11,049
Interest Cost 35,485 33,532 31,422
Expected Return on Plan Assets (35,724) (34,011) (32,122)
Amortization of Prior Service Cost 1,065 991 1,001
Amortization of Transition Asset (3,716) (3,754) (4,167)
Amortization of Loss 981 - -
Early Retirement Window - 1,904 6,986
Net Amortization and Deferral for
Regulatory Purposes 4,829 (374) (2,320)
-------- -------- --------
Net Periodic Benefit Cost $ 13,575 $ 8,276 $ 11,849
======== ======== ========
The Benefit Obligation was determined using an assumed discount rate as
noted in the data above. The effect of the discount rate change in 1998 was to
increase the Benefit Obligation by $45.0 million as of the end of the period.
The effect of the discount rate change in 1997 was to increase the Benefit
Obligation as of the beginning of the period by $12.8 million.
The mortality assumption for healthy lives was changed from the 1983
Group Annuity Mortality Tables to the 1994 Group Annuity Mortality Tables. This
change had the effect of increasing the Benefit Obligation as of the beginning
of the period by $9.8 million.
As described in Note B - Regulatory Matters, subheading "New York Rate
Settlement," Distribution Corporation was allowed a refund pool to offset
certain specific expense items. Of the amount utilized in 1998, $6.6 million was
recorded as pension cost and is included in Net Amortization and Deferral for
Regulatory Purposes in the table above.
In June 1997, the Company completed an early retirement offer for the
Pennsylvania operating union employees of Distribution Corporation and Supply
Corporation. As a result, the Company recorded expense of $1.9 million ($1.2
million after tax) related to special termination benefits, which is included in
1997 pension cost.
In 1996, the Company had an early retirement offer for certain
salaried, non-union hourly and New York union employees of Distribution
Corporation and Supply Corporation. The Company recorded related expense in 1996
of $8.2 million ($5.2 million after tax), comprised of special termination
benefits and severance pay. The special termination benefits portion of the
expense of $7.0 million is included in 1996 pension cost.
On October 26, 1998, the Company announced an early retirement offer to
certain salaried, non-union hourly and union employees of Distribution
Corporation and Supply Corporation who have completed at least five years of
service and have attained at least 55 years of age on or before December 1,
1998. Approximately 280 employees are eligible for the early retirement offer.
The offer must be accepted by an eligible employee by November 30, 1998 and will
become effective December 1, 1998. The Company anticipates that approximately
40% of those eligible will accept the offer. Management's estimate of the pretax
expense associated with this early retirement offer related to special
termination benefits is approximately $5.0 million to $5.7 million. A charge to
earnings will be reflected in the Company's first quarter of 1999 financial
results after the number of employees accepting the offer is known.
Other Post-Retirement Benefits
In addition to providing retirement plan benefits, the Company provides health
care and life insurance benefits for substantially all domestic retired
employees under a post-retirement benefit plan (Post-Retirement Plan).
The Company has established Voluntary Employees' Beneficiary
Association (VEBA) trusts for collectively bargained employees and
non-bargaining employees. The VEBA trusts are similar to the Company's
Retirement Plan trust. Contributions to the VEBA trusts are tax deductible,
subject to limitations contained in the Internal Revenue Code and regulations.
Contributions to the VEBA trusts are made to fund employees' post-retirement
health care and life insurance benefits, as well as benefits as they are paid to
current retirees. Post-Retirement Plan assets primarily consist of equity and
fixed income investments and money market funds.
Distribution Corporation and Supply Corporation represent virtually all
of the Company's total post-retirement benefit costs. Distribution Corporation
and Supply Corporation are fully recovering their net periodic post-retirement
benefit costs in accordance with the PSC and the Pennsylvania Public Utility
Commission (PaPUC) and Federal Energy Regulatory Commission (FERC)
authorization, respectively. In accordance with regulatory guidelines, the
difference between the amounts of post-retirement benefit costs recoverable in
rates and the amounts of post-retirement benefit costs determined by the actuary
under SFAS 106, "Employers' Accounting for Post-Retirement Benefits Other Than
Pensions," are deferred in each jurisdiction as either a regulatory asset or
liability, as appropriate. The PSC policy regarding amounts collected in rates,
but not contributed, described under the Retirement Plan section in this note,
also applies to other post-retirement benefits.
Reconciliations of the Benefit Obligation, Plan Assets and Funded
Status, as well as the components of Net Periodic Benefit Cost and the Weighted
Average Assumptions are as follows:
Year Ended September 30 (Thousands) 1998 1997
---- ----
Change in Benefit Obligation
Benefit Obligation at Beginning of Period $ 218,370 $ 212,047
Service Cost 4,022 4,056
Interest Cost 17,122 16,594
Plan Participants' Contributions 867 417
Actuarial (Gain) Loss 27,014 (6,653)
Benefits Paid (10,412) (8,091)
--------- ---------
Benefit Obligation at End of Period $ 256,983 $ 218,370
--------- ---------
Change in Plan Assets
Fair Value of Assets at Beginning of Period $ 98,639 $ 73,059
Actual Return on Plan Assets 14,602 13,618
Employer Contribution 19,174 19,636
Plan Participants' Contributions 867 417
Benefits Paid (10,412) (8,091)
--------- ---------
Fair Value of Assets at End of Period $ 122,870 $ 98,639
--------- ---------
Reconciliation of Funded Status
Funded Status $(134,113) $(119,731)
Unrecognized Net Actuarial Loss 19,660 505
Unrecognized Transition Obligation 106,907 114,034
--------- ---------
Accrued Benefit Cost $ (7,546) $ (5,192)
--------- ---------
Weighted Average Assumptions
as of September 30 1998 1997 1996
---- ---- ----
Discount Rate 7.00% 7.75% 8.00%
Expected Return on Plan Assets 8.50% 8.50% 8.50%
Rate of Compensation Increase 5.00% 5.00% 5.00%
Year Ended September 30 (Thousands)
Components of Net Periodic Benefit Cost 1998 1997 1996
---- ---- ----
Service Cost $ 4,022 $ 4,056 $ 3,926
Interest Cost 17,122 16,594 14,391
Expected Return on Plan Assets (8,099) (6,014) (4,306)
Amortization of Transition Obligation 7,127 7,768 7,862
Amortization of Loss 683 - -
Net Amortization and Deferral for
Regulatory Purposes 915 (1,257) (798)
-------- -------- --------
Net Periodic Benefit Cost $ 21,770 $ 21,147 $ 21,075
======== ======== ========
The Benefit Obligation was determined using an assumed discount rate as
noted in the data above. The effect of the discount rate change in 1998 was to
increase the Benefit Obligation by $25.3 million. The effect of the discount
rate change in 1997 was to increase the Benefit Obligation as of the beginning
of the period by $7.0 million.
The mortality assumption for healthy lives was changed from the 1983
Group Annuity Mortality Tables to the 1994 Group Annuity Mortality Tables. This
change had the effect of increasing the Benefit Obligation as of the beginning
of the period by $7.4 million.
The annual rate of increase in the per capita cost of covered medical
care benefits was assumed to be 11% for 1996, 10% for 1997 and 9% for 1998; this
rate was assumed to decrease gradually to 5.5% by the year 2003 and remain at
that level thereafter. The annual rate of increase for medical care benefits
provided by Healthcare Maintenance Organizations was assumed to be 7.5% in 1998
and gradually decline to 5.5% by the year 2002 and remain level thereafter. The
annual rate of increase in the per capita cost of covered prescription drug
benefits was assumed to be 10% for 1996, 8.5% for 1997 and 9% for 1998. This
rate was assumed to decrease gradually to 5.5% by the year 2003 and remain level
thereafter. The annual rate increase in the per capita Medicare Part B
Reimbursement was assumed to be 12% for 1996, 3.1% for 1997 and 9% for 1998.
This rate was assumed to decrease gradually to 5.5% by the year 2003 and remain
level thereafter.
The health care cost trend rate assumptions used to calculate the per
capita cost of covered medical care benefits have a significant effect on the
amounts reported. If the health care cost trend rates were increased by 1% in
each year, the Benefit Obligation as of October 1, 1998, would be increased by
$39.9 million. This 1% change would also have increased the aggregate of the
service and interest cost components of net periodic post-retirement benefit
cost for 1998 by $2.8 million. If the health care cost trend rates were
decreased by 1% in each year, the Benefit Obligation as of October 1, 1998,
would be decreased by $34.7 million. This 1% change would also have decreased
the aggregate of the service and interest cost components of net periodic
post-retirement benefit cost for 1998 by $3.1 million.
Note H - Commitments and Contingencies
Leases
System companies have entered into lease agreements, principally for the use of
office space, business machines, transportation equipment and meters. The
Company's policy is to treat all leases as operating leases for both accounting
and ratemaking purposes. While certain of these leases are capital leases, had
they been capitalized, the effect on results of operations and financial
position would not be material. Total lease expense approximated $14.0 million
in 1998, $16.0 million in 1997 and $16.9 million in 1996. At September 30, 1998,
the future minimum payments under the Company's lease agreements for the next
five years are: $11.3 million in 1999, $9.3 million in 2000, $7.6 million in
2001, $5.7 million in 2002 and $4.5 million in 2003. The aggregate future
minimum lease payments attributable to later years is $15.7 million.
Environmental Matters
It is the Company's policy to accrue estimated environmental clean-up costs
(investigation and remediation) when such amounts can reasonably be estimated
and it is probable that the Company will be required to incur such costs.
Distribution Corporation has estimated its clean-up costs related to the sites
described below in (i) and (ii) will be in the range of $12.4 million to $13.4
million. At September 30, 1998, Distribution Corporation has recorded the
minimum liability of $12.4 million. The Company is currently not aware of any
material additional exposure to environmental liabilities. However, adverse
changes in environmental regulations or other factors could 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 September 30, 1998 includes related regulatory assets in the
amount of approximately $12.4 million.
The Company is subject to various federal, state and local laws and
regulations relating to the protection of the environment. The Company has
established procedures for the ongoing evaluation of its operations to identify
potential environmental exposures and assure compliance with regulatory policies
and procedures.
(i) Former Manufactured Gas Plant Sites
Distribution Corporation has incurred and is incurring clean-up costs
at five former manufactured gas plant sites in New York and Pennsylvania. Two of
these sites are at the remediation stage, two at the investigation stage, and
one has completed the investigation stage with remediation being designed.
Distribution Corporation has been designated by the New York Department of
Environmental Conservation (DEC) as a potentially responsible party (PRP) with
respect to one of these sites in New York, and is also engaged in litigation
with the DEC and the party who bought that site from Distribution Corporation's
predecessor.
Distribution Corporation also received in 1998 a notice that the DEC
believes Distribution Corporation is responsible for contamination discovered at
an additional former manufactured gas plant site in New York (without naming
Distribution Corporation as a PRP). Distribution Corporation responded that
other companies operated that site before Distribution Corporation's predecessor
did, that liability could be imposed upon Distribution Corporation only if
hazardous substances were disposed of at the site during a period when the site
was operated by Distribution Corporation's predecessor, and that Distribution
Corporation was unaware of any such disposal. Distribution Corporation has not
incurred any clean-up costs at this site nor has it been able to reasonably
estimate the probability or extent of potential liability.
(ii) Third Party Waste Disposal Sites
Distribution Corporation and Supply Corporation are each currently
identified by the DEC or the federal Environmental Protection Agency as one of a
number of companies considered to be PRPs with respect to certain waste disposal
sites in New York which were operated by unrelated third parties. The PRPs are
alleged to have contributed to the materials that may have been collected at
such waste disposal sites by the site operators. The ultimate cost to
Distribution Corporation or Supply Corporation with respect to the remediation
of these sites will depend on such factors as the remediation plan selected, the
extent of site contamination, the number of additional PRPs at each site and the
portion, if any, attributed to Distribution Corporation or Supply Corporation.
Distribution Corporation is a PRP at two waste disposal sites, one of which is
in remediation and the other has completed the investigation stage with
remediation being designed to begin in fiscal 1999. Supply Corporation is a PRP
at one waste disposal site, which is at the investigation stage, and has
estimated its exposure at less than $0.1 million for that site.
Without being named a PRP, Distribution Corporation has also signed a
consent decree (court approval pending) by which it would share the costs of
remediating another waste disposal site in New York.
Distribution Corporation also understands that PRPs at another site
have obtained records from the operator (a waste oil collector) indicating that
the site received used oil from Distribution Corporation (among others). A
contribution claim will likely be asserted against Distribution Corporation,
which has not incurred any clean-up costs at this site nor been able to
reasonably estimate the probability or extent of potential liability.
(iii) Clean Air Standards
The Company, in its international operations in the Czech Republic, is
in the process of reconstructing boilers at the heating plant of PSZT to comply
with certain clean air standards mandated by the Czech Republic government.
Capital expenditures related to this reconstruction incurred by PSZT in 1998
(since its acquisition by Horizon through September 30, 1998) were approximately
$12 million. Approximately $33 million is budgeted for this reconstruction work
in 1999.
Other
The Company has entered into contractual commitments in the ordinary course of
business including commitments by Distribution Corporation to purchase capacity
on nonaffiliated pipelines to meet customer gas supply needs. The majority of
these contracts (representing 80% of current contracted demand capacity) expire
within the next five years. Costs incurred under these contracts are purchased
gas costs, subject to state commission review, and are being recovered in
customer rates through inclusion in Distribution Corporation's rate schedules.
The Company is involved in litigation arising in the normal course of
its business. In addition to the regulatory matters discussed in Note B -
Regulatory Matters, the Company is involved in other 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 other
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 other
regulatory matters, are expected to have a material adverse effect on the
financial condition of the Company at this time.
Note I - Business Segment Information
The Company's operations are comprised of five business segments: Utility,
Pipeline and Storage, Exploration and Production, International and Other
Nonregulated.
The Utility segment is regulated by the PSC and the PaPUC and its
operations are carried out by Distribution Corporation. Distribution Corporation
sells and transports gas to retail customers located in western New York and
northwestern Pennsylvania. It also provides off-system sales to customers
located in regions through which the upstream pipelines serving Distribution
Corporation pass (i.e., from the southwestern to northeastern regions of the
United States).
The Pipeline and Storage segment is regulated by the FERC and its
operations are carried out by Supply Corporation and SIP. Supply Corporation
transports and stores natural gas for utilities and pipeline companies in the
northeastern United States markets. In 1998, 1997 and 1996, 51%, 52% and 51%,
respectively, of Supply Corporation's revenue was from affiliated companies,
mainly Distribution Corporation. SIP has a one-third general partnership
interest in Independence Pipeline Company.
The Exploration and Production segment's operations are carried out by
Seneca. Seneca is engaged in exploration for, and development and purchase of,
oil and natural gas reserves in the Gulf Coast areas of Texas, Louisiana, and
Alabama, and in California, Wyoming, and the Appalachian region of the United
States. Seneca's production is, for the most part, sold to purchasers located in
the vicinity of its wells.
The International segment's operations are carried out by Horizon.
Horizon is engaged in the investigation and development of international energy
projects. Horizon's primary focus currently is in the Czech Republic where it
owns a majority interest in SCT and PSZT, which have district heating and power
generation operations.
The Other Nonregulated segment consists primarily of the Company's
timber, sawmill and dry kiln operations (carried out by the northeast division
of Seneca and by Highland) and energy marketing operations (carried out by NFR
and Upstate).
The data presented in the tables below reflect the Company's business
segments for the three years ended September 30, 1998. Total operating revenues
by segment include both revenues from nonaffiliated customers and intersegment
revenues. Operating income is total operating revenues less operating expenses,
not including income taxes. The elimination of significant intercompany balances
and transactions, if appropriate, is made in order to reconcile segment
information with consolidated amounts. Identifiable assets of a segment are
those assets that are used in the operations of that segment. Corporate assets
are principally cash and temporary cash investments, receivables, deferred
charges and cash surrender values of insurance contracts.
<PAGE>
Year Ended September 30 (Thousands) 1998 1997 1996
---- ---- ----
Operating Revenues
Utility $ 871,180 $ 991,366 $ 954,326
Pipeline and Storage 170,983 172,694 176,553
Exploration and Production 124,272 119,260 114,462
International 76,259 1,910 286
Other Nonregulated 106,527 82,005 68,644
Intersegment Revenues(1) (101,221) (101,423) (106,254)
---------- ---------- ----------
$1,248,000 $1,265,812 $1,208,017
========== ========== ==========
Operating Income (Loss) Before
Income Taxes
Utility $124,482 $123,856 $115,257
Pipeline and Storage 71,510 73,523 72,914
Exploration and Production(2)(3) (93,266) 42,694 46,408
International 2,136 (2,987) (14,281)
Other Nonregulated 5,347 2,244 5,700
Corporate (2,254) (2,353) (2,231)
-------- -------- --------
$107,955 $236,977 $223,767
======== ======== ========
Depreciation, Depletion and Amortization
Utility $ 33,459 $ 32,972 $ 31,491
Pipeline and Storage 21,816 21,459 19,942
Exploration and Production(3) 50,937 51,117 46,042
International 7,309 107 -
Other Nonregulated 5,357 5,992 752
Corporate 2 3 4
-------- ------- --------
$118,880 $111,650 $ 98,231
======== ======== ========
Capital Expenditures
Utility $ 50,680 $ 66,908 $ 63,730
Pipeline and Storage 23,692 22,562 22,260
Exploration and Production(4) 293,870 120,282 83,554
International(4) 14,778 292 133
Other Nonregulated(5) 10,213 16,266 3,056
Intersegment Elimination - - (1,166)
-------- -------- --------
$393,233 $226,310 $171,567
======== ======== ========
Identifiable Assets
At September 30 (Thousands)
Utility $1,161,046 $1,163,702 $1,154,364
Pipeline and Storage 513,346 510,109 515,569
Exploration and Production 661,742 466,208 396,077
International 239,763 23,987 3,370
Other Nonregulated 62,228 51,200 35,585
Corporate 46,334 52,125 44,807
---------- ---------- ----------
$2,684,459 $2,267,331 $2,149,772
========== ========== ==========
(1) Represents primarily Pipeline and Storage revenue from the Utility
segment.
