- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
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Commission File Number 1-3880
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NATIONAL FUEL GAS COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 13-1086010
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Lafayette Square
Buffalo, New York 14203
----------------- -----
(Address of principal executive offices) (Zip Code)
(716) 857-6980
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common stock, $1 par value, outstanding at July 31, 1999:
38,798,310 shares.
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<PAGE>
Company or Group of Companies for which Report is Filed:
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NATIONAL FUEL GAS COMPANY (Company or Registrant)
SUBSIDIARIES: National Fuel Gas Distribution Corporation (Distribution
Corporation)
National Fuel Gas Supply Corporation (Supply Corporation)
Seneca Resources Corporation (Seneca)
Highland Land & Minerals, Inc. (Highland)
Leidy Hub, Inc. (Leidy Hub)
Data-Track Account Services, Inc. (Data-Track)
National Fuel Resources, Inc. (NFR)
Horizon Energy Development, Inc. (Horizon)
Upstate Energy, Inc. (Upstate)
Niagara Independence Marketing Company (NIM)
Seneca Independence Pipeline Company (SIP)
Utility Constructors, Inc. (UCI)
NFR Power, Inc.
INDEX
Part I. Financial Information Page
----------------------------- ----
Item 1. Financial Statements
a. Consolidated Statements of Income and Earnings
Reinvested in the Business - Three Months and
Nine Months Ended June 30, 1999 and 1998 4 - 5
b. Consolidated Balance Sheets - June 30, 1999 and
September 30, 1998 6 - 7
c. Consolidated Statements of Cash Flows - Nine
Months Ended June 30, 1999 and 1998 8
d. Consolidated Statements of Comprehensive
Income - Three Months and Nine Months
Ended June 30, 1999 and 1998 9
e. Notes to Consolidated Financial Statements 10 - 16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17 - 40
Item 3. Quantitative and Qualitative Disclosures About Market Risk 40
Part II. Other Information
--------------------------
Item 1. Legal Proceedings *
Item 2. Changes in Securities 40
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information 40 - 41
Item 6. Exhibits and Reports on Form 8-K 41
Signature 42
* The Company has nothing to report under this item.
<PAGE>
Reference to "the Company" in this report means the Registrant or the Registrant
and its subsidiaries collectively, as appropriate in the context of the
disclosure. All references to a certain year in this report are to the Company's
fiscal year ended September 30 of that year, unless otherwise noted.
This Form 10-Q contains "forward-looking statements" as defined by the Private
Securities Litigation Reform Act of 1995. Forward-looking statements should be
read with the cautionary statements included in this Form 10-Q at Item 2
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" (MD&A), under the heading "Safe Harbor for Forward-Looking
Statements." Forward-looking statements are all statements other than statements
of historical fact, including, without limitation, those statements that are
designated with a "1" following the statement, as well as those statements that
are identified by the use of the words "anticipates," "estimates," "expects,"
"intends," "plans," "predicts," "projects," and similar expressions.
<PAGE>
Part I. - Financial Information
- -------------------------------
Item 1. Financial Statements
--------------------
National Fuel Gas Company
-------------------------
Consolidated Statements of Income and Earnings
----------------------------------------------
Reinvested in the Business
--------------------------
(Unaudited)
-----------
Three Months Ended
June 30,
------------------
1999 1998
---- ----
(Thousands of Dollars, Except Per
Common Share Amounts)
INCOME
Operating Revenues $248,658 $243,130
-------- --------
Operating Expenses
Purchased Gas 64,449 65,088
Fuel Used in Heat and Electric Generation 9,530 11,650
Operation 76,163 62,614
Maintenance 5,753 6,440
Property, Franchise and Other Taxes 20,817 20,716
Depreciation, Depletion and Amortization 32,880 31,019
Income Taxes - Net 7,747 11,877
-------- --------
217,339 209,404
-------- --------
Operating Income 31,319 33,726
Other Income 1,584 5,651
-------- --------
Income Before Interest Charges and
Minority Interest in Foreign Subsidiaries 32,903 39,377
-------- --------
Interest Charges
Interest on Long-Term Debt 16,180 14,636
Other Interest 5,231 5,427
-------- --------
21,411 20,063
-------- --------
Minority Interest in Foreign Subsidiaries 348 (207)
-------- --------
Net Income Available for Common Stock 11,840 19,107
EARNINGS REINVESTED IN THE BUSINESS
Balance at April 1 492,233 446,565
-------- --------
504,073 465,672
Dividends on Common Stock
(1999 - $.465; 1998 - $.45) 17,974 17,224
-------- --------
Balance at June 30 $486,099 $448,448
======== ========
Earnings Per Common Share:
Basic $ 0.31 $ 0.50
====== ======
Diluted $ 0.30 $ 0.49
====== ======
Weighted Average Common Shares Outstanding:
Used in Basic Calculation 38,662,728 38,358,065
========== ==========
Used In Diluted Calculation 39,000,553 38,719,074
========== ==========
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. Financial Statements (Cont.)
----------------------------
National Fuel Gas Company
-------------------------
Consolidated Statements of Income and Earnings
----------------------------------------------
Reinvested in the Business
--------------------------
(Unaudited)
-----------
Nine Months Ended
June 30,
------------------
1999 1998
---- ----
(Thousands of Dollars, Except Per
Common Share Amounts)
INCOME
Operating Revenues $1,072,484 $1,070,592
---------- ----------
Operating Expenses
Purchased Gas 377,273 418,228
Fuel Used in Heat and Electric Generation 47,311 30,160
Operation 228,586 214,454
Maintenance 17,400 19,347
Property, Franchise and Other Taxes 73,504 75,607
Depreciation, Depletion and Amortization 96,455 88,936
Impairment of Oil and Gas Producing Properties - 128,996
Income Taxes - Net 60,327 25,085
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900,856 1,000,813
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Operating Income 171,628 69,779
Other Income 7,901 32,413
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Income Before Interest Charges and
Minority Interest in Foreign Subsidiaries 179,529 102,192
---------- ----------
Interest Charges
Interest on Long-Term Debt 49,630 37,517
Other Interest 16,755 26,260
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66,385 63,777
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Minority Interest in Foreign Subsidiaries (2,540) (3,036)
---------- ----------
Income Before Cumulative Effect 110,604 35,379
Cumulative Effect of Change in
Accounting for Depletion - (9,116)
---------- ----------
Net Income Available for Common Stock 110,604 26,263
EARNINGS REINVESTED IN THE BUSINESS
Balance at October 1 428,112 472,595
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538,716 498,858
Dividends on Common Stock
(1999 - $1.365; 1998 - $1.32) 52,617 50,410
---------- ----------
Balance at June 30 $ 486,099 $ 448,448
========== ==========
Basic Earnings Per Common Share:
Income Before Cumulative Effect $2.86 $ 0.93
Cumulative Effect of Change in Accounting for Depletion - (0.24)
----- ------
Net Income Available for Common Stock $2.86 $ 0.69
===== ======
Diluted Earnings Per Common Share:
Income Before Cumulative Effect $2.84 $ 0.92
Cumulative Effect of Change in Accounting for Depletion - (0.24)
----- ------
Net Income Available for Common Stock $2.84 $ 0.68
===== ======
Weighted Average Common Shares Outstanding:
Used in Basic Calculation 38,619,120 38,272,907
========== ==========
Used in Diluted Calculation 38,969,822 38,688,564
========== ==========
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. Financial Statements (Cont.)
----------------------------
National Fuel Gas Company
-------------------------
Consolidated Balance Sheets
---------------------------
June 30,
1999 September 30,
(Unaudited) 1998
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(Thousands of Dollars)
ASSETS
Property, Plant and Equipment $3,330,839 $3,186,853
Less - Accumulated Depreciation, Depletion
and Amortization 1,003,818 938,716
---------- ----------
2,327,021 2,248,137
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Current Assets
Cash and Temporary Cash Investments 35,848 30,437
Receivables - Net 139,303 82,336
Unbilled Utility Revenue 13,023 15,403
Gas Stored Underground 20,737 31,661
Materials and Supplies - at average cost 23,069 24,609
Unrecovered Purchased Gas Costs - 6,316
Prepayments 26,026 19,755
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258,006 210,517
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Other Assets
Recoverable Future Taxes 88,302 88,303
Unamortized Debt Expense 21,771 22,295
Other Regulatory Assets 40,915 41,735
Deferred Charges 13,736 8,619
Other 77,413 64,853
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242,137 225,805
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$2,827,164 $2,684,459
========== ==========
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. Financial Statements (Cont.)
----------------------------
National Fuel Gas Company
-------------------------
Consolidated Balance Sheets
---------------------------
June 30,
1999 September 30,
(Unaudited) 1998
----------- -------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common Stock Equity
Common Stock, $1 Par Value
Authorized - 200,000,000 Shares; Issued
and Outstanding - 38,750,428 Shares and
38,468,795 Shares, Respectively $ 38,751 $ 38,469
Paid in Capital 428,273 416,239
Earnings Reinvested in the Business 486,099 428,112
Cumulative Translation Adjustment (9,454) 7,265
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Total Common Stock Equity 943,669 890,085
Long-Term Debt, Net of Current Portion 726,272 693,021
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Total Capitalization 1,669,941 1,583,106
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Minority Interest in Foreign Subsidiaries 24,346 25,479
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Current and Accrued Liabilities
Notes Payable to Banks and
Commercial Paper 351,000 326,300
Current Portion of Long-Term Debt 159,696 216,929
Accounts Payable 44,966 59,933
Amounts Payable to Customers 21,484 5,781
Other Accruals and Current Liabilities 125,666 80,480
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702,812 689,423
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Deferred Credits
Accumulated Deferred Income Taxes 269,855 258,222
Taxes Refundable to Customers 18,404 18,404
Unamortized Investment Tax Credit 11,782 11,372
Other Deferred Credits 130,024 98,453
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430,065 386,451
---------- ----------
Commitments and Contingencies - -
---------- ----------
$2,827,164 $2,684,459
========== ==========
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. Financial Statements (Cont.)
----------------------------
National Fuel Gas Company
-------------------------
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
-----------
Nine Months Ended
June 30,
------------------
1999 1998
---- ----
(Thousands of Dollars)
OPERATING ACTIVITIES
Net Income Available for Common Stock $110,604 $ 26,263
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Cumulative Effect of Change in Accounting
for Depletion - 9,116
Impairment of Oil and Gas Producing Properties - 128,996
Depreciation, Depletion and Amortization 96,455 88,936
Deferred Income Taxes 12,912 (44,829)
Minority Interest in Foreign Subsidiaries 2,540 3,036
Other 5,597 (215)
Change in:
Receivables and Unbilled Utility Revenue (56,195) (6,357)
Gas Stored Underground and Materials and
Supplies 11,659 14,422
Unrecovered Purchased Gas Costs 6,316 -
Prepayments (6,284) (8,930)
Accounts Payable (13,234) (14,237)
Amounts Payable to Customers 15,703 5,003
Other Accruals and Current Liabilities 46,637 40,088
Other Assets (12,203) (11,470)
Other Liabilities 31,576 12,802
-------- --------
Net Cash Provided by
Operating Activities 252,083 242,624
-------- --------
INVESTING ACTIVITIES
Capital Expenditures (209,918) (315,223)
Investment in Subsidiaries, Net of Cash
Acquired - (111,179)
Other (114) 2,065
-------- --------
Net Cash Used in Investing Activities (210,032) (424,337)
-------- --------
FINANCING ACTIVITIES
Change in Notes Payable to Banks and Commercial
Paper 24,700 105,187
Net Proceeds from Issuance of Long-Term Debt 98,736 198,750
Reduction of Long-Term Debt (115,365) (53,048)
Dividends Paid on Common Stock (51,904) (49,734)
Proceeds from Issuance of Common Stock 7,921 5,429
-------- --------
Net Cash Provided by (Used in)
Financing Activities (35,912) 206,584
--------- --------
Effect of Exchange Rates on Cash (728) -
--------- --------
Net Increase in Cash and
Temporary Cash Investments 5,411 24,871
Cash and Temporary Cash Investments at October 1 30,437 14,039
-------- --------
Cash and Temporary Cash Investments at June 30 $ 35,848 $ 38,910
======== ========
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. Financial Statements (Cont.)