(2) 1998 includes impairment of oil and gas producing properties of $129.0
million. Refer to Note A - Summary of Significant Accounting Policies for
further discussion.
(3) In 1998, Seneca changed its method of depletion for oil and gas producing
properties from the gross revenue method to the units of production
method. The effect of this change was to reduce 1998 depletion expense and
to reduce the operating loss before income taxes of the Exploration and
Production segment by $2.3 million. See further discussion in Note A -
Summary of Significant Accounting Policies.
(4) 1998 amounts exclude stock acquisitions. Refer to Note J - Stock
Acquisitions for further discussion.
(5) 1997 amount includes noncash acquisition of $12.3 million in exchange for
long-term debt obligations.
Note J - Stock Acquisitions
Exploration and Production
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 was 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 $32.6 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. See Note D -
Capitalization for discussion of HarCor's senior secured debt.
International
During the year, Horizon, through a wholly-owned subsidiary, increased its
ownership interest in SCT from 36.8% at September 30, 1997 to 82.7% at September
30, 1998. The cost of acquiring these additional shares was approximately $24.9
million. Also in 1998, Horizon invested in PSZT, and owned an 86.2% interest at
September 30, 1998. The cost of acquiring the shares of PSZT was approximately
$64.5 million. PSZT is a wholesale power and district heating company that
adjoins the service territory of SCT in the northern Bohemia region of the Czech
Republic.
The acquisitions of SCT and PSZT have been accounted for in accordance
with the purchase method as specified by APB 16. The acquisitions resulted in
approximately $10.6 million of goodwill, which is being amortized over a
twenty-year period. This goodwill ($10.1 million at September 30, 1998) is
recorded in Other Assets in the Company's Consolidated Balance Sheet. See Note D
Capitalization for discussion of the debt of SCT and PSZT.
Note K - Quarterly Financial Data (unaudited)
In the opinion of management, the following quarterly information includes all
adjustments necessary for a fair statement of the results of operations for such
periods. Per common share amounts are calculated using the weighted average
number of shares outstanding during each quarter. The total of all quarters may
differ from the per common share amounts shown on the Consolidated Statement of
Income, which is based on the weighted average number of shares outstanding for
the entire fiscal year. Because of the seasonal nature of the Company's heating
business, there are substantial variations in operations reported on a quarterly
basis.
Financial data for the quarter ended December 31, 1997 reflects the
accounting change in depletion methods for Seneca's oil and gas assets, which
had a negative after tax $9.1 million, or $0.24 per share (basic and diluted)
non-cash cumulative effect through October 1, 1997. See further discussion of
this accounting change in Note A - Summary of Significant Accounting Policies.
Financial data for the quarter ended March 31, 1998 reflects an
impairment of Seneca's oil and gas producing properties. The after tax amount of
this impairment charge was $79.1 million, or $2.07 per share (basic). See
further discussion of this impairment in Note A - Summary of Significant
Accounting Policies.
Financial data for the quarter ended March 31, 1998 also reflects an
after tax income amount of $5.0 million, or $0.13 per share (basic) from the
settlement of the primary issues relating to IRS audits of years 1977 - 1994.
Diluted per share amounts for the quarter ended March 31, 1998 are not
applicable due to the antidilution effect on the loss for the quarter.
<TABLE>
<CAPTION>
Net
Income (Loss) Income
Income Per Common (Loss)
(Loss) Share Before Available Earnings
Operating Before Cumulative for (Loss) Per
Quarter Operating Income Cumulative Effect Common Common Share
-------------- --------------
Ended Revenues (Loss) Effect Basic Diluted Stock Basic Diluted
----- -------- ------ ------ ----- ------- ----- ----- -------
1998 (Thousands, except per common share amounts)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/97 $371,021 $ 52,280 $ 37,534 $ 0.98 $0.97 $ 28,418 $ 0.74 $0.73
3/31/98 $462,648 $(16,228) $(21,262) $(0.56) N/A $(21,262) $(0.56) N/A
6/30/98 $242,447 $ 33,726 $ 19,107 $ 0.50 $0.49 $ 19,107 $ 0.50 $0.49
9/30/98 $171,884 $ 14,153 $ (3,075) $(0.08) N/A $ (3,075) $(0.08) N/A
1997 (Thousands, except per common share amounts)
- ------------------------------------------------------------------------------------
12/31/96 $363,492 $ 52,153 $ 38,590 $ 1.02 $1.01 $ 38,590 $ 1.02 $1.01
3/31/97 $498,704 $ 70,812 $ 57,109 $ 1.50 $1.48 $ 57,109 $ 1.50 $1.48
6/30/97 $246,051 $ 31,283 $ 18,905 $ 0.50 $0.49 $ 18,905 $ 0.50 $0.49
9/30/97 $157,565 $ 14,055 $ 84 $ - $ - $ 84 $ - $ -
</TABLE>
N/A - Not applicable due to antidilution.
Note L - Market for Common Stock and Related Shareholder Matters (unaudited)
At September 30, 1998, there were 23,743 holders of National Fuel Gas Company
common stock. The common stock is listed and traded on the New York Stock
Exchange. Information related to restrictions on the payment of dividends can be
found in Note D Capitalization. The quarterly price ranges and quarterly
dividends declared for the fiscal years ended September 30, 1998 and 1997, are
shown below:
Price Range Dividends
Quarter Ended High Low Declared
- ------------- ---- --- --------
1998
12/31/97 $48-15/16 $42-11/16 $.435
3/31/98 $48-13/16 $45-3/8 $.435
6/30/98 $49-1/8 $39-5/8 $.450
9/30/98 $47 $39-13/16 $.450
1997
12/31/96 $44-1/8 $36-5/8 $.420
3/31/97 $44-7/8 $39-3/8 $.420
6/30/97 $44-1/8 $40-5/8 $.435
9/30/97 $45-7/16 $40-1/8 $.435
Note M - Supplementary Information for Oil and Gas Producing Activities
The following supplementary information is presented in accordance with SFAS 69,
"Disclosures about Oil and Gas Producing Activities," and related SEC accounting
rules.
Capitalized Costs Relating to Oil and Gas Producing Activities
At September 30 (Thousands) 1998 1997
---- ----
Proved Properties $739,684 $658,327
Unproved Properties 141,873 64,597
-------- --------
881,557 722,924
Less - Accumulated Depreciation, Depletion
and Amortization 261,236 284,429
-------- --------
$620,321 $438,495
======== ========
Costs related to unproved properties are excluded from amortization as
they represent unevaluated properties that require additional drilling to
determine the existence of oil and gas reserves. Following is a summary of such
costs excluded from amortization at September 30, 1998:
Total Year Costs Incurred
--------------------------------
(Thousands) at September 30, 1998 1998 1997 1996 Prior
--------------------- ---- ---- ---- -----
Acquisition Costs $123,632 $ 92,864 $7,114 $12,930 $10,724
Exploration Costs 18,241 18,241 - - -
-------- -------- ------ ------- -------
$141,873 $111,105 $7,114 $12,930 $10,724
======== ======== ====== ======= =======
Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development
Activities
Year Ended September 30 (Thousands) 1998 1997 1996
---- ---- ----
Property Acquisition Costs:*
Proved $189,201 $ 4,154 $ 4,632
Unproved 88,369 23,120 12,879
Exploration Costs 74,421 76,703 33,191
Development Costs 23,887 15,583 32,747
Other - - 230
-------- -------- -------
$375,878 $119,560 $83,679
======== ======== =======
* Total proved and unproved property acquisition costs of $277.6 million
include amounts related to the HarCor, Bakersfield Energy and Whittier Trust
properties acquired in 1998 of $87.0 million, $25.3 million and $141.1
million, respectively.
Results of Operations for Producing Activities
Year Ended September 30 (Thousands) 1998 1997 1996
---- ---- ----
Operating Revenues:
Natural Gas (includes revenues from sales
to affiliates of $11,065, $10,682 and
$11,872, respectively) $ 89,284 $100,411 $ 91,018
Oil, Condensate and Other Liquids 31,770 39,237 33,978
-------- -------- --------
Total Operating Revenues* 121,054 139,648 124,996
Production/Lifting Costs 23,622 17,335 15,196
Depreciation, Depletion and Amortization
($0.96 per Mcfe of production,
$0.36 and $0.36 per dollar of
operating revenues, respectively)** 50,221 50,687 45,502
Impairment of Oil and Gas Producing
Properties*** 128,996 - -
Income Tax (Benefit) Expense (28,949) 24,699 22,069
-------- -------- --------
Results of Operations for Producing
Activities (excluding corporate overheads
and interest charges) $(52,836) $ 46,927 $ 42,229
======== ======== ========
* Exclusive of hedging gains and losses. See further discussion in Note F -
Financial Instruments.
** In 1998, Seneca changed its method of depletion for oil and gas producing
properties from the gross revenue method to the units of production method.
See further discussion in Note A - Summary of Significant Accounting
Policies.
*** See discussion of impairment in Note A - Summary of Significant Accounting
Policies.
Reserve Quantity Information (unaudited)
The Company's proved oil and gas reserves are located in the United States. The
estimated quantities of proved reserves disclosed in the table below are based
upon estimates by qualified Company geologists and engineers and are audited by
independent petroleum engineers. Such estimates are inherently imprecise and may
be subject to substantial revisions as a result of numerous factors including,
but not limited to, additional development activity, evolving production
history, and continual reassessment of the viability of production under varying
economic conditions.
Gas Oil
Year Ended MMcf Mbbl
---------------------- ---------------------
September 30 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Proved Developed and
Undeveloped Reserves:
Beginning of Year 232,449 207,082 221,459 17,981 25,749 22,865
Extensions and
Discoveries 40,293 47,951 29,161 640 359 5,701
Revisions of
Previous Estimates (18,623) 20,820 (3,442) (4,191) (6,224) (1,173)
Production (36,474) (38,586) (38,767) (2,614) (1,902) (1,742)
Sales of Minerals in
Place - (5,464) (1,532) - (1) (27)
Purchases of Minerals
in Place and Other 107,420 646 203 54,775 - 125
------- ------- ------- ------ ------ ------
End of Year 325,065 232,449 207,082 66,591 17,981 25,749
======= ======= ======= ====== ====== ======
Proved Developed Reserves:
Beginning of Year 194,454 163,537 162,504 11,354 14,043 14,937
======= ======= ======= ====== ====== ======
End of Year 230,508 194,454 163,537 48,081 11,354 14,043
======= ======= ======= ====== ====== ======
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves (unaudited)
The Company cautions that the following presentation of the standardized measure
of discounted future net cash flows is intended to be neither a measure of the
fair market value of the Company's oil and gas properties, nor an estimate of
the present value of actual future cash flows to be obtained as a result of
their development and production. It is based upon subjective estimates of
proved reserves only and attributes no value to categories of reserves other
than proved reserves, such as probable or possible reserves, or to unproved
acreage. Furthermore, it is based on year-end prices and costs adjusted only for
existing contractual changes, and it assumes an arbitrary discount rate of 10%.
Thus, it gives no effect to future price and cost changes certain to occur under
the widely fluctuating political and economic conditions of today's world.
The standardized measure is intended instead to provide a somewhat
better means for comparing the value of the Company's proved reserves at a given
time with those of other oil- and gas-producing companies than is provided by a
simple comparison of raw proved reserve quantities.
Year Ended September 30 (Thousands) 1998 1997 1996
---- ---- ----
Future Cash Inflows $1,547,216 $1,072,375 $1,003,280
Less:
Future Production and Development Costs 574,637 252,205 294,778
Future Income Tax Expense at
Applicable Statutory Rate 245,120 257,172 221,956
---------- ---------- ----------
Future Net Cash Flows 727,459 562,998 486,546
Less:
10% Annual Discount for Estimated
Timing of Cash Flows 260,688 179,798 157,302
---------- ---------- ----------
Standardized Measure of Discounted Future
Net Cash Flows $ 466,771 $ 383,200 $ 329,244
========== ========== ==========
The principal sources of change in the standardized measure of
discounted future net cash flows were as follows:
Year Ended September 30 (Thousands) 1998 1997 1996
---- ---- ----
Standardized Measure of Discounted Future
Net Cash Flows at Beginning of Year $383,200 $329,244 $245,268
Sales, Net of Production Costs (97,432) (122,313) (109,801)
Net Changes in Prices, Net of
Production Costs (180,853) 78,499 147,330
Purchases of Minerals in Place 364,102 1,138 770
Sales of Minerals in Place - (9,632) (1,141)
Extensions and Discoveries 36,844 88,228 93,864
Changes in Estimated Future
Development Costs (104,181) (20,785) (53,630)
Previously Estimated Development
Costs Incurred 28,514 43,731 42,780
Net Change in Income Taxes at
Applicable Statutory Rate 57,190 (24,797) (52,613)
Revisions of Previous Quantity
Estimates (75,136) (27,317) (15,491)
Accretion of Discount and Other 54,523 47,204 31,908
-------- -------- --------
Standardized Measure of Discounted
Future Net Cash Flows at End of Year $466,771 $383,200 $329,244
======== ======== ========
<PAGE>
NATIONAL FUEL GAS COMPANY AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
(Thousands)
-----------
Additions
----------------------
Charged to
Balance at Charged to Other Balance at
Beginning Costs and Accounts Deductions End of
Description of Period Expenses (Note 1) (Note 2) Period
- ----------- ---------- ---------- ----------- ---------- ---------
Year Ended September 30, 1998
- -----------------------------
Reserve for Doubtful
Accounts $8,291 $15,861 $ 746 $18,666 $6,232
====== ======= ====== ======= ======
Year Ended September 30, 1997
- -----------------------------
Reserve for Doubtful
Accounts $7,672 $16,586 $ - $15,967 $8,291
====== ======= ====== ======= ======
Year Ended September 30, 1996
- -----------------------------
Reserve for Doubtful
Accounts $5,924 $15,191 $ - $13,443 $7,672
====== ======= ====== ======= ======
Note 1 - Represents opening balance sheet reserve plus exchange rate impact of
translating the Czech koruna to the U.S. dollar for Horizon.
Note 2 - Amounts represent net accounts receivable written-off.
ITEM 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
--------
ITEM 10 Directors and Executive Officers of the Registrant
The information required by this item concerning the directors of the Company is
omitted pursuant to Instruction G of Form 10-K since the Company's definitive
Proxy Statement for its February 18, 1999 Annual Meeting of Shareholders will be
filed with the SEC not later than 120 days after September 30, 1998. The
information provided in such definitive Proxy Statement is incorporated herein
by reference. Information concerning the Company's executive officers can be
found in Part I, Item 1, of this report.
ITEM 11 Executive Compensation
The information required by this item is omitted pursuant to Instruction G of
Form 10-K since the Company's definitive Proxy Statement for its February 18,
1999 Annual Meeting of Shareholders will be filed with the SEC not later than
120 days after September 30, 1998. The information provided in such definitive
Proxy Statement is incorporated herein by reference.
ITEM 12 Security Ownership of Certain Beneficial Owners and Management
The information required by this item is omitted pursuant to Instruction G of
Form 10-K since the Company's definitive Proxy Statement for its February 18,
1999 Annual Meeting of Shareholders will be filed with the SEC not later than
120 days after September 30, 1998. The information provided in such definitive
Proxy Statement is incorporated herein by reference.
ITEM 13 Certain Relationships and Related Transactions
At September 30, 1998, the Company knows of no relationships or transactions
required to be disclosed pursuant to Item 404 of Regulation S-K.
PART IV
-------
ITEM 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statement Schedules
All financial statement schedules filed as part of this report
are included in Item 8 of this Form 10-K and reference is made
thereto.