----------------------------
National Fuel Gas Company
-------------------------
Consolidated Statements of Comprehensive Income
-----------------------------------------------
(Unaudited)
-----------
Three Months Ended
June 30,
------------------
1999 1998
---- ----
(Thousands of Dollars)
Net Income Available for Common Stock $ 11,840 $ 19,107
Other Comprehensive Income, Net of Tax:
Cumulative Translation Adjustment 2,326 116
-------- --------
Comprehensive Income Available for
Common Stock $ 14,166 $ 19,223
======== ========
Nine Months Ended
June 30,
-----------------
1999 1998
---- ----
(Thousands of Dollars)
Net Income Available for Common Stock $110,604 $ 26,263
Other Comprehensive Income (Loss), Net of Tax:
Cumulative Translation Adjustment (16,719) 1,026
-------- --------
Comprehensive Income Available for
Common Stock $ 93,885 $ 27,289
======== ========
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. Financial Statements (Cont.)
----------------------------
National Fuel Gas Company
-------------------------
Notes to Consolidated Financial Statements
------------------------------------------
Note 1 - 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, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Quarterly Earnings. The Company, in its opinion, has included all adjustments
that are necessary for a fair statement of the results of operations for the
reported periods. The consolidated financial statements and notes thereto,
included herein, should be read in conjunction with the financial statements and
notes for the years ended September 30, 1998, 1997 and 1996, that are included
in the Company's combined Annual Report to Shareholders/Form 10-K for 1998. The
1999 consolidated financial statements will be examined by the Company's
independent accountants after the end of the year.
The earnings for the nine months ended June 30, 1999 should not be
taken as a prediction of earnings for the entire year ending September 30, 1999.
Most of the Company's business is seasonal in nature and is influenced by
weather conditions. Because of the seasonal nature of the Company's heating
business, earnings during the winter months normally represent a substantial
part of earnings for the entire year. The impact of abnormal weather on earnings
during the heating season is partially reduced by the operation of a weather
normalization clause included in Distribution Corporation's New York tariff. The
weather normalization clause is effective for October through May billings.
Distribution Corporation's tariff for its Pennsylvania jurisdiction does not
include a weather normalization clause. In addition, Supply Corporation's
straight fixed-variable rate design, which allows for recovery of substantially
all fixed costs in the demand or reservation charge, reduces the earnings impact
of weather fluctuations.
Cumulative Effect of Change in Accounting. Effective October 1, 1997, Seneca
changed its method of depletion for oil and gas properties from the gross
revenue method to the units of production method. The 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.
<PAGE>
Item 1. Financial Statements (Cont.)
----------------------------
Oil and Gas Exploration and Development Costs. Oil and gas property acquisition,
exploration and development costs are capitalized under the full-cost method of
accounting as prescribed by the Securities and Exchange Commission (SEC). 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.
Accordingly, Seneca was required to recognize an impairment of its oil and gas
producing properties in the quarter ended March 31, 1998. This charge amounted
to $129.0 million (pretax) and reduced net income for the nine months ended June
30, 1998 by $79.1 million ($2.07 per common share, basic; $2.04 per common
share, diluted).
Consolidated Statements of Cash Flows. For purposes of the Consolidated
Statements of Cash Flows, the Company considers all highly liquid debt
instruments purchased with a maturity of generally three months or less to be
cash equivalents. Cash interest payments during the nine months ended June 30,
1999 and 1998, amounted to $64.1 million and $38.0 million, respectively. Income
taxes paid during the nine months ended June 30, 1999 and 1998 amounted to $30.4
million and $55.4 million, respectively. During the nine months ended June 30,
1999, the Company received a $1.0 million refund of taxes and interest from the
Internal Revenue Service (IRS) stemming from the final settlement of the audits
of years 1977-1994. During the nine months ended June 30, 1998, the Company
received a $22.4 million refund of taxes and interest from the IRS stemming from
the aforementioned settlement.
Reclassification. Certain prior year amounts have been reclassified to conform
with current year presentation.
Earnings per Common Share. Basic earnings per common share is computed by
dividing income available for common stock by the weighted average number of
common shares outstanding for the period. Diluted earnings per common share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Such additional shares are added to the denominator of the basic earnings per
common share calculation in order to calculate diluted earnings per common
share. The only potentially dilutive securities the Company has outstanding are
stock options. The diluted weighted average shares outstanding shown on the
Consolidated Statement of Income reflects the potential dilution as a result of
these stock options. Such dilution was determined using the Treasury Stock
Method as required by Statement of Financial Accounting Standards No. 128,
"Earnings per Share."
<PAGE>
Item 1. Financial Statements (Cont.)
----------------------------
Note 2 - Income Taxes
The components of federal and state income taxes included in the
Consolidated Statement of Income are as follows (in thousands):
Nine Months Ended
June 30,
-----------------
1999 1998
---- ----
Operating Expenses:
Current Income Taxes -
Federal $35,940 $59,208
State 6,050 6,814
Deferred Income Taxes -
Federal 13,585 (41,132)
State 1,706 (3,697)
Foreign Income Taxes 3,046 3,892
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60,327 25,085
Other Income:
Deferred Investment Tax Credit (499) (457)
Minority Interest in Foreign Subsidiaries (705) (1,576)
Cumulative Effect of Change in Accounting - (5,737)
------- -------
Total Income Taxes $59,123 $17,315
======= =======
Total income taxes as reported differ from the amounts that were
computed by applying the federal income tax rate to income before income taxes.