(b) Reports on Form 8-K
None
(c) Exhibits
Exhibit
Number Description of Exhibits
------ -----------------------
3(i) Articles of Incorporation:
3.1 Restated Certificate of Incorporation of National Fuel Gas
Company dated September 21, 1998
3(ii) By-Laws:
3.2 National Fuel Gas Company By-Laws as amended through
September 17, 1998
(4) Instruments Defining the Rights of Security Holders,
Including Indentures:
* Indenture dated as of October 15, 1974, between the Company
and The Bank of New York (formerly Irving Trust Company)
(Exhibit 2(b) in File No. 2-51796)
* Third Supplemental Indenture dated as of December 1, 1982,
to Indenture dated as of October 15, 1974, between the
Company and The Bank of New York (formerly Irving Trust
Company) (Exhibit 4(a)(4) in File No. 33-49401)
* Tenth Supplemental Indenture dated as of February 1, 1992,
to Indenture dated as of October 15, 1974, between the
Company and The Bank of New York (formerly Irving Trust
Company) (Exhibit 4(a), Form 8-K dated February 14, 1992 in
File No. 1-3880)
* Eleventh Supplemental Indenture dated as of May 1, 1992, to
Indenture dated as of October 15, 1974, between the Company
and The Bank of New York (formerly Irving Trust Company)
(Exhibit 4(b), Form 8-K dated February 14, 1992 in File No.
1-3880)
* Twelfth Supplemental Indenture dated as of June 1, 1992, to
Indenture dated as of October 15, 1974, between the Company
and The Bank of New York (formerly Irving Trust Company)
(Exhibit 4(c), Form 8-K dated June 18, 1992 in File No.
1-3880)
* Thirteenth Supplemental Indenture dated as of March 1, 1993,
to Indenture dated as of October 15, 1974, between the
Company and The Bank of New York (formerly Irving Trust
Company) (Exhibit 4(a)(14) in File No. 33-49401)
* Fourteenth Supplemental Indenture dated as of July 1, 1993,
to Indenture dated as of October 15, 1974, between the
Company and The Bank of New York (formerly Irving Trust
Company) (Exhibit 4.1, Form 10-K for fiscal year ended
September 30, 1993 in File No. 1-3880)
* Fifteenth Supplemental Indenture dated as of September 1,
1996 to Indenture dated as of October 15, 1974, between the
Company and The Bank of New York (formerly Irving Trust
Company) (Exhibit 4.1, Form 10-K for fiscal year ended
September 30, 1996 in File No. 1-3880)
* Rights Agreement between National Fuel Gas Company and
Marine Midland Bank dated June 12, 1996 (Exhibit 99.1, Form
8-K dated June 13, 1996 in File No. 1-3880)
(10) Material Contracts:
(ii) (B) Contracts upon which Registrant's business is substantially
dependent:
* Service Agreement No. 830016 with Texas Eastern Transmission
Corporation, under Rate Schedule FT-1, dated November 2,
1995 (Exhibit 10.1, Form 10-K for fiscal year ended
September 30, 1996 in File No. 1-3880)
* Service Agreement No. 830017 with Texas Eastern Transmission
Corporation, under Rate Schedule FT-1, dated November 2,
1995 (Exhibit 10.2, Form 10-K for fiscal year ended
September 30, 1996 in File No. 1-3880)
* Service Agreement with Texas Eastern Transmission
Corporation, under Rate Schedule CDS, dated November 2, 1995
(Exhibit 10.3, Form 10-K for fiscal year ended September 30,
1996 in File No. 1-3880)
* Service Agreement between National Fuel Gas Distribution
Corporation and National Fuel Gas Supply Corporation, under
Rate Schedule FSS, dated April 3, 1996 [Portions of this
agreement are subject to confidential treatment under Rule
24b-2] (Exhibit 10.4, Form 10-K for fiscal year ended
September 30, 1996 in File No. 1-3880)
* Service Agreement with St. Clair Pipelines Ltd., dated
January 29, 1996 [Portions of this agreement are subject to
confidential treatment under Rule 24b-2] (Exhibit 10.5, Form
10-K for fiscal year ended September 30, 1996 in File No.
1-3880)
* Service Agreement with Empire State Pipeline under Rate
Schedule FT, dated December 15, 1994 [Portions of this
agreement are subject to confidential treatment under Rule
24b-2] (Exhibit 10.1, Form 10-K for fiscal year ended
September 30, 1995, in File No. 1-3880)
* Service Agreement between National Fuel Gas Distribution
Corporation and National Fuel Gas Supply Corporation under
Rate Schedule ESS dated August 1, 1993 (Exhibit 10.2, Form
10-K for fiscal year ended September 30, 1995, in File No.
1-3880)
* Service Agreement between National Fuel Gas Distribution
Corporation and National Fuel Gas Supply Corporation under
Rate Schedule ESS dated September 19, 1995 (Exhibit 10.3,
Form 10-K for fiscal year ended September 30, 1995, in File
No. 1-3880)
* Service Agreement between National Fuel Gas Distribution
Corporation and National Fuel Gas Supply Corporation under
Rate Schedule EFT dated August 1, 1993 (Exhibit 10.4, Form
10-K for fiscal year ended September 30, 1995, in File No.
1-3880)
* Amendment dated as of May 1, 1995 to Service Agreement
between National Fuel Gas Distribution Corporation and
National Fuel Gas Supply Corporation under Rate Schedule EFT
dated August 1, 1993 (Exhibit 10.5, Form 10-K for fiscal
year ended September 30, 1995, in File No. 1-3880)
* Service Agreement with Transcontinental Gas Pipe Line
Corporation under Rate Schedule FT dated August 1, 1993
(Exhibit 10.6, Form 10-K for fiscal year ended September 30,
1995, in File No. 1-3880)
* Service Agreement with Transcontinental Gas Pipe Line
Corporation under Rate Schedule FT dated October 1, 1993
(Exhibit 10.7, Form 10-K for fiscal year ended September 30,
1995, in File No. 1-3880)
* Service Agreement with Columbia Gas Transmission Corporation
under Rate Schedule FTS, dated November 1, 1993 and executed
February 13, 1994 (Exhibit 10.1, Form 10-K for fiscal year
ended September 30, 1994 in File No. 1-3880)
* Service Agreement with Columbia Gas Transmission Corporation
under Rate Schedule FSS, dated November 1, 1993 and executed
February 13, 1994 (Exhibit 10.2, Form 10-K for fiscal year
ended September 30, 1994 in File No. 1-3880)
* Service Agreement with Columbia Gas Transmission Corporation
under Rate Schedule SST, dated November 1, 1993 and executed
February 13, 1994 (Exhibit 10.3, Form 10-K for fiscal year
ended September 30, 1994 in File No. 1-3880)
* Gas Transportation Agreement with Tennessee Gas Pipeline
Company under Rate Schedule FT-A (Zone 4), dated September
1, 1993 (Exhibit 10.1, Form 10-K for fiscal year ended
September 30, 1993 in File No. 1-3880)
* Gas Transportation Agreement with Tennessee Gas Pipeline
Company under Rate Schedule FT-A (Zone 5), dated September
1, 1993 (Exhibit 10.2, Form 10-K for fiscal year ended
September 30, 1993 in File No. 1-3880)
* Service Agreement with CNG Transmission Corporation under
Rate Schedule FT, dated October 1, 1993 (Exhibit 10.5, Form
10-K for fiscal year ended September 30, 1993 in File No.
1-3880)
* Service Agreement with CNG Transmission Corporation under
Rate Schedule GSS, dated October 1, 1993 (Exhibit 10.6, Form
10-K for fiscal year ended September 30, 1993 in File No.
1-3880)
(iii) Compensatory plans for officers:
* Employment Agreement, dated September 17, 1981, with Bernard
J. Kennedy (Exhibit 10.4, Form 10-K for fiscal year ended
September 30, 1994 in File No. 1-3880)
* Ninth Extension to Employment Agreement with Bernard J.
Kennedy, dated September 19, 1996 (Exhibit 10.6, Form 10-K
for fiscal year ended September 30, 1996 in File No. 1-3880)
* National Fuel Gas Company 1983 Incentive Stock Option Plan,
as amended and restated through February 18, 1993 (Exhibit
10.2, Form 10-Q for the quarterly period ended March 31,
1993 in File No. 1-3880)
* National Fuel Gas Company 1984 Stock Plan, as amended and
restated through February 18, 1993 (Exhibit 10.3, Form 10-Q
for the quarterly period ended March 31, 1993 in File No.
1-3880)
* Amendment to the National Fuel Gas Company 1984 Stock Plan,
dated December 11, 1996 (Exhibit 10.7, Form 10-K for fiscal
year ended September 30, 1996 in File No. 1-3880)
* National Fuel Gas Company 1993 Award and Option Plan, dated
February 18, 1993 (Exhibit 10.1, Form 10-Q for the quarterly
period ended March 31, 1993 in File No. 1-3880)
* Amendment to National Fuel Gas Company 1993 Award and Option
Plan, dated December 18, 1996 (Exhibit 10, Form 10-Q for the
quarterly period ended December 31, 1996 in File No. 1-3880)
* Amendment to National Fuel Gas Company 1993 Award and Option
Plan, dated December 11, 1996 (Exhibit 10.8, Form 10-K for
fiscal year ended September 30, 1996 in File No. 1-3880)
* Amendment to National Fuel Gas Company 1993 Award and Option
Plan, dated October 27, 1995 (Exhibit 10.8, Form 10-K for
fiscal year ended September 30, 1995 in File No. 1-3880)
* National Fuel Gas Company 1997 Award and Option Plan
(Exhibit 10.9, Form 10-K for fiscal year ended September 30,
1996 in File No. 1-3880)
* Change in Control Agreement, dated May 1, 1992, with Philip
C. Ackerman (Exhibit EX-10.4, Form 10-K for fiscal year
ended September 30, 1992 in File No. 1-3880)
* Change in Control Agreement, dated May 1, 1992, with Richard
Hare (Exhibit EX-10.5, Form 10-K for fiscal year ended
September 30, 1992 in File No. 1-3880)
* Agreement, dated August 1, 1989, with Richard Hare (Exhibit
10-Q, Form 10-K for fiscal year ended September 30, 1989 in
File No. 1-3880)
* Agreement dated August 1, 1986, with Joseph P. Pawlowski
(Exhibit 10.1, Form 10-K for fiscal year ended September
30,1997 in File No. 1-3880)
* Agreement dated August 1, 1986, with Gerald T. Wehrlin
(Exhibit 10.2, Form 10-K for fiscal year ended September 30,
1997, in File No. 1-3880)
* National Fuel Gas Company Deferred Compensation Plan, as
amended and restated through May 1, 1994 (Exhibit 10.7, Form
10-K for fiscal year ended September 30, 1994 in File No.
1-3880)
* Amendment to the National Fuel Gas Company Deferred
Compensation Plan, dated September 19, 1996 (Exhibit 10.10,
Form 10-K for fiscal year ended September 30, 1996 in File
No. 1-3880)
* Amendment to National Fuel Gas Company Deferred Compensation
Plan, dated September 27, 1995 (Exhibit 10.9, Form 10-K for
fiscal year ended September 30, 1995 in File No. 1-3880)
* National Fuel Gas Company Deferred Compensation Plan, as
amended and restated through March 20, 1997 (Exhibit 10.3,
Form 10-K for fiscal year ended September 30, 1997 in File
No. 1-3880)
* Amendment to National Fuel Gas Company Deferred Compensation
Plan dated June 16, 1997 (Exhibit 10.4, Form 10-K for fiscal
year ended September 30, 1997 in File No. 1-3880)
10.1 Amendment No. 2 to the National Fuel Gas Company Deferred
Compensation Plan, dated March 13, 1998
* National Fuel Gas Company Tophat Plan, effective March 20,
1997 (Exhibit 10, Form 10-Q for the quarterly period ended
June 30, 1997 in File No. 1-3880)
10.2 Amendment No. 1 to the National Fuel Gas Company Tophat
Plan, dated April 6, 1998
* Death Benefits Agreement, dated August 28, 1991, with
Bernard J. Kennedy (Exhibit 10-TT, Form 10-K for fiscal year
ended September 30, 1991 in File No. 1-3880)
* Amendment to Death Benefit Agreement of August 28, 1991,
with Bernard J. Kennedy, dated March 15, 1994 (Exhibit
10.11, Form 10-K for fiscal year ended September 30, 1995 in
File No. 1-3880)
* Amended and Restated Split Dollar Insurance and Death
Benefit Agreement dated September 17, 1997 with Philip C.
Ackerman (Exhibit 10.5, Form 10-K for fiscal year ended
September 30, 1997 in File No. 1-3880)
* Amended and Restated Split Dollar Insurance and Death
Benefit Agreement dated September 15, 1997 with Richard Hare
(Exhibit 10.6, Form 10-K for fiscal year ended September 30,
1997 in File No. 1-3880)
* Amended and Restated Split Dollar Insurance and Death
Benefit Agreement dated September 15, 1997 with Joseph P.
Pawlowski (Exhibit 10.7, Form 10-K for fiscal year ended
September 30, 1997 in File No. 1-3880)
* Amended and Restated Split Dollar Insurance and Death
Benefit Agreement dated September 15, 1997 with Gerald T.
Wehrlin (Exhibit 10.8, Form 10-K for fiscal year ended
September 30, 1997 in File No. 1-3880)
* National Fuel Gas Company and Participating Subsidiaries
Executive Retirement Plan as amended and restated through
November 1, 1995 (Exhibit 10.10, Form 10-K for fiscal year
ended September 30, 1995 in File No. 1-3880)
* National Fuel Gas Company and Participating Subsidiaries
1996 Executive Retirement Plan Trust Agreement (II) dated
May 10, 1996 (Exhibit 10.13, Form 10-K for fiscal year ended
September 30, 1996 in File No. 1-3880)
* Amendments to National Fuel Gas Company and Participating
Subsidiaries Executive Retirement Plan dated September 18,
1997 (Exhibit 10.9, Form 10-K for fiscal year ended
September 30, 1997 in File No. 1-3880)
* Summary of Annual at Risk Compensation Incentive Program
(Exhibit 10.10, Form 10-K for fiscal year ended September
30, 1993 in File No. 1-3880)
* Administrative Rules with Respect to at Risk Awards under
the 1993 Award and Option Plan (Exhibit 10.14, Form 10-K for
fiscal year ended September 30, 1996 in File No. 1-3880)
* Administrative Rules of the Compensation Committee of the
Board of Directors of National Fuel Gas Company as amended
through December 11, 1996 (Exhibit 10.15, Form 10-K for
fiscal year ended September 30, 1996 in File No. 1-3880)
* Excerpts of Minutes from the National Fuel Gas Company Board
of Directors Meeting of December 5, 1991 regarding change in
control agreements, non-employee director retirement plan,
and restrictions on restricted stock (Exhibit 10-UU, Form
10-K for fiscal year ended September 30, 1991 in File No.
1-3880)
* Excerpts from Minutes from the National Fuel Gas Company
Board of Directors Meeting of September 19, 1996 regarding
compensation of non-employee directors and related
amendments of By-Laws (Exhibit 3.1, Form 10-K for fiscal
year ended September 30, 1996 in File No. 1-3880)
* Excerpts of Minutes from the National Fuel Gas Company Board
of Directors Meeting of February 20, 1997 regarding the
Retirement Benefits for Bernard J. Kennedy (Exhibit 10.10,
Form 10-K for fiscal year ended September 30, 1997 in File
No. 1-3880)
* Excerpts of Minutes from the National Fuel Gas Company Board
of Directors Meeting of March 20, 1997 regarding the
Retainer Policy for Non-Employee Directors (Exhibit 10.11,
Form 10-K for fiscal year ended September 30, 1997 in File
No. 1-3880)
* Form of Change in Control Agreement, dated May 1, 1992, with
Walter E. DeForest, Bruce H. Hale, Joseph P. Pawlowski,
Dennis J. Seeley, David F. Smith and Gerald T. Wehrlin, and
dated March 16, 1995, with James A. Beck (Exhibit 10.16,
Form 10-K for fiscal year ended September 30, 1996 in File
No. 1-3880)
(12) Computation of Ratio of Earnings to Fixed Charges
(13) Letter to Shareholders as contained in the 1998 Annual
Report and incorporated by reference into this Form 10-K
(21) Subsidiaries of the Registrant:
See Item 1 of Part I of this Annual Report on
Form 10-K
(23) Consents of Experts and Counsel:
23.1 Consent of Ralph E. Davis Associates, Inc.
23.2 Consent of Independent Accountants
(27) Financial Data Schedules
(99) Additional Exhibits:
99.1 Report of Ralph E. Davis Associates, Inc.
All other exhibits are omitted because they are not applicable or the
required information is shown elsewhere in this Annual Report on Form 10-K.
* Incorporated herein by reference as indicated.
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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)
-------------------------
By /s/ B. J. Kennedy
----------------------------
B. J. Kennedy
Chairman of the Board, President
Date: December 10, 1998 and Chief Executive Officer
-------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title
--------- -----
/s/ B. J. Kennedy
------------------------ Chairman of the Board,
B. J. Kennedy President, Chief Executive
Officer and Director
Date: December 10, 1998
-----------------
/s/ P. C. Ackerman
------------------------ Senior Vice President, Principal
P. C. Ackerman Financial Officer and Director
Date: December 10, 1998
-----------------
/s/ R. T. Brady
------------------------ Director
R. T. Brady
Date: December 10, 1998
-----------------
/s/ J. V. Glynn
------------------------ Director
J. V. Glynn
Date: December 10, 1998
-----------------
/s/ W. J. Hill
------------------------ Director
W. J. Hill
Date: December 10, 1998
-----------------
/s/ B. S. Lee
------------------------ Director
B. S. Lee
Date: December 10, 1998
-----------------
/s/ E. T. Mann
------------------------ Director
E. T. Mann
Date: December 10, 1998
-----------------
/s/ G. L. Mazanec
------------------------ Director
G. L. Mazanec
Date: December 10, 1998
-----------------
/s/ G. H. Schofield
------------------------ Director
G. H. Schofield
Date: December 10, 1998
-----------------
/s/ J. P. Pawlowski
------------------------ Treasurer and Principal
J. P. Pawlowski Accounting Officer
Date: December 10, 1998
-----------------
/s/ A. M. Cellino
------------------------ Secretary
A. M. Cellino
Date: December 10, 1998
-----------------
/s/ G. T. Wehrlin
------------------------ Controller
G. T. Wehrlin
Date: December 10, 1998
-----------------
<PAGE>
APPENDIX TO ITEM 2 - PROPERTIES
Five maps outlining the Company's operating areas at September 30, 1998
are included on the inside front cover and on page 1 of the paper format
version of the Company's combined Annual Report to Shareholders/Form 10-K.
The first map identifies the Company's Pipeline and Storage operating area
(i.e., Supply Corporation's storage areas and pipelines). The second map
identifies the Company's Exploration and Production operating area (i.e.,
Seneca's operating area). The third map identifies the Company's
International operating area (i.e., Horizon's Czech Republic operations).
The fourth map identifies the geographic location of the Company's Other
Nonregulated operating areas (i.e., NFR's marketing offices and Highland's
sawmill operations). The fifth map identifies the Company's Utility
Operating area (i.e., Distribution Corporation's service area).
APPENDIX TO ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION - GRAPHS
A. The Revenue Dollar - 1998
Two pie graphs detailing the revenue dollar in 1998: where it came from
and where it went to, broken down as follows:
Where it came from:
$ .483 Residential Gas Sales
.147 Commercial, Industrial and Off-System Gas Sales
.083 Oil and Gas Production Revenues
.077 Gas Transportation Revenues
.070 Energy Marketing Revenues
.039 District Heating Revenues
.028 Gas Storage Service Revenues
.018 Electric Generation Revenues
.014 Timber and Sawmill Revenues
.041 Other Revenues
$1.000 Total
Where it went to:
$ .348 Gas Purchased
.150 Wages, Including Benefits
.105 Depreciation
.102 Impairment of Oil and Gas Producing Properties
.096 Other Materials and Services
.087 Taxes
.062 Interest
.030 Fuel Used in Heat and Electric Generation
.018 Earnings
.002 Minority Interest in Foreign Subsidiaries
$1.000 Total
<PAGE>
Exhibit Index
-------------
3.1 Restated Certificate of Incorporation of National Fuel Gas
Company dated September 21, 1998
3.2 National Fuel Gas Company By-Laws as amended through
September 17, 1998
10.1 Amendment No. 2 to the National Fuel Gas Company Deferred
Compensation Plan, dated March 13, 1998
10.2 Amendment No. 1 to the National Fuel Gas Company Tophat
Plan, dated April 6, 1998
(12) Computation of Ratio of Earnings to Fixed Charges
(13) Letter to Shareholders as contained in the 1998 Annual
Report and incorporated by reference into this Form 10-K
23.1 Consent of Ralph E. Davis Associates, Inc.
23.2 Consent of Independent Accountants
27.1 Financial Data Schedule for 12 months ended September 30,
1998
27.2 Financial Data Schedule Restated for 12 months ended
September 30, 1997
27.3 Financial Data Schedule Restated for 12 months ended
September 30, 1996
27.4 Financial Data Schedule Restated for 3 months ended December
31, 1996
27.5 Financial Data Schedule Restated for 3 months ended March
31, 1997
27.6 Financial Data Schedule Restated for 3 months ended June 30,
1997
99.1 Report of Ralph E. Davis Associates, Inc.
RESTATED CERTIFICATE OF INCORPORATION
OF
NATIONAL FUEL GAS COMPANY
Dated: September 21, 1998
The undersigned corporation, National Fuel Gas Company, certifies that
it has adopted, pursuant to Section 14A:9-5 of the New Jersey Business
Corporation Act, the following restated certificate of incorporation which
restates and integrates its certificate of incorporation, as heretofore restated
and amended:
ARTICLE FIRST
Corporate Name
The name of the corporation is NATIONAL FUEL GAS COMPANY.
ARTICLE SECOND
Registered Office and Agent
The location of this corporation's current registered office in the
State of New Jersey is 830 Bear Tavern Road, West Trenton, New Jersey 08628. The
name of the corporation's current registered agent at that address is
Corporation Service Company.
ARTICLE THIRD
Purpose and Objects
The objects for which this corporation is formed are: to do all kinds
of mining, manufacturing and trading business authorized by the laws of New
Jersey; to transport goods and merchandise by land and water; to buy, sell,
lease and improve lands; to build houses, structures, docks and piers; to lay
and operate pipelines; to erect and operate telegraph and telephone lines and
lines for conducting electricity; to enter into and carry out contracts of every
kind pertaining to its business; to loan and borrow money; to purchase or
otherwise acquire, hold, sell, assign and transfer shares of capital stock and
bonds or other evidences of indebtedness of corporations, and to exercise all
the privileges of ownership, including voting upon the stock so held; to carry
on its business and have offices and agencies therefor in all parts of the
world; and to hold, purchase, mortgage and convey real estate and personal
property outside of the State of New Jersey.
ARTICLE FOURTH
Capital Stock
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
forgoing 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, 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.
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
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 shares 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 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 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.
ARTICLE FIFTH
Business Combinations
1. In addition to any approval required by law or by this Certificate
of Incorporation, and any other provision of this Certificate of Incorporation
notwithstanding, any Business Combination and any Substantial Stockholder
effecting, proposing to effect or attempting to effect a Business Combination,
shall meet and be subject to all of the following conditions:
(a) The aggregate amount of cash and the Fair Market Value as of
the date of the consummation of the Business Combination of
other consideration to be received per share by the holders of
shares of Common Stock in such Business Combination shall be
not less than the highest per share price (including brokerage
commissions, transfer taxes and soliciting dealers' fees) that
a Substantial Stockholder paid for any shares of Common Stock
acquired by the Substantial Stockholder after it acquired a 5%
Interest.
(b) The consideration to be received by the holders of shares of
Common Stock in such Business Combination shall be either cash
or the same form as the consideration paid by the Substantial
Stockholder for shares of Common Stock acquired by the
Substantial Stockholder after it acquired a 5% Interest. If
the Substantial Stockholder has acquired shares of Common
Stock after the Substantial Stockholder has acquired a 5%
Interest, using more than one form of consideration, the form
of consideration to be received by the holders of shares of
Common Stock shall be either cash or the form used to acquire
the largest number of shares of Common Stock after the
Substantial Stockholder has acquired a 5% Interest.
(c) A proxy statement responsive to the requirements of the
Securities Exchange Act of 1934 shall have been mailed to all
holders of shares of Common Stock for the purpose of
soliciting stockholder approval of such Business Combination.
Such proxy statement shall contain at the front thereof, in a
prominent place, any recommendations as to the advisability
(or inadvisability) of the Business Combination that the
Continuing Directors, or any of them, may have furnished in
writing and, if deemed advisable by two-thirds of the
Continuing Directors, an opinion of a reputable investment
banking firm as to the fairness (or lack of fairness) of the
terms of such Business Combination, from the point of view of
the holders of shares of Common Stock other than the
Substantial Stockholder. Such investment banking firm shall be
selected by two-thirds of the Continuing Directors, shall be
furnished with all information it reasonably requests and
shall be paid by this corporation a reasonable fee for its
services upon receipt by this corporation of such opinion.
2. For purposes of this Article FIFTH, two-thirds of the Continuing
Directors shall have the power to determine in good faith, on the basis of
information known to them, (a) the number of shares of Common Stock beneficially
owned by any Person, the time at which any Person acquired a 5% Interest, the
highest per share price paid by a Substantial Stockholder for any shares of
Common Stock acquired by the Substantial Stockholder after it acquired a 5%
Interest, and, subject to subparagraph 4(f) of this Article FIFTH, the Fair
Market Value of the securities or other property exchanged in connection with
the transactions described in subparagraphs 4(d)(ii) and (d)(iii), respectively,
of this Article FIFTH, (b) whether a Person is an affiliate or associate of
another, (c) whether a Person has an agreement, arrangement or understanding
with another as to the matters referred to in subparagraph 4(c) of this Article
FIFTH, and (d) whether the transactions described in subparagraphs (d)(ii) and
(iii), respectively, of paragraph 4 of this Article FIFTH constitute Business
Combinations.
3. Nothing contained in this Article FIFTH shall be construed to
relieve any Substantial Stockholder from any fiduciary obligation imposed by
law.
4. For the purposes of this Article FIFTH:
(a) An "Affiliate" of, or a Person "affiliated" with, a specified
Person, is a Person that directly, or indirectly through one
or more intermediaries, controls, is controlled by, or is
under common control with, the Person specified.
(b) The term "Associate", when used to indicate a relationship
with any Person, means (1) any corporation or other
organization (other than this corporation or a Subsidiary) of
which such Person is a director, officer or partner or is,
directly or indirectly, the beneficial owner of 10% or more of
any class of equity securities thereof, (2) any trust or other
estate in which such Person has a substantial beneficial
interest or as to which such Person serves as a trustee or in
a similar fiduciary capacity, and (3) any relative or spouse
of such Person, or any relative of such spouse, who has the
same home as such Person, or who is a director, officer or
partner of a corporation or other organization of which such
Person is a director, officer or partner or is, directly or
indirectly, the beneficial owner of 10% or more of any class
of equity securities thereof.
(c) A Person shall be the "beneficial owner" of any shares of
Common Stock:
(i) with respect to which such Person or any of its
Affiliates or Associates directly or indirectly has or
shares (a) voting power, including the power to vote or
to direct the voting of such shares of Common Stock
and/or (b) investment power, including the power to
dispose of or to direct the disposition of such shares
of Common Stock, or
(ii) that such Person or any of its Affiliates or Associates
has (a) the right to acquire (whether such right is
exercisable immediately or only after the passage of
time), pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights,
exchange rights, warrants, or options, or otherwise, or
(b) the right to vote pursuant to any agreement,
arrangement or understanding, or
(iii) that are beneficially owned, directly or indirectly, by
any other Person with which such first-mentioned Person
or any of its Affiliates or Associates has any
agreement, arrangement or understanding for the purpose
of acquiring, holding, voting or disposing of any shares
of Common Stock.
Notwithstanding the foregoing, a member of a national securities exchange shall
not be deemed to be a beneficial owner of shares of Common Stock held directly
or indirectly by it on behalf of another Person solely because such member is
the record holder of such shares of Common Stock, and pursuant to the rules of
such exchange, may direct the vote of such shares of Common Stock, without
instruction, on other than contested matters or matters that may affect
substantially the rights or privileges of the holders of the shares of Common
Stock to be voted, but is otherwise precluded by the rules of such exchange from
voting without instruction.
(d) "Business Combination" shall mean:
(i) any merger, consolidation or share exchange of this
corporation or any Subsidiary with or into (a) any
Substantial Stockholder or (b) any other corporation
(whether or not itself a Substantial Stockholder)
which, after such merger or consolidation, would be
an Affiliate of a Substantial Stockholder, or
(ii) any sale, lease, exchange, mortgage, pledge, transfer
or other disposition (in one transaction or a series
of related transactions) to or with any Substantial
Stockholder or an Affiliate of a Substantial
Stockholder of any assets of this corporation or any
Subsidiary, in exchange for cash, securities or other
property (or a combination thereof) having a Fair
Market Value in excess of $10 million that shall be
determined to be a Business Combination by two-thirds
of the Continuing Directors as provided in clause (d)
of paragraph 2 of this Article FIFTH, or
(iii) the issuance or transfer by this corporation or any
Subsidiary (in one transaction or a series of related
transactions) of any securities of this corporation
or any Subsidiary to (a) any Substantial Stockholder
or (b) any other corporation (whether or not itself a
Substantial Stockholder) that, after such issuance or
transfer, would be an Affiliate of a Substantial
Stockholder, in exchange for cash, securities or
other property (or a combination thereof) having a
Fair Market Value in excess of $10 million that shall
be determined to be a Business Combination by
two-thirds of the Continuing Directors as provided in
clause (d) of paragraph 2 of this Article FIFTH, or
(iv) the adoption of any plan or proposal for the
liquidation or dissolution of this corporation
proposed by or on behalf of a Substantial Stockholder
or an Affiliate of a Substantial Stockholder, or
(v) any reclassification of securities (including any
reverse stock split), recapitalization,
reorganization, merger or consolidation of this
corporation with any of its Subsidiaries or any
similar transaction (whether or not with or into or
otherwise involving a Substantial Stockholder or an
Affiliate of a Substantial Stockholder) that has the
effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any
class of equity or convertible securities of this
corporation or any Subsidiary that is directly or
indirectly owned by any Substantial Stockholder or by
an Affiliate of a Substantial Stockholder.
(e) "Continuing Director" shall mean a person who was a director
on or prior to February 21, 1985, or who was elected to and
became a member of the Board of Directors of this corporation
by vote of the Public Holders prior to the date as of which a
Person becoming a Substantial Stockholder acquired a 5%
Interest, or a person designated as a Continuing Director by
two-thirds of the then Continuing Directors.
(f) "Fair Market Value" shall mean: (i) in the case of stock, the
closing sale price on the day immediately preceding the date
in question of a share of such stock (or, if no trade was made
on such day, the closing sale price on the closest day prior
thereto on which a trade with respect to such stock was made),
which price was quoted on the Composite Tape for New York
Stock Exchange-Listed Stocks, or, if such stock is not quoted
on the Composite Tape, on the New York Stock Exchange, or, if
such stock is not listed on such Exchange, on the principal
United States securities exchange registered under the
Securities Exchange Act of 1934 on which such stock is listed,
or, if such stock is not listed on any such exchange, the
closing bid quotation with respect to a share of such stock on
the day immediately preceding the date in question (or, if no
closing bid quotation was available for such day, the closing
bid quotation on the closest day prior thereto on which a
closing bid quotation is available) on the National
Association of Securities Dealers, Inc. Automated Quotations
System or any system then in use, or if no such quotations are
available, the fair market value on the date in question of a
share of such stock as determined by two-thirds of the
Continuing Directors in good faith; and (ii) in the case of
property other than cash or stock, the fair market value of
such property on the date in question as determined in good
faith by two-thirds of the Continuing Directors.
(g) A "5% Interest" shall mean beneficial ownership, directly or
indirectly, of not less than 5% of the then outstanding Common
Stock.
(h) "Other consideration to be received" shall mean anything other
than cash, including, without limitation, shares of Common
Stock retained by Public Holders in the event of a Business
Combination in which this corporation is the surviving
corporation.
(i) "Person" shall mean any individual, firm, corporation or other
entity.
(j) "Public Holders" shall mean Persons other than the relevant
Substantial Stockholder.
(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.
(l) A "Substantial Stockholder" shall mean any Person (other than
this corporation or any Subsidiary of this corporation or any
trustee holding shares of Common Stock of this corporation for
the benefit of the employees of this corporation or any
Subsidiary of this corporation, or any of them, pursuant to
one or more employee benefit plans or arrangements) who or
that, as of the record date for the determination of
stockholders entitled to notice of and to vote on such
Business Combination, or as of the time of the vote on such
Business Combination, or immediately prior to the consummation
of any such transaction, is the beneficial owner, directly or
indirectly, of not less than 5% of the then outstanding Common
Stock of this corporation.
ARTICLE SIXTH
Board of Directors
The business and affairs of this corporation shall be managed by a
Board of Directors. The number of directors (exclusive of directors, if any, to
be elected by the holders of shares of Preferred Stock, voting separately from
the Common Stock as provided in any amendment creating any series of Preferred
Stock) shall be not less than 7 nor more than 11, the exact number of directors
to be determined from time to time by a resolution adopted by the affirmative
vote of a majority of the entire Board of Directors.
The directors of this corporation shall be divided into three classes,
designated Class I, Class II and Class III, respectively. Each class shall be as
nearly equal in number as may be possible. At the 1985 annual meeting of
stockholders, Class I directors shall be elected for a one-year term, Class II
directors for a two-year term and Class III directors for a three-year term. At
each succeeding annual meeting of stockholders beginning in 1986, the successors
to the class of directors whose term expires at that annual meeting shall be
elected for a three-year term, and successors to directors of any other class,
including directors elected in any such class by the Board of Directors to fill
one or more vacancies or newly-created directorships, shall be elected for the
remaining term of that class. If the number of directors is changed by
resolution of the Board of Directors pursuant to this Article SIXTH, any
increase or decrease shall be apportioned by the Board among the classes so as
to maintain the number of directors in each class as nearly equal as possible,
but in no case shall a decrease in the number of directors shorten the term of
any incumbent director.