The following is a reconciliation of this difference (in thousands):
Nine Months Ended
June 30,
-----------------
1999 1998
---- ----
Net income available for common stock $110,604 $ 26,263
Total income taxes 59,123 17,315
-------- --------
Income before income taxes $169,727 $ 43,578
======== ========
Income tax expense, computed at federal
statutory rate of 35% $ 59,404 $ 15,252
Increase (reduction) in taxes resulting from:
State income taxes 5,045 1,488
Depreciation 1,492 1,738
Prior years tax adjustment (1,329) 3,021
Foreign tax in excess of (less than)
federal statutory rate (2,620) 10
Miscellaneous (2,869) (4,194)
--------- --------
Total Income Taxes $ 59,123 $ 17,315
======== ========
<PAGE>
Item 1. Financial Statements (Cont.)
----------------------------
Significant components of the Company's deferred tax liabilities
(assets) were as follows (in thousands):
At June 30, 1999 At September 30, 1998
---------------- ---------------------
Deferred Tax Liabilities:
Abandonments $ 18,951 $ 15,545
Excess of tax over book
depreciation 140,051 132,138
Exploration and
intangible well
drilling costs 163,302 147,795
Other 41,855 42,109
-------- --------
Total Deferred Tax
Liabilities 364,159 337,587
-------- --------
Deferred Tax Assets:
Overheads capitalized
for tax purposes (24,793) (22,484)
Other (69,511) (56,881)
-------- --------
Total Deferred Tax
Assets (94,304) (79,365)
-------- --------
Total Net Deferred
Income Taxes $269,855 $258,222
======== ========
The primary issues related to Internal Revenue Service audits of the
Company for the years 1977 - 1994 were settled during March 1998 with the
settlement of remaining issues related to these same audits occurring in
December 1998. Net income for the nine months ended June 30, 1999 and 1998 were
increased by approximately $3.9 and $5.0 million, respectively, as a result of
interest, net of tax and other adjustments, related to these settlements.
Note 3 - Capitalization
Common Stock. During the nine months ended June 30, 1999, the Company issued
94,255 shares of common stock under the Company's section 401(k) Plans, 88,446
shares to participants in the Company's Dividend Reinvestment Plan and 26,399
shares to participants in the Company's Customer Stock Purchase Plan.
Additionally, 72,533 shares of common stock were issued under the Company's
stock option and award plans, including 6,580 shares of restricted stock.
On December 10, 1998, 615,500 stock options were granted at an
exercise price of $46.0625 per share.
Shareholder Rights Plan. The Company's shareholder rights plan (the "Plan") was
adopted in 1996, and is described in the Company's combined Annual Report to
Shareholders/Form 10-K for the year ended September 30, 1998 at Note D
(Capitalization) to the financial statements which are found in Item 8. The Plan
was amended effective April 30, 1999, and is now embodied in an Amended and
Restated Rights Agreement, which was included as Exhibit 10.2 to the Company's
Form 10-Q for the period ended March 31, 1999.
<PAGE>
Item 1. Financial Statements (Cont.)
----------------------------
Long-Term Debt. In February 1999, the Company issued $100.0 million of 6.0%
medium-term notes due to mature in March 2009. After deducting underwriting
discounts and commissions, the net proceeds to the Company amounted to $98.7
million. The proceeds of this debt issuance were used to redeem $100.0 million
of 5.58% medium-term notes which matured in March 1999.
In July 1999, the Company issued $100.0 million of 6.82% medium-term
notes due to mature in August 2004. After deducting underwriting discounts and
commissions, the net proceeds to the Company amounted to $99.5 million. The
proceeds of this debt issuance were used to redeem $50 million of 7.25%
medium-term notes which matured in July 1999 and to complete the redemption of
HarCor's 14.875% Senior Secured Notes, which is discussed below.
In March 1999, the Company redeemed $10.3 million of HarCor Energy,
Inc.'s (HarCor) 14.875% Senior Secured Notes through an open market purchase.
HarCor is a wholly-owned subsidiary of Seneca. The total cost of this redemption
was $11.9 million, which included a redemption price of 110% and accrued
interest. In July 1999, the Company redeemed the remaining $43.5 million of
HarCor's 14.875% Senior Secured Notes. The total cost of this redemption was
$51.0 million, which included a redemption price of 110% and accrued interest.
As noted above, this redemption was financed primarily by proceeds from the
Company's July 1999 issuance of 6.82% medium-term notes. The redemption premiums
were accrued on the opening balance sheet when HarCor was acquired in 1998.
Note 4 - Derivative Financial Instruments
Seneca has entered into certain price swap agreements and options to
manage a portion of the market risk associated with fluctuations in the price of
natural gas and crude oil, in an effort to provide more stability to its
operating results. These agreements and options 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 June 30, 1999, Seneca had natural gas price swap agreements
covering a notional amount of 17.9 Bcf extending through 2002 at a weighted
average fixed rate of $2.45 per Mcf. Seneca also had crude oil price swap
agreements covering a notional amount of 1,550,000 bbls extending through 2001
at a fixed rate of $17.76 per bbl. Gains or losses from these price swap
agreements are accrued in Operating Revenues on the Consolidated Statement of
Income at the contract settlement dates. Seneca recognized gains of $0.3 million
and $6.2 million related to its price swap agreements during the quarter and
nine months ended June 30, 1999, respectively. During the quarter ended June 30,
1998, Seneca recognized gains of $0.9 million related to its price swap
agreements. For the nine months ended June 30, 1998, Seneca recognized losses of
$6.9 million related to its price swap agreements. The unrealized net loss on
these natural gas and crude oil price swap agreements was $2.4 million at June
30, 1999.
<PAGE>
Item 1. Financial Statements (Cont.)