Any newly-created directorship resulting from an increase in the number
of directors by resolution of the Board pursuant to this Article SIXTH may be
filled by a majority of the directors then in office. Any vacancy on the Board
of Directors occurring for any reason, other than an increase in the number of
directors as aforesaid, may be filled by a majority of the directors then in
office, although less than a quorum, or by a sole remaining director.
Directors of any class shall hold office until the annual meeting of
the year in which the term of such class expires or, in the case of directors
elected by the Board of Directors to fill vacancies or newly-created
directorships, until the next annual meeting following their election, and until
their respective successors shall be elected and shall qualify, subject to prior
death, resignation, retirement, disqualification or removal from office.
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.
<PAGE>
ARTICLE SEVENTH
Current Directors
The current Board of Directors of this corporation consists of nine (9)
persons whose names and business addresses are as follows:
Name Business Address
Philip C. Ackerman National Fuel Gas Company
10 Lafayette Square
Buffalo, New York 14203
Robert T. Brady MOOG Inc.
Plant 24/Seneca at Jamison Road
East Aurora, New York 14052
James V. Glynn Maid of the Mist Corporation
151 Buffalo Avenue
Niagara Falls, New York 14303
William J. Hill 3515 Zimmerly Road
Erie, Pennsylvania 16506
Bernard J. Kennedy National Fuel Gas Company
10 Lafayette Square
Buffalo, New York 14203
Bernard S. Lee, Ph.D. Institute of Gas Technology
1700 South Mt. Prospect Road
Des Plaines, Illinois 60018
Eugene T. Mann 272 Porterville Road
Box 635
East Aurora, New York 14052
George L. Mazanec Duke Energy Corporation
P.O. Box 1642
Houston, Texas 77251
George H. Schofield 224 Ocean Avenue
Marblehead, Massachusetts 01945
<PAGE>
ARTICLE EIGHTH
Required Vote On Certain Actions
The following actions approved by the Board of Directors shall be
adopted upon receiving the affirmative vote of a majority of votes cast by the
holders of shares of the corporation entitled to vote thereon and, in addition,
if any class or series of shares is entitled to vote thereon as a class, a
majority of the votes cast in each such class vote:
(1) amendments to the Certificate of Incorporation, including
restatements, where shareholder approval is required or requested;
(2) a plan of merger or consolidation;
(3) a sale, lease, exchange or other disposition of all, or
substantially all, the assets of the corporation otherwise than in the usual and
regular course of business; and
(4) dissolution.
Notwithstanding any other provision hereof or the By-Laws of this
corporation (and notwithstanding the fact that a lesser percentage may be
specified by law, this Certificate of Incorporation or the By-Laws of this
corporation), the approval of at least three-fourths of the entire Board of
Directors or, in the event that the Board of Directors consists of directors
elected by the holders of shares of Preferred Stock, the approval of a majority
of the entire Board of Directors shall be required before any proposal to amend,
alter, change, repeal or adopt any provision inconsistent with Article FIFTH,
Article SIXTH or this paragraph of Article EIGHTH of this Certificate of
Incorporation, may be submitted to a vote at a meeting of stockholders.
ARTICLE NINTH
Director and Officer Exculpation
No director or officer of this corporation shall be personally liable
to the corporation or any of its shareholders for monetary damages for breach of
any duty owed to the corporation or any of its shareholders, except to the
extent that such exemption from liability is not permitted under the New Jersey
Business Corporation Act, as the same exists or may hereafter be amended, or
under any revision thereof or successor statute thereto.
<PAGE>
IN WITNESS WHEREOF, National Fuel Gas Company has caused this Restated
Certificate of Incorporation to be duly executed as of the date first above
written.
NATIONAL FUEL GAS COMPANY
By: /s/ B. J. Kennedy
----------------------------
Name: B. J. Kennedy
Title: Chairman of the Board
President and
Chief Executive Officer
<PAGE>
CERTIFICATE OF ADOPTION
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
NATIONAL FUEL GAS COMPANY
Dated: September 21, 1998
The undersigned corporation, National Fuel Gas Company, having adopted
a restated certificate of incorporation pursuant to Section 14A:9-5 of the New
Jersey Business Corporation Act, hereby certifies that:
1. Name. The name of the corporation is NATIONAL FUEL GAS COMPANY (the
----
"Corporation").
2. Date of Adoption. The date the restated certificate of
-------------------
incorporation was adopted was September 17, 1998.
3. Board Adoption. The restated certificate of incorporation was
---------------
approved and adopted by the Board of Directors of the Corporation. It restates
and integrates, but does not substantively amend, the certificate of
incorporation of the Corporation, as heretofore restated and amended.
IN WITNESS WHREOF, 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/ B. J. Kennedy
-------------------------------------
B. J. Kennedy
Chairman of the Board, President
and Chief Executive Officer
Amended 2/21/85
6/19/86
7/07/88
6/14/90
6/18/92
12/8/93
6/09/94
9/19/96
1/01/97
3/20/97
6/19/97
9/18/97
9/17/98
NATIONAL FUEL GAS COMPANY
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BY-LAWS
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ARTICLE I
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Meeting of Stockholders
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1. Meetings of stockholders may be held at such place, within or
without the State of New Jersey, as may be fixed by the Board of Directors and
stated in the notice of the meeting.
2. In 1999 and thereafter, the annual meeting of stockholders shall be
held on the third Thursday in February in each year beginning at ten o'clock in
the forenoon, local time, unless such day shall be on a holiday, in which event
such meeting shall be held at the same hour on the next succeeding business day.
In 1998, the Annual Meeting of Stockholders shall be held on Thursday, February
26, 1998 at ten o'clock in the forenoon, local time.
3. Except as otherwise provided by New Jersey law, written notice of
the time, place and purpose or purposes of every meeting of stockholders shall
be given not less than 10 nor more than 60 days before the date of the meeting,
either personally or by mail, to each stockholder of record entitled to vote at
the meeting.
4. Unless otherwise provided by statute, all Special Meetings shall be
called upon the written request of three or more directors or of stockholders
owning one-fourth of the capital stock issued and outstanding.
5. Unless otherwise provided in the Company's Certificate of
Incorporation or in New Jersey law, (i) the holders of shares entitled to cast a
majority of the votes at any meeting of stockholders shall constitute a quorum
at such meeting except that the votes that holders of any class or series of
shares are entitled to cast shall not be counted in the determination of a
quorum for action to be taken at a meeting with respect to which such class or
series has no vote, and (ii) the holders of shares of any class or series
entitled to cast a majority of the votes of such class or series entitled to
<PAGE>
vote separately on a specified item of business shall constitute a quorum of
such class or series for the transaction of such specified item of business.
If a quorum shall not be so represented, the stockholders
present at any meeting of stockholders shall have power to adjourn the meeting
to another time at the same or at another place. If the time and place to which
the meeting is adjourned are announced at the meeting at which the adjournment
is taken and at the adjourned meeting only such business is transacted as might
have been transacted at the original meeting, it shall not be necessary to give
notice of the adjourned meeting unless after the adjournment the Board of
Directors fixes a new record date for the adjourned meeting. In the event the
Board of Directors fixes such a new record date, a notice of the adjourned
meeting shall be given to each stockholder of record at the new record date
entitled to notice under Article I paragraph 3 of these By-Laws.
6. At each election of Directors, the proxies and ballots shall be
received and all questions respecting the qualification of voters shall be
decided by two inspectors, who shall be appointed by the presiding officer of
the meeting; provided however, that no candidate for election as Director shall
act as inspector. Such inspectors shall be sworn faithfully to perform their
duties and shall report in writing the results of the ballot.
ARTICLE II
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Board of Directors
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1. The Board of Directors shall consist of (i) such number of
directors, not less than seven nor more than eleven, as may be determined from
time to time by resolution adopted by the affirmative vote of a majority of the
entire Board of Directors, and (ii) such directors as may be elected by vote of
the holders of shares of preferred stock, when and as provided in the
Certificate of Incorporation of the Company. In order to qualify for election as
a director, a nominee must be a shareholder of the Company.
2. Subject to the provisions of the Statutes of the State of New
Jersey, the Certificate of Incorporation, and the By-Laws of the Corporation,
the Board of Directors shall have full and complete management and control of
the business and affairs of the Corporation.
<PAGE>
3. The Board of Directors may hold its meetings or any adjournment
thereof either in the State of New Jersey or elsewhere and keep the books of the
Corporation at such places within or without the State of New Jersey as the
Board of Directors may from time to time determine.
4. Meetings of the Board of Directors may be called at the direction of
the Chairman of the Board, the President, or any three of the Directors for the
time being in office.
5. Notice of any meetings of the Board of Directors shall be given to
each Director by mailing the same to him at his last known address, as the same
appears upon the records of the Corporation at least five days before the
meeting or by telegraphing, telephoning or delivering the same to him personally
at least one day before the meeting.
6. At any meeting of the Board of Directors, there may be transacted
without special notice, any business within the powers of the Directors to
transact, except that of which the Statutes of the State of New Jersey expressly
require special notice shall be given.
7. A. A majority of the Directors in office shall constitute a quorum
for the transaction of any business which may properly come before them. If a
majority of said Directors shall not be present at any meeting, the Directors
present shall have power to adjourn to a day certain, and notice of the
adjourned meeting shall be given by mailing the same addressed to each Director
at his address as the same appears upon the records of the Corporation, at least
two days prior to the adjourned meeting, or by telegraphing, telephoning or
delivering the same to him personally at least one day before said adjourned
meeting. But, if a majority of the Board of Directors are present, the said
meeting, or any adjourned meeting thereof, may be adjourned to a subsequent day;
such adjournment may be without notice of such adjournment if such notice is not
required by New Jersey Law (as of June 1997, N.J.S.A. 14A:6-10(2)).
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B. Unless a greater vote is required by applicable law or by the
Certificate of Incorporation of the Company or these By-laws (including, but not
limited to, subparagraph C of this paragraph 7), any action approved by a
majority of the votes of directors present at a meeting at which a quorum is
present shall be the act of the Board of Directors.
<PAGE>
C. Anything in these By-laws to the contrary notwithstanding, any
action taken by the Board of Directors pursuant to the terms of any Rights Plan
(as hereinafter defined) of the Company shall, unless otherwise provided by the
terms of the Rights Plan, be approved by the affirmative vote of three-fourths
(3/4ths) of the entire Board of Directors. For purposes of these By-laws, the
term "Rights Plan" shall mean any plan pursuant to which shareholders of the
Company are, upon the occurrence of certain specified events (including, but not
limited to, the acquisition by any person of a specified number of shares of
capital stock of the corporation), entitled to purchase shares of capital stock
or other securities of either the Company or the acquiring person at a
discounted price.
8. A. The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any pending, threatened or completed
civil, criminal, administrative or arbitrative action, suit or proceeding, and
any appeal therein and any inquiry or investigation which could lead to such
action, suit or proceeding ("Proceeding") by reason of the fact that such person
is or was a director or officer of the Corporation, or, while a director or
officer of the Corporation, is or was serving at the request of the Corporation
as a director, officer, trustee, employee or agent of another foreign or
domestic corporation, or of any partnership, joint venture, sole proprietorship,
employee benefit plan, trust or other enterprise, whether or not for profit, to
the fullest extent permitted and in the manner provided by the laws of the State
of New Jersey.
B. Nothing in this paragraph 8 shall restrict or limit the power of
the Corporation to indemnify its employees, agents and other persons, to advance
expenses (including attorneys' fees) on their behalf and to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation in connection with any Proceeding.
C. The indemnification provided by this paragraph 8 shall not
exclude any other rights to which a person seeking indemnification may be
<PAGE>
entitled under the Certificate of Incorporation, By-Laws, agreement, vote of
shareholders or otherwise. The indemnification provided by this paragraph 8
shall continue as to a person who has ceased to be a director or officer, and
shall extend to the estate or personal representative of any deceased director
or officer."
9. A. Except with respect to directors whose service as such ceases on
or before February 20, 1997, who will continue to receive the
previously-effective Director compensation until such time, each Director who is
not a regular full-time employee of the Corporation or one or more of its
subsidiaries, shall be paid an annual fee of $12,000 in cash and 400 shares of
the common stock of the Corporation, payable in equal quarterly increments, in
advance (i.e., as of the first business day of the quarter). There will be
proration of payments during quarters in which such Director has only partial
service. Each such share of stock of the Corporation will be nontransferable
until the later of two years from its issuance or six months after such
Director's cessation of service.
B. Each Director of the Corporation who is not a regular full-time
employee of the Corporation or one or more of its subsidiaries shall also
receive a fee of $1,000 for attendance at any meeting of the Board of Directors
and a fee of $800 for attendance at any meeting of any committee of the Board of
Directors, except that if a Director participates in a committee meeting by
telephone, the fee shall be $500. Each Director shall be reimbursed for the
travel expenses incurred by him or her in attending any meeting of the Board of
Directors or any committee of the Board of Directors.
10. Any contract or other transaction between the Corporation or a
subsidiary of the Corporation and any other entity shall not be void or voidable
because a Director of the Corporation is interested therein if the Corporation
has complied with the provisions of any then-applicable New Jersey statute(s)
necessary or sufficient to make the transaction not void or voidable, including,
as of June 1997, N.J.S.A. 14A:6-8(1).
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ARTICLE III
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Officers
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1. At the first meeting after the annual election, the Board of
Directors shall choose a Chairman of the Board and a President, both of whom
<PAGE>
shall be members of the Board of Directors, and one or more Vice Presidents, a
Secretary, a Treasurer and a Controller, who need not be members of the Board of
Directors, and who shall hold their respective offices until others are chosen
and qualify in their stead. The offices of Secretary and Treasurer may be filled
by the same person.
2. In its discretion, the Board of Directors may leave unfilled for
such period as it may determine, any office except the offices of the President,
Treasurer and Secretary.
3. The Chairman of the Board shall be the Chief Executive Officer of
the Corporation. He shall preside at all meetings of the Board of Directors and
shall, during the recess of the Board of Directors, have general control and
management of the affairs and business of the Corporation. In the absence of the
President, he shall preside at stockholders' meetings.
4. In addition to the duties and responsibilities specified in the laws
of the State of New Jersey and these By-Laws, the President shall preside at all
stockholders' meetings and shall perform such other duties as from time to time
may be assigned to him by the Board of Directors. In the absence of the Chairman
of the Board, or in the event that there is a vacancy in the office of the
Chairman of the Board, the President shall be the Chief Executive Officer of the
Corporation and shall perform all the duties of the Chairman of the Board as
well as those of President.
5. Each Vice President shall perform such duties as shall from time to
time be assigned to him by the Board of Directors, the Chairman of the Board, or
the President.
6. The Secretary, in addition to his statutory duties, shall give
proper notice of all meetings of the stockholders and of the Board of Directors.
He shall act as Secretary of all meetings of the stockholders and shall perform
such other duties as shall from time to time be assigned to him by the Board of
Directors or President.
7. The Treasurer, in addition to his statutory duties, shall keep full
and accurate accounts of receipts and disbursements of the funds belonging to
the Corporation, and shall cause to be deposited all moneys and other valuable
effects in the name and to the credit of the Corporation in such depositories as
may from time to time be designated by the Board of Directors. He shall disburse
the funds of the Corporation as may be ordered by the Board, taking proper
vouchers for such disbursements, and shall render to the President and Directors
whenever they may require it, account of all his transactions as Treasurer, and
of the financial condition of the Corporation. He shall perform such other
duties as shall be assigned to him by the Board or President, and shall give a
<PAGE>
bond for the faithful discharge of his duties in such sum and with such surety
or sureties as the Board of Directors may from time to time require.
8. The Controller shall see that adequate records of all assets,
liabilities and transactions of the Corporation are maintained; that adequate
audits thereof, are currently and regularly made, and in conjunction with other
officers, initiate and enforce measures and procedures whereby the business of
the Corporation shall be conducted with maximum efficiency, safety and economy.
He shall also perform all such other duties as usually pertain to the office of
Controller. He shall be in all matters subject to the control of and responsible
to the Board of Directors alone.
9. The Board of Directors may from time to time appoint such other
officers and agents as they may deem necessary or advisable for the transaction
of the business of the Corporation, who shall hold their offices during the
pleasure of the Board of Directors and perform such duties as may from time to
time be designated or assigned to them by said Board of Directors.
10. If the office of the Chairman of the Board, the President, Vice
President, Secretary, Treasurer, or Controller or one or more of them becomes
vacant for any reason whatsoever, the Board of Directors at any duly convened
meeting may, by a majority vote of those present, fill such vacancy and the
person elected shall hold office for the unexpired term of such office and until
his successor shall be chosen.
11. All officers and agents chosen or appointed by the Board of
Directors shall be subject to removal by the Board of Directors at any time with
or without cause, and in the case of the absence of any officer or agent of the
Corporation, or for any other reason that may seem sufficient to the Board of
Directors, the said Board of Directors subject to the limitations herein
contained and the statutes in such case made and provided, may, without removal,
delegate his powers and duties to any other officer or suitable person for such
period as it shall deem proper.
12. All duly authorized bonds and debentures of the Corporation shall
be signed on behalf of the Corporation by its Chairman of the Board or its
President, or one of its Vice Presidents or, if so provided by resolution of the
Board of Directors, by one or more of such officers and such other officer or
officers designated by the Board of Directors; any or all such signatures may be
manual or facsimile signatures, the signature on interest coupons attached to
any said bonds or debentures shall be a facsimile signature; and the corporate
seal or a facsimile of such seal may be impressed, affixed, imprinted or
otherwise reproduced on said bonds and debentures and, if attested, shall be
<PAGE>
attested by the Corporation's Secretary or Assistant Secretary by manual or
facsimile signature. In case any person whose signature (manual or facsimile)
appears upon any said bond or debenture or coupons attached thereto shall cease
to be an officer of the Corporation, or shall cease to be the officer specified
thereon, before the bonds or debentures so signed shall have been authenticated
by the trustee under the indenture or other instrument pursuant to which the
bonds or debentures are delivered or sold, such bonds or debentures or coupons
may nevertheless be adopted by the Corporation, without further action by the
Board of Directors, and authenticated and delivered and sold as though the
person or persons who so signed or attested such bonds or debentures or coupons
had not ceased to be an officer of the Corporation or the officer specified
thereof; and any bonds or debentures may be signed as aforesaid; and the seal of
the Corporation impressed, affixed, imprinted or otherwise reproduced thereon
may be attested on behalf of the Corporation as aforesaid, and coupons attached
may be signed as aforesaid by such persons as at the actual date of the
execution of the bonds or debentures or coupons shall be the proper officers of
the Corporations, although at the time of the date of the bonds or debentures,
such persons may not have been officers of the Corporation.
ARTICLE IV
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Executive Committee
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1. The Directors may appoint an executive committee and one or more
other committees of not less than three members to be chosen from among the
members of the Board of Directors. Such committees may meet at such times and
places as the committee shall, by resolution, determine and it shall make its
own rules of procedure. A majority of the members of any such committee shall
constitute a quorum.
2. Except as otherwise provided by Board resolution or statute (as of
June 1997, N.J.S.A. 14A:6-9(1)), each such committee shall have and may exercise
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the power of the Board of Directors in the management of the business and
affairs of the Corporation at any time when the Board of Directors are not in
session. Each such committee shall, however, be subject to the specific
directions of the Board of Directors.
3. Each such committee shall keep regular minutes of their transactions
and shall cause them to be recorded in books to be kept for that purpose in the
office of the Corporation, and shall report the same to the Board of Directors
at their regular meetings.
<PAGE>
ARTICLE V
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Transfer of Shares
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1. Except as otherwise provided by statute, shares shall be transferred
on the books of the Corporation only by the holder thereof in person or by his
attorney upon the surrender and cancellation of the certificate or certificates
of a like number of shares, except in case of lost or destroyed certificates,
and in that case only after the receipt of a satisfactory bond if required by
the Board of Directors.
2. The Board of Directors may appoint a transfer agent and a registrar
of transfers, and may require all stock certificates to bear the signatures of
either or both.
ARTICLE VI
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Fiscal Year
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1. The fiscal year of the corporation shall begin on the 1st day of
October in each calendar year and end on the 30th day of September of the next
succeeding year.
ARTICLE VII
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Dividends and Working Capital
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1. Before declaring any dividends or making any distribution of
profits, the Directors may set apart out of the net profits or out of the
surplus of the Corporation as a reserve fund to be used as working capital or
for any other proper purpose, such sum or sums as the Directors shall in their
discretion deem just and proper and most for the benefit of the Corporation.
2. Dividends upon the capital stock of the Corporation when declared
shall be payable on dates to be determined by the Board of Directors.
ARTICLE VIII
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Closing of Transfer Books and
Fixing A Record Book
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The Board of Directors may close the stock transfer books of the
Corporation for a period not exceeding sixty days preceding the date of any
meeting of stockholders or the date for payment of any dividend, or the date for
the allotment of rights, or the date when any change or conversion or exchange
of capital stock shall go into effect.
In lieu of so closing the stock transfer books, the Board of Directors
may fix, in advance, a date, not exceeding sixty days preceding the date of any
meeting of stockholders, or the date for the payment of any dividend, or the
<PAGE>
date for the allotment of rights, or the date when any change or conversion or
exchange of capital stock shall go into effect, as a record date for the
determination of the stockholders entitled to notice of, and to vote at, any
such meeting, or entitled to receive payment of any such dividend, or any such
allotment of rights, or to exercise the rights in respect to any such change,
conversion or exchange of capital stock, and in such case only stockholders of
record on the date so fixed shall be entitled to such notice of, and to vote at,
such meeting, or to receive payment of such dividend, or allotment of rights or
exercise of such rights, as the case may be, and notwithstanding any transfer of
any stock on the books of the Corporation after any such record date fixed as
aforesaid.
ARTICLE IX
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Waiver of Notice
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1. Any notice required to be given by these By-Laws may be waived by
the person entitled thereto.
ARTICLE X
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Seal
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1. The common corporate seal is and until otherwise ordered by the
Board of Directors shall be an impression upon paper or wax bearing the words -
"NATIONAL FUEL GAS COMPANY, NEW JERSEY, INCORPORATED 1902".
ARTICLE XI
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Amendment of By-Laws
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1. Except as otherwise provided by statute, the Board of Directors
shall have power to make, alter or repeal the By-Laws of the Corporation by a
vote of a majority of all the Directors at any duly convened meeting of the
Board, but any By-Laws so made or otherwise promulgated may be altered or
repealed and new By-Laws made by the stockholders at any duly conveyed meeting
thereof.
AMENDMENT NO. 2 TO
NATIONAL FUEL GAS COMPANY
DEFERRED COMPENSATION PLAN
I, B. J. Kennedy, am duly authorized by Article 10, Paragraph 10.3 of
the National Fuel Gas Company Deferred Compensation Plan ("Plan") to amend the
Plan under certain circumstances or as necessary or appropriate.
Accordingly, I do hereby amend the Plan as follows, effective January
1, 1997:
1. Paragraph 6.4(a) shall be deleted in its entirety and shall be
replaced with the following:
(a) Respecting Plan balances attributable to the Deferral
Periods for Cycles I, II, II-A and III, the annuities
shall be determined by using an interest rate equal
to the sum of (i) the average of the Moody's Index in
effect for the 60-month period that ends with the
month preceding the month in which the Participant's
Retirement Benefit Date occurs; and (ii) thirty-five
percent (35%) of the average referred to in (i)
above.
2. In all other respects the Plan shall remain unchanged.
Dated: 3/13/98 /s/ B. J. Kennedy
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B. J. Kennedy
President, Chief Executive Officer
and Chairman of the Board of Directors
AMENDMENT NO. 1 TO
NATIONAL FUEL GAS COMPANY
TOPHAT PLAN
I, B. J. Kennedy, am duly authorized by Article 5, Paragraph 5.2 of the
National Fuel Gas Company Tophat Plan ("Plan") to amend the Plan under certain
circumstances and as necessary or appropriate.
Accordingly, I do hereby amend the Plan as follows:
1. Paragraph 1.1 shall be deleted in its entirety and replaced
with the following, effective August 1, 1997:
1.1 "Base Salary" shall mean gross cash compensation per
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regular payroll period, including salary continuation
payments made by an Employer on account of sickness
or accident, which are paid to a Participant for
employment services rendered to an Employer, before
reduction for compensation deferred pursuant to the
National Fuel Gas Company Deferred Compensation Plan
or pursuant to the National Fuel Gas Company
Tax-Deferred Savings Plan for Non-Union Employees,
and shall also include (i) payments made to a
Participant pursuant to the Company's Annual At Risk
Compensation Incentive Program or a successor plan
thereto, and (ii) any performance-related lump sum
compensation (i.e., lump sum payments other than
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expense or tuition reimbursements, moving expense
reimbursements, lump sum payments for eligible unused
vacation, worker's compensation payments, award
payments for suggestions, severance payments or any
other non-performance related payments) made on or
after July 1, 1996, but shall exclude all other fees,
commissions, special, extra or nonperiodic
compensation in any form. Notwithstanding the above,
amounts described in clause (ii) shall be included in
Base Salary only for officers of any Employer other
than Seneca Resources Corporation.
2. Before August 1, 1997, Base Salary shall have the same meaning
as it had in Section 1.2 of the DCP Plan, as it existed on
March 19, 1997.
3. In all other respects, the Plan shall remain unchanged.
Dated: 4/6/98 /s/ B. J. Kennedy
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B. J. Kennedy
President, Chief Executive Officer
and Chairman of the Board of Directors
EXHIBIT 12
<TABLE>
<CAPTION>
COMPUTATION OF RATIO OF
EARNINGS TO FIXED CHARGES
UNAUDITED
Fiscal Year Ended September 30
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1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
EARNINGS:
Income Before Interest Charges and Minority
Interest in Foreign Subsidiaries (2) $118,085 $169,783 $159,599 $128,061 $127,885
Allowance for Borrowed Funds Used in Construction 110 346 205 195 209
Federal Income Tax 43,626 57,807 55,148 30,522 36,630
State Income Tax 6,635 7,067 7,266 4,905 6,309
Deferred Inc. Taxes - Net (3) (26,237) 3,800 3,907 8,452 4,853
Investment Tax Credit - Net (663) (665) (665) (672) (682)
Rentals (1) 4,672 5,328 5,640 5,422 5,730
---------------------------------------------
$146,228 $243,466 $231,100 $176,885 $180,934
=============================================
FIXED CHARGES:
Interest & Amortization of Premium and
Discount of Funded Debt $53,154 $42,131 $40,872 $40,896 $36,699
Interest on Commercial Paper and
Short-Term Notes Payable 13,605 8,808 7,872 6,745 5,599
Other Interest (2) 16,919 4,502 6,389 4,721 3,361
Rentals (1) 4,672 5,328 5,640 5,422 5,730
---------------------------------------------
$88,350 $60,769 $60,773 $57,784 $51,389
=============================================
RATIO OF EARNINGS TO FIXED CHARGES 1.66 4.01 3.80 3.06 3.52
</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 September 30, 1998 and, fiscal 1997, 1996, 1995
and 1994 reflect the reclassification of $1,716, $1,716, $1,716, $1,716
and $1,674, representing the loss on reacquired debt amortized during
each period, from Other Interest Charges to Operation Expense.
(3) Deferred Income Taxes - Net for fiscal 1998 and 1994 exclude the
cumulative effect of changes in accounting.
LETTER TO SHAREHOLDERS
1998* was a year in which we, and many companies in our industry, faced
serious challenges. The weather was, on average, 12% warmer than normal in our
Utility service areas. Our Exploration and Production segment experienced the
unpredictable fury of this year's tropical storms, which, although not resulting
in any physical damage for us, caused our gas production in the Gulf of Mexico
to be shut-in for 13 days. Also, the steady decline of oil and gas prices was a
significant factor in the year's earnings.
In the second quarter of 1998, we could not avoid the "ceiling test"
used under the rule prescribing the full cost method of accounting for oil and
gas exploration and production operations. As a result of falling prices, we
recorded a non-cash impairment to our oil and gas assets of $79.1 million after
tax, or $2.06 per share.** The rule requiring this write-down is, unfortunately,
a one way street, making it both arbitrary and misleading. While there is no
denying that declining prices had a negative impact on the value of our oil and
gas assets, we believe this snapshot approach to valuation overstates the
magnitude of the decline as of fiscal year-end, and ignores the routine seasonal
variability of energy prices. The rule provides only for write-downs and doesn't
allow for write-ups that may occur due to subsequent price increases. While the
requirement arguably provides a reasonable representation of our experience in
the second quarter, it does not fully reflect our experience for the year.
Our method of accounting for depletion of oil and gas properties was
changed, effective October 1, 1997, to the more widely used units of production
method. This resulted in a non-cash, non-recurring reduction of earnings per
share of 24 cents. Without these two non-cash reductions, earnings per share
were strong at $2.91 - only 3% lower than last year's record earnings. However,
with the two non-cash special items, earnings per share for 1998 were $0.61
versus $3.01 for 1997.
The total market value of Company stock rose approximately $128.7
million, to $1.8 billion, despite the volatility in the stock market this year.
The market price per share closed at $47 on September 30, 1998, 6.8% higher than
the market price per share on September 30, 1997.
Once again, your Company fulfilled its commitment to annual dividend
increases. In June, the Board of Directors raised the dividend by $0.06 (3.4%),
to $1.80 per share on an annual basis, bringing you 28 years of consecutive
increases and 96 years of uninterrupted dividend payments. As we look forward to
the future growth of your Company, we expect the Company to continue this long
history of uninterrupted dividend increases.1
- -----------------------
* All references to years in this Annual Report are to the Company's fiscal
year, which ends September 30.
** All references to earnings per share are for basic earnings per common
share.
Several exciting projects and acquisitions were completed in 1998 which
added value to your Company and, in turn, gave rise to new opportunities.1 Our
goal of increasing domestic onshore activities of the Exploration and Production
segment was achieved when we closed three acquisitions in the San Joaquin Basin
in California. Our Pipeline and Storage segment became an equal partner with
affiliates of Transcontinental Gas Pipe Line Corporation, one of the Williams
Companies, and ANR Pipeline Company, a subsidiary of The Coastal Corporation, in
the Independence Pipeline project. The International segment achieved an
identity of its own through our considerable investments in Severoceske
teplarny, a.s. and Prvni severozapadni teplarenska, a.s. which are both located
in the northern region of the Czech Republic. We reached a settlement on the
primary issues of a long-standing IRS audit, which provided a net $5.0 million
benefit to the Company. Finally, but certainly important among this year's
successes, we are pleased to report that the excellent efforts made by our
employees to contain costs lead to another two-year rate settlement in New York,
resulting in a rate reduction for our customers.
We are all very aware that current events impact your Company. The
worldwide surplus of crude oil and the warmer than normal temperatures have kept
oil and gas prices at near record low levels. The strength of your Company will
be tested in 1999 by many outside elements such as the predicted slowdown in the
world economy, continued low commodity prices, and energy industry deregulation
resulting in consumer choice of energy providers. Given the opportunities we
enjoyed in 1998 to further your Company's historic strengths and to enhance our
strong foundation, we are confident your Company will meet these challenges,
grow from them and present an even stronger Company that will see us into the
new millennium.1
EXPLORATION AND PRODUCTION
The Exploration and Production segment experienced a pre-tax operating
loss this year of $93.3 million, down $136 million from the prior year due to
the non-cash impairment. Excluding this impairment, the segment had pre-tax
operating income of $35.7 million, down $7 million from the previous year.
At the beginning of the year when oil and gas prices were up, it was
nearly impossible to obtain offshore drilling rigs at reasonable prices. Thus,
we chose to defer drilling many of our planned wells. We took advantage of this
lull in our drilling program to arrange three acquisitions of properties in the
San Joaquin Basin in Southern California. We believe these properties will
significantly enhance this segment's long-term growth potential.1 These
acquisitions cost approximately $268 million, including assumed debt of $64.7
million, and contributed substantially - approximately 436 Bcf equivalent - to
our total reserve base, which now stands at 725 Bcf equivalent. The mix of our
reserves also changed, where nearly 55% is now oil and 45% is natural gas
compared to 32% oil and 68% gas at September 30, 1997.
In March, we acquired from The Whittier Trust Company and others
properties in the Midway-Sunset and Lost Hills Fields, which added approximately
40 million barrels of proved oil reserves. In May, we completed a tender offer
for HarCor Energy, Inc., an oil and gas company with properties located
primarily on the west side of the San Joaquin Basin, which produce natural gas
and higher gravity oil. Finally, in June, we acquired from Bakersfield Energy
Resources, Inc. the remaining interests in those oil and gas assets located in
the Lost Hills Field. In addition to the properties, we also acquired a gas
processing plant and associated pipelines. As part of our West Coast
reorganization plan, Barry L. McMahan was elected Vice President of Seneca
Resources Corporation and is responsible for all West Coast operations.
As oil and gas prices declined during the year we had some good news in
the form of dramatically reduced prices for drilling rigs and other services
associated with well completion. During the fourth quarter, we initiated
development drilling on the California properties and resumed an active
exploration program. To date, 35 development wells were successfully drilled on
the California properties, with additional wells underway.1
Total production volumes increased to 52.2 Bcf equivalent this year
from 50.0 Bcf equivalent last year. Oil production increased to 2.6 million
barrels from 1.9 million barrels the year before, primarily due to increased oil
production late in the year from the newly-acquired California properties.
However, natural gas production levels went down from 38.6 Bcf to 36.5 Bcf
because of decreased rig availability and tropical storms, as noted above.