----------------------------
At June 30, 1999, Seneca had the following options outstanding:
Weighted Average
Type of Option Notional Amount Strike Price
- -------------- --------------- ----------------
Written Call Options* 13.9 Bcf or $2.62/Mcf or
732,000 bbls $18.00/bbl
Written Call Option 19.1 Bcf $2.65/Mcf
Written Put Option 1,100,000 bbls $12.50/bbl
Purchased Call Option 1,832,000 bbls $20.00/bbl
*The counterparty has a choice between a natural gas call option and a crude oil
call option, depending on whichever option has a greater value to the
counterparty.
Seneca's call and put options are being marked-to-market on a
quarterly basis with gains or losses recorded in Operating Revenues on the
Consolidated Statement of Income. The mark-to-market adjustment for the quarter
and nine months ended June 30, 1999 was a loss of $1.1 million, which was
recorded in Operating Revenues on the Consolidated Statement of Income. The fair
value of the call and put options at June 30, 1999 was a net liability of $3.4
million. None of the options were exercised during the quarter ended June 30,
1999. For the nine months ended June 30, 1999, a portion of the written put
options were exercised, resulting in a minimal payment of $28,000 to the
counterparty.
The Company is exposed to credit risk on the price swap agreements
that Seneca has entered into as well as on the call options that Seneca has
purchased. Credit risk relates to the risk of loss that the Company would incur
as a result of nonperformance by Seneca's counterparties of their contractual
obligations pursuant to the price swap agreements. 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. In the case of the call options that
Seneca purchased, the counterparty selected was one in which Seneca currently
has a Master Swap Agreement, meaning that a credit investigation had been
completed and continues to be monitored. 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 June 30, 1999,
NFR had natural gas futures contracts related to gas purchase and sale
commitments covering 7.2 Bcf of gas on a net basis extending through 2000 at a
weighted average contract price of $2.40 per Mcf. NFR also had sold natural gas
options related to gas purchase and sale commitments covering 3.3 Bcf of gas on
a net basis extending through 2000 at a weighted average strike price of $2.68
per Mcf.
Gains or losses from natural gas futures are recorded in Other
Deferred Credits on the Consolidated Balance Sheet until the hedged commodity
transaction occurs, at which point they are reflected in operating revenues in
the Consolidated Statement of Income. At June 30, 1999, NFR had deferred gains
of $3.0 million related to these futures contracts and options. NFR recognized
net losses of $1.1 million related to futures contracts and options
<PAGE>
Item 1. Financial Statements (Cont.)
----------------------------
during the quarter ended June 30, 1999. For the quarter ended June 30, 1998, NFR
recognized a minimal gain. NFR recognized net losses of $6.5 million related to
futures contracts and options for the nine months ended June 30, 1999. For the
nine months ended June 30, 1998, NFR recognized net gains of $1.3 million. Since
these futures contracts and options qualify and have been designated as hedges
these net losses and gains were substantially offset by the related commodity
transaction.
Note 5 - Commitments and Contingencies
Environmental Matters. The Company is subject to various federal, state and
local laws and regulations relating to the protection of the environment. The
Company has established procedures for the ongoing evaluation of its operations
in order to identify potential environmental exposures and assure compliance
with regulatory policies and procedures.
It is the Company's policy to accrue estimated environmental clean-up
costs (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 $9.1 million to $10.1 million. At June 30, 1999, Distribution
Corporation has recorded the minimum liability of $9.1 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 June 30, 1999 includes related regulatory assets in the amount
of approximately $11.7 million.
The Company, in its international operations in the Czech Republic,
is in the process of constructing new fluidized-bed boilers at the district
heating and power generation plant of Prvni severozapadni teplarenska, a.s.
(PSZT) in order to comply with certain clean air standards mandated by the Czech
Republic government. Capital expenditures related to this construction incurred
by PSZT for the nine months ended June 30, 1999 were approximately $20.4
million. An additional $12.6 million is budgeted for this construction for the
remainder of 1999.
For further discussion, refer to Note H - Commitments and
Contingencies under the heading "Environmental Matters" in Item 8 of the
Company's 1998 Form 10-K.
Other. The Company is involved in litigation arising in the normal course of
business. The Company is involved in regulatory matters arising in the normal
course of business that involve rate base, cost of service and purchased gas
cost issues. While the resolution of such litigation or regulatory matters could
have a material effect on earnings and cash flows, none of this litigation, and
none of these regulatory matters, is expected to have a material adverse effect
on the financial condition of the Company at this time.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Earnings. The Company's earnings were $11.8 million, or $0.31 per common share
($0.30 per common share on a diluted basis), for the third quarter ended June
30, 1999. This compares with earnings of $19.1 million, or $0.50 per common
share ($0.49 per common share on a diluted basis), for the quarter ended June
30, 1998.
The Company's earnings were $110.6 million, or $2.86 per common share
($2.84 per common share on a diluted basis), for the nine months ended June 30,
1999. This compares with earnings of $26.3 million, or $0.69 per common share
($0.68 per common share on a diluted basis), for the nine months ended June 30,
1998. Earnings for the nine months ended June 30, 1998 included a non-cash
impairment of the Exploration and Production segment's oil and gas assets and a
non-cash cumulative effect of a change in accounting. Last year's accounting
change, which was a change in depletion methods for the Exploration and
Production segment's oil and gas assets, had a negative $9.1 million
(after-tax), or $0.24 per common share, non-cash cumulative effect through 1997,
which was recorded in the first quarter of 1998. Excluding these two non-cash
special items, earnings for the nine months ended June 30, 1998 would have been
$114.5 million, or $3.00 per common share ($2.96 per common share on a diluted
basis).
Discussion of Quarter Results. Except for the Other Nonregulated segment, which
showed higher earnings in its timber and natural gas marketing operations,
earnings decreased in all other segments for the quarter as compared with the
prior year's quarter. The rebound in the market price of the Company's stock
during the quarter ended June 30, 1999 (the price increased from $39.25 per
common share on March 31, 1999 to $48.50 per common share on June 30, 1999),
while benefiting shareholders, carried with it the required recognition of $5.9
million of expense for stock appreciation rights (SARs). This expense is spread
across all segments. In the prior year's quarter, the Company's stock price
decreased from $47.00 per common share on March 31, 1998 to $43.56 per common
share at June 30, 1998. This resulted in the reduction of the SAR liability and
related expense by $3.2 million in the quarter ended June 30, 1998.