Should oil and gas prices improve, and if rig rates remain affordable,
we expect to increase total production next year by approximately 46% to 76 Bcf
equivalent and maintain a production ratio of 65% gas and 35% oil.1 In this
regard, 82 exploration and development wells are planned for 1999.1 We
anticipate most of the gas production increase for next year will be in the
offshore area.1 In fact, late in the fourth quarter we successfully completed
two additional development wells in the Gulf at Vermilion Block 309, raising the
number of successful wells in that Block to six. All wells in this Block should
be on line by the end of January 1999, and production from these wells is
expected to be near 60 MMcf per day.1 In addition, we look for California
production to increase approximately 15% for next year.1
Lower commodity prices do present other opportunities for us. A number
of quality properties are for sale at competitive prices and many companies are
looking for merger opportunities. We have further emphasized our business
development efforts and will evaluate these opportunities as they arise.1 As
part of this effort, Emmett Wassell was named to the newly created position of
Vice President of Business Development of Seneca Resources Corporation,
responsible for acquisitions and divestitures.
PIPELINE AND STORAGE
The Pipeline and Storage segment's 1998 pre-tax operating income
decreased by $2 million to $71.5 million. Lower revenue from unbundled pipeline
sales and open access transportation was the major cause of this decrease.
As the natural gas industry evolves, we are proceeding with two
fundamental strategies:
o Capitalize on the opportunities which naturally result from our
excellent location between Canada and the energy-hungry East Coast
markets.1
o Expand our presence into new geographic areas through acquisitions
and joint ventures.1
In 1998, we continued to develop, with our partners, the Independence
Pipeline project, an interstate natural gas pipeline from Defiance, Ohio to our
hub in Leidy, Pennsylvania.1 The pipeline will provide a critical path for about
900,000 Dth/day of gas from the Chicago area to the energy-demanding East Coast
markets.1 Although this gas will primarily serve electric generation loads, it
is enough to serve 900,000 residential customers on an average heating day.1
This project is currently planned to be in service by late 2000.1
The Independence Pipeline should also help us capitalize on
opportunities for new or alternative uses of natural gas in the power generation
market through its use of gas-fired turbines.1 This market is expected to
generate areas of significant growth for our industry.1 As a result of
deregulation and unbundling in the electric industry, many electric companies
shied away from putting new units on line in recent years to avoid overcapacity
and stranded costs. However, these companies now seek to reverse that trend and
will look to increase the demand for and use of gas-fired turbines, thereby
creating an additional market for natural gas.1
Growth in demand for natural gas is also expected to result from the
shutdown of uneconomic nuclear power plants.1 If these plants are replaced by
gas-fired combined cycle units, industry reports predict an additional demand of
1.5 Tcf/year, with approximately 1.2 Tcf /year in the New England, New York,
Pennsylvania and New Jersey areas.1 The Independence Pipeline will be
well-situated, both geographically and from a competitive cost standpoint, to
meet this increased demand.1
We also anticipate increased demand for natural gas to result from the
shutdown of coal-fired plants due to more stringent emission controls and costs.
If these plants are also replaced by gas-fired combined cycle units, industry
reports predict additional increased demand will range from 2.2 Tcf/year to 7.6
Tcf/year.1 As gas-fired units replace coal plants, emission of nitrogen oxide
(which contributes to ozone depletion), sulfur dioxide (which causes acid rain)
and carbon dioxide (which contributes to global warming) should be reduced
significantly.1
Underground gas storage has long been a critical and integral part of
meeting seasonal demands for natural gas. As the demand continues to increase,
we stand ready to develop a number of depleted gas fields, which we control, to
provide additional storage capacity to meet these needs.1
Moreover, given the success with our first horizontal storage well,
from which we experienced a dramatic increase in deliverability, we are testing
our other storage fields, in both New York and Pennsylvania, to determine if
they are suitable for this new technology. Increasing the quantity of gas which
can be withdrawn from storage in a day should provide new sources of revenue by
enabling us to meet multiple markets' peak gas demand requirements.1 Also,
applying our successful horizontal storage well technology to our other storage
fields should enable us to build on our strategic location between Canadian
supply sources and the East Coast market area.1
The Pipeline and Storage segment is a major contributor to your
Company's net operating income, consistently providing a sound foundation for
growth. As the pipeline industry evolves, we have the necessary components to
satisfy the needs of both existing and emerging energy markets.1
UTILITY
The Utility segment's 1998 pre-tax operating income increased by $0.6
million to $124.5 million. However, $6.0 million of revenues related to the IRS
audits was entirely offset by interest expense also related to the IRS audits;
thus, excluding this $6.0 million of revenue, pre-tax operating income decreased
$5.4 million to $118.5 million.
New York: At the expiration of the Utility's two-year rate settlement, we
entered into a new two-year rate plan, commencing October 1, 1998. This plan
provides for a $7.2 million rate reduction for our New York customers while
preserving the 12% return on equity threshold for the 50/50 sharing of excess
earnings with customers. Further, the new plan establishes a fund where $7.2
million of 1999 revenues will be set aside to help pay for future
transition-related expenses incurred as the Company moves toward a competitive
restructuring of its rates and services.1 We were able to negotiate this
favorable rate plan primarily because of the Utility's ongoing cost control
efforts.
The New York Public Service Commission (PSC) recently issued a "vision
statement" contemplating that local distribution companies would exit the
merchant function over a three-to-seven year period. The PSC's proposal for the
future of the gas industry in New York envisions that the Utility, as system
operator, will retain the assets necessary to perform that function. These and
other restructuring matters will be addressed in global settlement proceedings
with each utility in New York. We will continue to work with the PSC and its
Staff to more fully develop the PSC's restructuring objectives. However, we
believe existing laws require gas utilities to maintain a certain, although
possibly reduced, level of their traditional merchant service, including the
requirement to serve as the retail customers' supplier of last resort.1
Pennsylvania: The Utility continues to avoid the need for a general rate
increase through cost reductions and productivity advances and does not
currently plan to file for any general rate increase in 1999.1
In 1998, we participated in an industry collaborative whose goal was to
draft restructuring legislation that would ultimately bring energy provider
choice to all of Pennsylvania's retail gas customers. While we gained valuable
experience and insight into potential legislative reform, we determined that the
legislation being considered by the collaborative was not in the best interests
of our customers or our shareholders. It was too complex and required far more
changes in laws and regulations than was truly needed.
However, we capitalized on that collaborative experience, as well as
our experience garnered through the Company's Energy Select program. That pilot
program allowed our customers in the greater Sharon area the opportunity to buy
natural gas from a merchant other than the Utility. In late October 1998, we
filed a proposal with the Pennsylvania Public Utility Commission to offer direct
access to competitive markets for all customers on our system. This customer
choice program requires no new legislation.1
Recently, restructuring legislation was proposed in a significantly
scaled-down version from the original gas restructuring bill. This draft
proposal supports our view that sweeping changes to the current law are
unnecessary. While we are evaluating this bill and its impact on our operations,
we continue to pursue approval of our customer choice filing.1 To recognize his
increased level of responsibility in Pennsylvania, Carl M. Carlotti was named
Vice President of National Fuel Gas Distribution Corporation, responsible for
the Pennsylvania division.
As part of the industry's evolution, customer choice of gas suppliers
is building momentum and should expand as customer awareness increases and as
marketers pursue customers.1 No matter who the consumers buy their gas from, we
will continue to deliver that gas in a cost efficient manner and profit from
providing that service.1 To that end, we recently announced an early retirement
offer to our employees. This will have a cost of approximately $5.5 million to
be recorded in the first quarter of fiscal 1999; however, we expect to see some
benefit to earnings in 1999, with the full value realized in fiscal 2000.1
INTERNATIONAL
For the year, the International segment had pre-tax operating income of
$2.1 million - up $5.1 million over the loss recognized last year. We continue
our focus on eastern Central Europe - and the Czech Republic in particular - for
further international expansion.1 Given the region's abundance of central steam
plants and the prospects of increased electric energy usage, we expect more
opportunities to use our expertise in both retail heating service as well as
electric power generation.1
Our total investment in the Czech Republic now stands at $125 million,
with $240 million in total assets. We increased our total ownership interest in
Severoceske teplarny, a.s. (SCT) to 82.7%. We also acquired an 86.2% ownership
interest in Prvni severozapadni teplarenska, a.s. (PSZT), a wholesale power and
district heating company located in the northern Bohemia region of the Czech
Republic. PSZT derives its revenues from the sale of both electric energy and
thermal energy produced from its generation facilities located in Komorany. PSZT
also purchases thermal energy for resale to residential, commercial and
industrial customers.
In 1999, we propose to merge SCT and PSZT in order to achieve operating
and management efficiencies.1 This proposed merger of SCT and PSZT would create
the third largest heating company in the Czech Republic and the third largest
private producer of electricity for sale to the grid.1
Our investments in the International segment are an important part of
our strategy to further increase your Company's earnings and shareholder value
and provide a solid base to expand in eastern Central Europe.1 Over the next few
years, we intend to exploit the co-generation prospects associated with our
steam plants in the Czech Republic and use our facilities and personnel there to
explore further opportunities, both within the Czech Republic and beyond its
borders in Poland, Hungary and eastern Germany.1
OTHER NONREGULATED ACTIVITIES
Our Other Nonregulated activities continue to grow and improve.1 As a
group, they showed pre-tax operating income of $5.3 million, up $3.1 million
from last year. Most of the increase came from our timber holdings and related
sawmills. These holdings continue to increase in value due to biological growth
and the steady demand for quality hardwoods.1
National Fuel Resources, Inc. (NFR) continues its dramatic growth in
energy marketing, increasing its customer base, broadening its services and
building a foundation for capturing more and more customers who will choose
their energy supplier in a competitive marketplace.1 As a result of its
marketing initiatives and the continued expansion of its sales team, NFR serves
approximately 5,400 residential and commercial customers under long-term gas
supply agreements. We are particularly proud of the efforts made during the year
to secure two significant agreements, which provide geographic diversity to our
customer base and demonstrate our competitiveness outside National Fuel's
historic franchise area. In February, NFR secured a gas supply contract with the
State of New Jersey to service various state owned and operated facilities,
making NFR one of that state's largest retail suppliers of natural gas. In July,
NFR began supplying energy to the University of Rochester for its central
heating plant, eighteen campus buildings and Highland Hospital. Under this
two-year agreement, NFR will supply approximately 3 Bcf of natural gas for
heating and other process needs.1
NFR also participates in various natural gas and electric energy pilot
programs, selling natural gas to residential customers in Pennsylvania as part
of the Utility's Energy Select program and in Massachusetts as part of the
Pioneer Valley Customer Choice program. Other electric projects for NFR include
the state-wide pilot for food processors and farmers, and New York State
Electric & Gas Corporation's Customer Advantage program for its electric
customers in Lockport, New York. NFR successfully pursued this market, securing
a contract to serve all of the Niagara County facilities in the pilot area.
We are excited about the challenges and changes offered by the
ever-changing gas and electric industry. As other companies have exited the
market, or encountered heavy losses, NFR has remained a stable and profitable
player, positioned to capitalize on regulatory changes that will occur in the
future.1
INVESTING PLANS
Because of our continued emphasis on expanding your Company's value as
a diversified energy company, and in particular, capitalizing on the successes
of the Exploration and Production segment, about one-half of our $204.4 million
capital budget for 1999 is aimed at exploiting that segment's growth potential.1
There is $92 million targeted for our Exploration and Production segment, but
this number is expected to fluctuate, depending on oil and gas prices and on
drilling costs.1
We have allocated $35.6 million of the 1999 capital budget to our
International segment, to be used primarily for retrofitting our facilities in
the Czech Republic to comply with their environmental regulations.1 The $27
million allocated to our Pipeline and Storage segment largely covers the
reconditioning of storage wells and the replacement of storage and transmission
lines.1 Utility capital expenditures are projected at $48.9 million and will be
used mostly to maintain our system and to replace main and service lines.1 This
is a marked decrease from recent levels of Utility expenditures, and it also
reflects the cumulative effect of replacing our steel pipe with plastic. The
remaining amount is planned for the Other Nonregulated segment.1 As always,
these numbers do not include any amounts for acquisitions or investments.
Finally, we would like to thank all of our employees, including those
who retired this year, for their years of commitment and contribution to your
Company. We gratefully express our appreciation for their dedication in helping
us continue to grow the value of your Company. Their efforts have provided your
Company with a solid foundation, upon which to plan our future growth and take
advantage of the exciting opportunities which that future will inevitably bring.
/s/
Bernard J. Kennedy
Chairman of the Board, President and Chief Executive Officer
/s/
Philip C. Ackerman
Senior Vice President
December 10, 1998
1 This document contains "forward looking statements" as defined by the Private
Securities Litigation Reform Act of 1995. Forward looking statements, including
those designated by a "1," should be read with the cautionary statements
included in this Annual Report on Form 10-K at Item 7, under the heading "Safe
Harbor for Forward-Looking Statements."
<PAGE>
APPENDIX TO EXHIBIT 13 - This appendix contains a narrative description of image
and graphic information as contained in the Letter to Shareholders included in
the paper copy of the Company's combined Annual Report to Shareholders/Form
10-K.
1.) Image - Picture of Bernard J. Kennedy, Chairman of the Board, President
and Chief Executive Officer, with Philip C. Ackerman, Senior Vice
President.
2.) Graph - Annual Dividend Rate at Year End
Bar graph showing the annual dividend rate per share at year-end (in
dollars per common share) for 1988 through 1998, as follows:
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
$1.26 $1.34 $1.42 $1.46 $1.50 $1.54 $1.58 $1.62 $1.68 $1.74 $1.80
3.) Graph - Return on Average Common Equity
Bar graph showing return on average common equity for 1994 through
1998, as follows (1994 and 1998 show actual return and return excluding
special items):
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
11.3% 9.6% 12.6% 13.0% 11.9%*
10.8%* 2.6%
*Excludes special items for impairment of oil and gas producing assets
in 1998 and for cumulative effect of changes in accounting in 1998 and
1994.
4.) Graph
Bar graph showing oil and gas proved developed and undeveloped reserves
(in billion cubic feet (Bcf) equivalent), at September 30, 1994 through
1998, as follows:
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Oil 105.0 137.2 154.5 107.9 399.5
Gas 247.4 221.5 207.1 232.4 325.1
----- ----- ----- ----- -----
352.4 358.7 361.6 340.3 724.6
5.) Graph
Bar graph showing oil and gas production (in billion cubic feet (Bcf)
equivalent), for the years 1994 through 1998, as follows:
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Oil 6.2 4.5 10.4 11.4 15.7
Gas 23.3 20.9 38.8 38.6 36.5
---- ---- ---- ---- ----
29.5 25.4 49.2 50.0 52.2
6.) Graphs - Oil and Gas Prices
Two bar graphs showing weighted average oil and gas prices after
hedging (in dollars) for the years 1994 through 1998, as follows:
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Oil (per bbl) $14.86 $15.86 $18.01 $17.95 $13.03
Gas (per Mcf) $2.26 $2.01 $2.11 $2.18 $2.27
Images 7 - 11 are contained on a page devoted to the Exploration & Production
segment as follows:
7.) Image - Picture of an offshore drilling rig located offshore Louisiana,
with the following caption: Vermilion Block #309, located offshore
Louisiana, is Seneca Resources' largest production endeavor. Production
from its six wells is expected to be at a rate of 60 MMcf per day.1
8.) Image - Drilling rig with the following caption: Drilling rigs like the
one pictured are used in Seneca Resources' San Joaquin exploration
program.
9.) Graph - 1998 Exploration and Production Capital and Acquisition
Expenditures
Pie graph showing the following pie slices for the total $391.2 million
(which includes $64.7 million of assumed debt) of 1998 Exploration and
Production Capital and Acquisition Expenditures: Whittier 36%; HarCor
25%; BER 8%; Offshore 25%; Onshore and Other 6%.
10.) Image - Picture of gas processing plant with the following caption: In
addition to oil and gas assets located in the San Joaquin Basin,
California, Seneca Resources acquired the Belridge gas processing plant
in June 1998. This plant has the capacity to remove and separate
natural gas liquids from 22 MMcf of gas per day.
11.) Image - Pumping unit with the following caption: This pumping unit
typifies the preferred method of lifting crude oil to the surface in
Seneca's California operations.
Images 12 - 13 are contained on a page devoted to the Pipeline & Storage segment
as follows:
12.) Image - Picture of Concord Station Compressor engine with the following
caption: The Concord Station Compressor engines have been altered to
accommodate a wider range of operating conditions and handle additional
throughput from the Niagara Expansion. Pictured: (center) Concord
employee Michael P. Yasurek surveys the installation of a master rod
and crossbar.
13.) Image - Map of Northeastern to Midwestern United States with outline of
proposed Independence Pipeline Project, with the following caption: The
proposed Independence Pipeline will transport natural gas to
distribution companies, electric power producers and large-volume
industrial and commercial customers, offering access to every major
natural gas supply basin in North America, from the Gulf of Mexico, to
western Canada.
A second image of a circle containing the following sentence appears
above the image of the map: The Independence Pipeline will provide a
critical path for about 900,000 Dth/day of natural gas ... enough to
serve 900,000 residential customers.