For the nine months ended June 30, 1999, the expense related to SARs
of $1.5 million was not as significant as in the quarter since it reflects the
stock price increase from September 30, 1998 ($47.00 per common share) to the
price at June 30, 1999 ($48.50 per common share). For the nine months ended June
30, 1998, there was a minimal reduction of the SAR liability and related expense
since the stock price at September 30, 1997 ($44.00 per common share) was close
to the price at June 30, 1998 ($43.56 per common share).
In the Pipeline and Storage and Utility segments, earnings were down
because of the SARs expense, as discussed above, and because of $1.6 million of
expense associated with an early retirement offer effective in May 1999. In
addition, a buyout of a firm transportation agreement by a customer in the
amount of $2.5 million made a positive contribution to the Pipeline and Storage
segment's earnings in the third quarter of last year.
Had it not been for the early retirement charge and the SARs, the
Utility segment would have shown an increase in earnings in spite of a rate
reduction in New York that became effective October 1, 1998 and a reduction in
revenues due to the setting up of a special reserve to be applied against
incremental costs resulting from the New York Public Service Commission's (PSC)
gas restructuring efforts. Weather that was colder than the prior year's quarter
and lower operation and maintenance (O&M) expenses (exclusive of the SARs and
early retirement) benefited the Utility's earnings.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
The International segment's decreased earnings reflect its Czech
Republic operations where warmer weather and lower margins on heat and electric
sales negatively impacted earnings. In addition, the prior year's quarter
included a gain of approximately $1.2 million associated with U.S. dollar
denominated debt.
In the Exploration and Production segment, earnings were down
slightly. Higher interest expense associated with the acquisitions made in the
prior year impacted earnings this quarter. Partly offsetting this was an
increase in oil prices, after hedging, which were higher than the prior year's
quarter by $2.80 barrel (a 25% increase) and an increase in both oil and gas
production.
Discussion of Nine-Months Results. Excluding both the non-cash impairment and
the cumulative effect of a change in accounting from the prior year's period,
the decrease in earnings for the nine months ended June 30, 1999 as compared
with the prior year's period was the result of lower earnings in the Exploration
and Production and Pipeline and Storage segments offset in part by higher
earnings in the Utility, International and Other Nonregulated segments.
In the Exploration and Production segment, earnings are down
primarily because of this segment's portion of interest income recognized last
year related to the settlement of the primary issues of IRS audits of years
1977-1994. In addition, earnings year-to-date reflect low oil and gas prices
experienced through most of the first part of this year and higher interest, as
discussed above.
In the Pipeline and Storage segment, lower earnings resulted from the
expense associated with early retirement offers effective in December 1998 and
May 1999, the previously mentioned buyout of a firm transportation agreement by
a customer in the prior year, and the impact of the above noted settlement of
IRS audits, which had a greater positive effect on earnings of this segment in
the prior year-to-date period. Partly offsetting these items, the prior year's
results reflect recognition of several reserves related to proposed pipeline
projects and a storage loss that did not recur this year.
In the Utility segment, earnings were up because the settlement of
the primary issues of IRS audits had a negative impact on earnings in the prior
year while adjustments made relating to the final settlement of these audits had
a positive impact to earnings in the current year. Absent the IRS audit items,
operating results of the Utility segment are actually down from the prior year
as slightly colder weather (which mainly benefits the Pennsylvania jurisdiction)
and lower O&M expense were not enough to offset the effects of the New York rate
decrease, the special gas restructuring reserve and the expense associated with
early retirement offers effective in December 1998 and May 1999.
The International segment's higher earnings reflect nine months of
results from one of its investments in the Czech Republic, while the prior
year's period only includes five months. Earnings in the Other Nonregulated
segment continue to benefit from timber and natural gas marketing operations. A
more detailed discussion of current period results can be found in the business
segment information that follows.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
<TABLE>
<CAPTION>
OPERATING REVENUES
(in thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- ---------------------------
1999 1998 % Change 1999 1998 % Change
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Utility
Retail Revenues:
Residential $100,924 $100,816 0.1 $ 521,457 $ 553,950 (5.9)
Commercial 15,214 17,831 (14.7) 93,444 114,512 (18.4)
Industrial 2,618 3,478 (24.7) 11,988 15,137 (20.8)
-------- -------- ---------- ----------
118,756 122,125 (2.8) 626,889 683,599 (8.3)
Off-System Sales 5,401 9,201 (41.3) 22,897 39,972 (42.7)
Transportation 19,331 15,196 27.2 65,996 52,710 25.2
Other (292) (618) 52.8 (4,932) 2,834 (274.0)
-------- -------- ---------- ----------
143,196 145,904 (1.9) 710,850 779,115 (8.8)
-------- -------- ---------- ----------
Pipeline and Storage
Storage Service 15,663 15,315 2.3 47,289 47,785 (1.0)
Transportation 22,054 22,756 (3.1) 69,946 71,218 (1.8)
Other 2,752 3,252 (15.4) 9,441 10,509 (10.2)
-------- -------- ---------- ----------
40,469 41,323 (2.1) 126,676 129,512 (2.2)
-------- -------- ---------- ----------
Exploration and
Production 40,162 36,802 9.1 105,450 86,330 22.1
-------- -------- ---------- ----------
International 16,089 19,322 (16.7) 97,166 67,262 44.5
-------- -------- ---------- ----------
Other Nonregulated 32,410 24,054 34.7 107,899 85,380 26.4
-------- -------- ---------- ----------
Less-Intersegment
Revenues 23,668 24,275 (2.5) 75,557 77,007 (1.9)
-------- -------- ---------- ----------
$248,658 $243,130 2.3 $1,072,484 $1,070,592 0.2
======== ======== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
OPERATING INCOME (LOSS) BEFORE
INCOME TAXES
(in thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- -------------------------
1999 1998 % Change 1999 1998 % Change
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Utility $ 12,640 $ 12,956 (2.4) $121,123 $132,810 (8.8)
Pipeline and Storage 14,256 19,960 (28.6) 53,633 56,976 (5.9)
Exploration and
Production* 12,640 11,859 6.6 29,796 (104,507) 128.5
International (1,941) 794 NM 18,675 7,704 142.4
Other Nonregulated 2,419 124 NM 10,481 3,063 242.2
Corporate (948) (90) NM (1,753) (1,182) (48.3)
-------- -------- -------- --------
$ 39,066 $ 45,603 (14.3) $231,955 $ 94,864 144.5
======== ======== ======== ========
</TABLE>
*The nine months ended June 30, 1998 includes a non-cash impairment charge of
$128,996,000.
NM = Not meaningful
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
<TABLE>
<CAPTION>
SYSTEM NATURAL GAS VOLUMES
(millions of cubic feet-MMcf)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ -------------------------
1999 1998 % Change 1999 1998 % Change
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Utility Gas Sales
Retail Sales:
Residential 11,222 10,739 4.5 66,199 66,749 (0.8)
Commercial 1,926 2,219 (13.2) 13,055 15,406 (15.3)
Industrial 747 884 (15.5) 2,978 3,353 (11.2)
------- ------- ------- -------
13,895 13,842 0.4 82,232 85,508 (3.8)
Off-System 2,223 3,484 (36.2) 10,195 14,432 (29.4)
------- ------- ------- -------
16,118 17,326 (7.0) 92,427 99,940 (7.5)
------- ------- ------- -------
Non-Utility Gas Sales
Production(in
equivalent MMcf) 16,759 15,840 5.8 45,607 36,293 25.7
------- ------- ------- -------
Total Gas Sales 32,877 33,166 (0.9) 138,034 136,233 1.3
------- ------- ------- -------
Transportation
Utility 15,608 14,690 6.2 53,638 50,022 7.2
Pipeline and Storage 54,388 59,281 (8.3) 244,494 255,174 (4.2)
Nonregulated 16 262 (93.9) 337 538 (37.4)
------- ------- ------- -------
70,012 74,233 (5.7) 298,469 305,734 (2.4)
------- ------- ------- -------
Marketing Volumes 8,875 6,176 43.7 29,214 20,696 41.2
------- ------- ------- -------
Less-Inter and
Intrasegment Volumes:
Transportation 23,649 22,796 3.7 133,301 125,539 6.2
Production 578 1,001 (42.3) 2,438 3,059 (20.3)
------- ------- ------- -------
24,227 23,797 1.8 135,739 128,598 5.6
------- ------- ------- -------
Total System Natural Gas
Volumes 87,537 89,778 (2.5) 329,978 334,065 (1.2)
======= ======= ======= =======
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
Utility.
Operating revenues for the Utility segment decreased $2.7 million for
the quarter ended June 30, 1999, as compared with the same period a year ago.
This resulted from a reduction in retail and off-system gas sales revenue of
$3.3 million and $3.8 million, respectively, offset in part by an increase in
transportation revenue of $4.1 million. In addition, other operating revenue
increased $0.3 million.
The decrease in retail gas revenue was caused primarily by the
general base rate decrease in the New York jurisdiction effective October 1,
1998. Retail gas sales volumes have increased slightly from the prior year's
quarter, although higher volumes sold due to colder weather have been partly
offset by a reduction in sales volumes due to the migration of certain retail
customers to transportation service in both the New York and Pennsylvania
jurisdictions. This is the result of customers turning to marketers for their
gas supplies while using Distribution Corporation for gas transportation
service. (Restructuring in the Utility segment's service territory is further
discussed in the "Rate Matters" section that follows.) Transportation revenues
and volumes are up as a result of the migration from retail service and because
of colder weather. Off-system revenues are down due to lower volumes sold. The
margins resulting from off-system sales are minimal.
Operating revenues for the Utility segment decreased $68.3 million
for the nine months ended June 30, 1999, as compared with the same period a year
ago. This resulted from a reduction in retail and off-system gas sales revenue
of $56.7 million and $17.1 million, respectively, and a reduction in other
operating revenue of $7.8 million. These decreases were partly offset by an
increase in transportation revenue of $13.3 million.
The decrease in retail gas revenue was caused by the recovery of
lower gas costs and the general base rate decrease in the New York jurisdiction
effective October 1, 1998. The recovery of lower gas costs resulted from both
lower retail volumes sold of 3.3 billion cubic feet (Bcf) and a lower average
cost of purchased gas (the average cost of purchased gas was $3.64 per Mcf and
$4.03 per Mcf, for the nine months ended June 30, 1999 and 1998, respectively).
Despite weather that was colder than the prior year, retail volumes sold
decreased, mainly due to the migration from retail to transportation service
noted above. Transportation revenues increased and volumes are up 3.6 Bcf as a
result of this migration and because of colder weather. Off-system revenues are
down due to lower volumes sold.
The decrease in other operating revenue of $7.8 million is due
primarily to a $6.5 million gas restructuring reserve reducing revenue in the
current nine month period, $6.0 million of revenue recorded in 1998 as a result
of the settlement of IRS audits and $0.5 million of a revenue reduction in the
current year due to a final IRS audit settlement. These items are offset in part
by a $4.9 million refund provision recorded in the prior year's nine month
period. The gas restructuring reserve is to be applied against incremental costs
resulting from the PSC's gas restructuring efforts (the PSC's gas restructuring
efforts are further discussed in the "Rate Matters" section that follows). The
revenue related to the IRS audits represents the rate recovery of interest
expense as allowed by the New York rate settlement of July 1996. The refund
provision recorded in the prior year's period was for a 50% sharing with
customers of earnings over a predetermined amount in
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
accordance with the New York rate settlement of July 1996. All of these items
are included in the "Other" category in the Utility section of the Operating
Revenues table above.