14.) Graph - Pipeline and Storage Throughput
Bar graph showing Pipeline & Storage throughput with percentage of
total transportation throughput to affiliated and nonaffiliated
customers, for 1994 through 1998, as follows:
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Affiliated 45% 42% 41% 41% 32%
Nonaffiliated 55% 58% 59% 59% 68%
Total Sales (Bcf) 296.6 290.7 325.0 300.3 313.0
15.) Graph - Utility Operation and Maintenance Expense
Bar graph showing the Utility segment's operation and maintenance
expense (in millions of dollars) for 1994 through 1998, as follows:
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
$193 $194 $201 $187 $184
16.) Graph - Fiscal 1998 Weather
Bar graph showing fiscal 1998 percent warmer than last year and warmer
than normal for Buffalo, New York and Erie, Pennsylvania, as follows:
Percent warmer
Than Than
Last Year Normal
--------- ------
Buffalo, New York 12.9% 11.6%
Erie, Pennsylvania 15.7% 13.4%
Images 17 - 18 are contained on a page devoted to the Utility segment as
follows:
17.) Image - Picture of dispatch operations at Mineral Spring Works.
Additional images above and to the right of dispatch operations picture
are a National Fuel service van with dotted lines to an image of a
satellite and a diagram of a dispatch service area map. The following
caption is included: The dispatching of all New York customer service
orders has been centralized at Mineral Spring Works. This facility
operates 24 hours a day, 365 days a year. Pictured: (l-r): Teresa
Ortiz, Aileen Kozakiewicz, Patricia A. White and Cheryl A. Henault.
18.) Image -Picture of National Fuel employees working on computerized
mapping and work order management system with the following caption:
National Fuel recently implemented an integrated, state-of-the-art
computerized mapping and work order management system. This system will
enhance mapping productivity, as well as provide "real time" gas
facilities status. Pictured: Foreground: Erie Engineering employees
Michael J. Bolla, Linda J. Wardzinski and Mark E. Thornton.
Images 19 - 21 are contained on a page devoted to the International and the
Other Nonregulated segments as follows:
19.) Image - Picture of PSZT facility with the following caption: Horizon
Energy Development, Inc. acquired a majority interest in PSZT, a
wholesale power and district heating company located in the northern
Bohemia region of the Czech Republic. At this facility, steam turbines
produce 240 megawatts of electric generation. Additional image of a
street and buildings in Prague, Czech Republic and a map of the Czech
Republic with the general location of SCT and PSZT identified.
20.) Image - Picture of Erie Barge Canal Locks with the following caption:
National Fuel Resources is diversifying its energy selection by
offering electric generation for sale to commercial, industrial and
residential prospects in the Lockport, New York area. Symbolic of
Lockport are the Erie Barge Canal Locks.
21.) Image - Picture of building at the University of Rochester with the
following caption: National Fuel Resources has entered into a two-year
agreement with the University of Rochester to supply approximately 3
Bcf of natural gas that will be used for heating and other process
needs.
22.) Graph - NFR Number of Customers
Bar graph showing number of customers of National Fuel Resources (NFR)
for the years 1994 to 1998, as follows:
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Commercial/
Industrial 180 246 672 937 1,499
Residential Gas - - - 370 3,872
Electric - - - - 105
----- ----- ----- ----- -----
Total 180 246 672 1,307 5,476
RALPH E. DAVIS ASSOCIATES, INC.
Consultants-Petroleum and Natural Gas
3555 Timmons Lane - Suite 1105
Houston, Texas 77027
(713) 622-8955
CONSENT OF ENGINEER
We hereby consent to the reproduction of our audit report dated
October 19, 1998, and to the reference to our estimate dated October 1, 1998,
appearing in this National Fuel Gas Company Annual Report on Form 10-K.
We also consent to the incorporation by reference in (i) the
Registration Statement (Form S-8, No. 2-95439), as amended, relating to the
National Fuel Gas Company 1983 Incentive Stock Option Plan and the National Fuel
Gas Company 1984 Stock Plan, and in the related Prospectuses, (ii) the
Registration Statements (Form S-8, No. 33-28037, No. 333-3055, and Nos. 2-97641,
33-17341 and 333-3057), as amended, relating to the National Fuel Gas Company
Tax-Deferred Savings Plan and the National Fuel Gas Company Tax-Deferred Savings
Plan for Non-Union Employees, respectively, and in the related Prospectuses,
(iii) the Registration Statement (Form S-3, No. 333-3803), as amended, relating
to $500,000,000 of National Fuel Gas Company debentures and/or medium term notes
and, in the related Prospectus, (iv) the Registration Statements (Form S-3, No.
33-51881 and Form S-3D, No. 333-51769), as amended, relating to the National
Fuel Gas Company Dividend Reinvestment and Stock Purchase Plan, and in the
related Prospectuses, (v) the Registration Statement (Form S-3, No. 33-36868),
as amended, relating to the National Fuel Gas Company Customer Stock Purchase
Plan, and in the related Prospectus, (vi) the Registration Statement (Form S-8,
No. 33-49693), as amended, relating to the National Fuel Gas Company 1993 Award
and Option Plan, and in the related Prospectus, and (vii) the Registration
Statement (Form S-8, No. 333-51595) relating to the National Fuel Gas Company
1997 Award and Option Plan, and in the related Prospectus, of the reproduction
of our report dated October 19, 1998, appearing in this National Fuel Gas
Company Annual Report on Form 10-K.
RALPH E. DAVIS ASSOCIATES, INC.
/s/ Allen C. Barron
-------------------------------
Allen C. Barron, P.E.
Vice President
Houston, Texas
October 19, 1998
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (No. 33-51881),
Form S-3 (No. 33-36868), Form S-3 (No. 333-03803), Form S-3 (No. 333-51769),
Form S-8 (No. 2-94539), Form S-8 (No. 33-49693), Form S-8 (No. 333-03057), Form
S-8 (No. 333-03055), and Form S-8 (No. 333-51595) of National Fuel Gas Company
of our report dated October 27, 1998, appearing on page 56 of this Form 10-K.
Buffalo, New York
December 21, 1998
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<ARTICLE> UT
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NATIONAL FUEL
GAS COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,819,366
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 208,667
<TOTAL-DEFERRED-CHARGES> 12,025
<OTHER-ASSETS> 227,273
<TOTAL-ASSETS> 2,267,331
<COMMON> 38,166
<CAPITAL-SURPLUS-PAID-IN> 405,028
<RETAINED-EARNINGS> 472,595
<TOTAL-COMMON-STOCKHOLDERS-EQ> 913,704
0
0
<LONG-TERM-DEBT-NET> 581,640
<SHORT-TERM-NOTES> 32,400
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 60,000
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 679,587
<TOT-CAPITALIZATION-AND-LIAB> 2,267,331
<GROSS-OPERATING-REVENUE> 1,265,812
<INCOME-TAX-EXPENSE> 68,674
<OTHER-OPERATING-EXPENSES> 1,028,835
<TOTAL-OPERATING-EXPENSES> 1,097,509
<OPERATING-INCOME-LOSS> 168,303
<OTHER-INCOME-NET> 3,196
<INCOME-BEFORE-INTEREST-EXPEN> 171,499
<TOTAL-INTEREST-EXPENSE> 56,811
<NET-INCOME> 114,688
0
<EARNINGS-AVAILABLE-FOR-COMM> 114,688
<COMMON-STOCK-DIVIDENDS> 64,967
<TOTAL-INTEREST-ON-BONDS> 41,576
<CASH-FLOW-OPERATIONS> 294,662
<EPS-PRIMARY> 3.01
<EPS-DILUTED> 2.98
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NATIONAL FUEL
GAS COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,709,606
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 220,981
<TOTAL-DEFERRED-CHARGES> 7,377
<OTHER-ASSETS> 211,808
<TOTAL-ASSETS> 2,149,772
<COMMON> 37,852
<CAPITAL-SURPLUS-PAID-IN> 395,272
<RETAINED-EARNINGS> 422,874
<TOTAL-COMMON-STOCKHOLDERS-EQ> 855,998
0
0
<LONG-TERM-DEBT-NET> 574,000
<SHORT-TERM-NOTES> 109,700
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 90,000
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 520,074
<TOT-CAPITALIZATION-AND-LIAB> 2,149,772
<GROSS-OPERATING-REVENUE> 1,208,017
<INCOME-TAX-EXPENSE> 66,321
<OTHER-OPERATING-EXPENSES> 984,250
<TOTAL-OPERATING-EXPENSES> 1,050,571
<OPERATING-INCOME-LOSS> 157,446
<OTHER-INCOME-NET> 3,869
<INCOME-BEFORE-INTEREST-EXPEN> 161,315
<TOTAL-INTEREST-EXPENSE> 56,644
<NET-INCOME> 104,671
0
<EARNINGS-AVAILABLE-FOR-COMM> 104,671
<COMMON-STOCK-DIVIDENDS> 61,920
<TOTAL-INTEREST-ON-BONDS> 40,872
<CASH-FLOW-OPERATIONS> 168,469
<EPS-PRIMARY> 2.78
<EPS-DILUTED> 2.77
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NATIONAL FUEL
GAS COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 03-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,716,588
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 356,011
<TOTAL-DEFERRED-CHARGES> 13,254
<OTHER-ASSETS> 211,446
<TOTAL-ASSETS> 2,297,299
<COMMON> 38,023
<CAPITAL-SURPLUS-PAID-IN> 400,807
<RETAINED-EARNINGS> 445,554
<TOTAL-COMMON-STOCKHOLDERS-EQ> 884,384
0
0
<LONG-TERM-DEBT-NET> 524,000
<SHORT-TERM-NOTES> 147,300
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 105,000
<LONG-TERM-DEBT-CURRENT-PORT> 50,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 586,615
<TOT-CAPITALIZATION-AND-LIAB> 2,297,299
<GROSS-OPERATING-REVENUE> 363,492
<INCOME-TAX-EXPENSE> 22,209
<OTHER-OPERATING-EXPENSES> 289,130
<TOTAL-OPERATING-EXPENSES> 311,339
<OPERATING-INCOME-LOSS> 52,153
<OTHER-INCOME-NET> 737
<INCOME-BEFORE-INTEREST-EXPEN> 52,890
<TOTAL-INTEREST-EXPENSE> 14,300
<NET-INCOME> 38,590
0
<EARNINGS-AVAILABLE-FOR-COMM> 38,590
<COMMON-STOCK-DIVIDENDS> 15,910
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 8,609
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 1.01
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NATIONAL FUEL
GAS COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 06-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,746,452
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 353,119
<TOTAL-DEFERRED-CHARGES> 9,464
<OTHER-ASSETS> 204,686
<TOTAL-ASSETS> 2,313,721
<COMMON> 38,138
<CAPITAL-SURPLUS-PAID-IN> 404,889
<RETAINED-EARNINGS> 486,696
<TOTAL-COMMON-STOCKHOLDERS-EQ> 929,723
0
0
<LONG-TERM-DEBT-NET> 531,739
<SHORT-TERM-NOTES> 153,200
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 20,000
<LONG-TERM-DEBT-CURRENT-PORT> 52,628
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 626,431
<TOT-CAPITALIZATION-AND-LIAB> 2,313,721
<GROSS-OPERATING-REVENUE> 862,196
<INCOME-TAX-EXPENSE> 56,411
<OTHER-OPERATING-EXPENSES> 682,821
<TOTAL-OPERATING-EXPENSES> 739,232
<OPERATING-INCOME-LOSS> 122,964
<OTHER-INCOME-NET> 1,322
<INCOME-BEFORE-INTEREST-EXPEN> 124,286
<TOTAL-INTEREST-EXPENSE> 28,587
<NET-INCOME> 95,699
0
<EARNINGS-AVAILABLE-FOR-COMM> 95,699
<COMMON-STOCK-DIVIDENDS> 31,877
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 145,739
<EPS-PRIMARY> 2.52
<EPS-DILUTED> 2.49
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NATIONAL FUEL
GAS COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 09-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,771,144
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 249,272
<TOTAL-DEFERRED-CHARGES> 11,400
<OTHER-ASSETS> 217,131
<TOTAL-ASSETS> 2,248,947
<COMMON> 38,148
<CAPITAL-SURPLUS-PAID-IN> 404,873
<RETAINED-EARNINGS> 489,060
<TOTAL-COMMON-STOCKHOLDERS-EQ> 929,836
0
0
<LONG-TERM-DEBT-NET> 532,214
<SHORT-TERM-NOTES> 27,100
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 105,000
<LONG-TERM-DEBT-CURRENT-PORT> 53,309
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 601,488
<TOT-CAPITALIZATION-AND-LIAB> 2,248,947
<GROSS-OPERATING-REVENUE> 1,108,247
<INCOME-TAX-EXPENSE> 69,719
<OTHER-OPERATING-EXPENSES> 884,281
<TOTAL-OPERATING-EXPENSES> 954,000
<OPERATING-INCOME-LOSS> 154,247
<OTHER-INCOME-NET> 2,598
<INCOME-BEFORE-INTEREST-EXPEN> 156,845
<TOTAL-INTEREST-EXPENSE> 42,240
<NET-INCOME> 114,605
0
<EARNINGS-AVAILABLE-FOR-COMM> 114,605
<COMMON-STOCK-DIVIDENDS> 48,419
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 270,874
<EPS-PRIMARY> 3.01
<EPS-DILUTED> 2.98
</TABLE>
RALPH E. DAVIS ASSOCIATES, INC.
CONSULTANTS-PETROLEUM AND NATURAL GAS
3555 TIMMONS LANE-SUITE 1105
HOUSTON, TEXAS 77027
(713) 622-8955
October 19, 1998
Seneca Resources Corporation
1201 Louisiana, Suite 400
Houston, Texas 77002
Attention: Mr. Don A. Brown
Vice President
Re: Oil, Condensate and Natural Gas Reserves,
Seneca Resources Corporation
As of October 1, 1998
Gentlemen:
At your request, the firm of Ralph E. Davis Associates, Inc. has audited an
evaluation of the proved oil, condensate and natural gas reserves on leaseholds
in which Seneca Resources Corporation has certain interests. This report
presents a summary of the Proved Developed (producing and non-producing) and
Proved Undeveloped reserves anticipated to be produced from Seneca Resources'
interest.
Liquid volumes are expressed in thousands of barrels (MBbls) of stock tank oil.
Gas volumes are expressed in millions of standard cubic feet (MMSCF) at the
official temperature and pressure bases of the areas wherein the gas reserves
are located.
The summarized results of the reserve audit are as follows:
<PAGE>
RALPH E. DAVIS ASSOCIATES, INC.
Seneca Resources Corp.
Mr. Don A. Brown
October 19, 1998
Page 2
Estimated Proved Reserves
Net to Seneca Resources Corporation
As of October 1, 1998
Proved Reserves
--------------------------------------------
Developed
-----------------------
Remaining Reserves Producing Non-Producing Undeveloped Total
- ------------------ --------- ------------- ----------- -----
East Coast Division:
- --------------------
Oil/Condensate, MBbls 80 0 0 80
Gas, MMSCF 80,062 414 0 80,476
Gulf Coast Division:
- --------------------
Oil/Condensate, MBbls 2,855 883 342 4,080
Gas, MMSCF 63,116 53,345 4,788 121,249
West Coast Division:
- --------------------
Oil/Condensate, MBbls 41,177 3,084 18,169 62,430
Gas, MMSCF 27,304 6,266 89,769 123,339
TOTAL:
Oil/Condensate, MBbls 44,112 3,967 18,511 66,590
Gas, MMSCF 170,482 60,025 94,557 325,064
DISCUSSION:
The scope of this study was to audit the proved reserves attributable to the
interests of Seneca Resources Corporation. Reserve estimates were prepared by
Seneca using acceptable evaluation principals for each source. The quantities
presented herein are estimated reserves of oil, condensate and natural gas that
geologic and engineering data demonstrate can be recovered from known reservoirs
under existing economic conditions with reasonable certainty.
Ralph E. Davis Associates, Inc. has audited the reserve estimates, the data
incorporated into preparing the estimates and the methodology used to evaluate
the reserves. In each of Seneca's producing divisions all 1998 additions and
those properties of significant value were reviewed by Ralph E. Davis. Reserve
estimates of current producing zones, productive zones
<PAGE>
RALPH E. DAVIS ASSOCIATES, INC.
Seneca Resources Corp.
Mr. Don A. Brown
October 19, 1998
Page 3
behind pipe and undrilled well locations were reviewed in detail. Certain
changes to either individual reserve estimates or the categorization of reserves
were suggested by Ralph E. Davis Associates, Inc. and accepted by Seneca
Resources. It is our opinion that the reserves presented herein meet all the
criteria of Proved Reserves.
Neither Ralph E. Davis Associates, Inc. nor any of its employees have any
interest in Seneca Resources Corporation or the properties reported herein. The
employment and compensation to make this study are not contingent on our
estimate of reserves.
We appreciate the opportunity to be of service to you in this matter, and will
be glad to address any questions or inquiries you may have.
Very truly yours,
RALPH E. DAVIS ASSOCIATES, INC.
/s/ Allen C. Barron
Allen C. Barron, P. E.
Vice President