Operating income before income taxes for the Utility segment
decreased $0.3 million for the quarter ended June 30, 1999, as compared with the
same period a year ago. This decrease reflects higher O&M ($4.0 million) and
higher other operating expenses ($0.3 million) which were only partially offset
by higher margin on gas and transportation sales of approximately $4.0 million
(i.e., lower revenues, as noted above, more than offset by lower purchased gas
costs). An item that increased margin by lowering gas costs was an adjustment
for lost and unaccounted-for (LAUF) gas in the New York jurisdiction related to
1998. Since Distribution Corporation's earnings in 1998 were above the
predetermined amount in accordance with the New York rate settlement of July
1996, 50% of the LAUF adjustment will be shared with customers and 50% (or $1.6
million) was recognized as a reduction in gas cost in June 1999. Higher O&M for
the quarter includes higher SARs expense of $3.8 million and the expense related
to the early retirement offer effective in May 1999 of $1.0 million. Partly
offsetting these two major items was a reduction in other O&M expense of $0.8
million, including labor savings.
Operating income before income taxes for the Utility segment
decreased $11.7 million for the nine months ended June 30, 1999, as compared
with the same period a year ago. Excluding the $6.0 million of rate recovery of
interest expense related to the IRS audits in 1998, as well as $0.5 million of a
revenue reduction in 1999 due to a final IRS audit settlement, as noted in the
revenue discussion above (this rate recovery is offset 100% by interest expense,
included below the operating income line), the Utility segment's pretax
operating income decreased $5.2 million. This decrease reflects a lower margin
on gas and transportation sales of approximately $3.1 million (i.e., lower
revenues, as noted above, partly offset by lower purchased gas costs) and higher
O&M ($2.4 million) offset in part by lower other operating expenses ($0.3
million). Although the LAUF gain is included in the margin for the nine months
ended June 30, 1999, the lower margin reflects the previously mentioned rate
reduction and gas restructuring reserve in New York. Higher O&M for the nine
month period includes higher expense related to the early retirement offers
effective in December 1998 and May 1999 of $5.6 million. Partly offsetting this
major item was a reduction in other O&M expense of $3.2 million, including labor
savings.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
Degree Days
Three Months Ended June 30:
---------------------------
Percent (Warmer) Colder
in 1999 Than
Normal 1999 1998 Normal 1998
- ----------------------------------------------------------------------
Buffalo 982 816 738 (16.9) 10.6
Erie 880 755 695 (14.2) 8.6
Nine Months Ended June 30:
--------------------------
Buffalo 6,647 6,065 5,817 (8.8) 4.3
Erie 6,123 5,513 5,338 (10.0) 3.3
- ----------------------------------------------------------------------
Pipeline and Storage.
Operating income before income taxes for the Pipeline and Storage
segment decreased $5.7 million and $3.3 million for the quarter and nine months
ended June 30, 1999, respectively, as compared with the same periods a year ago.
For the quarter, the decrease is primarily attributable to higher SARs expense
of $4.0 million, expense related to the early retirement offer effective May 1,
1999 of $0.6 million and an accrual for a gas imbalance payable of $1.0 million.
The decrease in operating income before income taxes for the nine
months ended June 30, 1999, is primarily attributable to lower revenue from
interruptible transportation and storage service, lower revenues from unbundled
pipeline sales and open access transportation and the accrual for the gas
imbalance payable, noted above. These items account for the majority of the $2.8
million revenue decrease of this segment. This combined with increased
depreciation and other taxes offset in part by lower O&M expense reduced pretax
operating income by $3.3 million. The reduction in O&M is partially attributable
to certain reserves and base gas loss recorded in 1998. In the previous year,
reserves were established for preliminary survey and investigation costs
associated with the Niagara Expansion and Green Canyon projects. In addition,
last year's period includes a base gas loss at the Zoar storage field. In total,
these three items amounted to $3.7 million. Partly offsetting these reductions
in O&M was the reversal of a reserve for a storage project in the first quarter
of 1998 in the amount of $1.0 million and expense related to the early
retirement offers in December 1998 and May 1999 of $1.4 million.
Transportation volumes in this segment decreased 4.9 Bcf and 10.7
Bcf, respectively, for the quarter and nine months ended June 30, 1999. For the
quarter, the majority of the volume decrease relates to firm contracted volumes
and thus the change in volumes did not have a significant impact on earnings as
a result of Supply Corporation's straight fixed-variable (SFV) rate design. For
the nine month period, 9.5 Bcf of the 10.7 Bcf volume decrease relates to lower
interruptible transportation. This decrease reduced Supply Corporation's
revenues by $0.5 million.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
Exploration and Production.
Operating income before income taxes from the Company's Exploration
and Production segment increased $0.8 million for the quarter ended June 30,
1999, compared with the same period a year ago. This increase resulted primarily
from higher oil prices and production and lower lease operating costs. Oil
prices after hedging were higher than the prices for the prior year's quarter by
$2.80 per bbl. The production increase came mainly from the properties acquired
in the HarCor Energy, Inc. (HarCor), Whittier Trust Company (Whittier) and
Bakersfield Energy Resources (BER) acquisitions in the prior year. There was
also increased production in the Gulf Coast, primarily new production at
Vermilion 309 and Vermilion 253. Lease operating costs decreased as a result of
management's effort to reduce costs. The increases to operating income before
income taxes noted above were partly offset by lower gas revenues, a
mark-to-market adjustment for written options (see further discussion in Note 4
- - Derivative Financial Instruments), higher depletion expense and higher general
and administrative costs. Gas revenues are down primarily due to lower gas
prices, offset slightly by higher production. The weighted average gas price
after hedging decreased $0.08 per Mcf, while production increased 209 MMcf.
General and administrative costs are up primarily due to the SARs expense.
For the nine months ended June 30, 1999, operating income before
income taxes for the Exploration and Production segment increased $134.3
million, compared with the same period a year ago. Excluding the prior year's
$129 million non-cash impairment of this segment's oil and gas assets, as
discussed previously, operating income before income taxes for the nine months
ended June 30, 1999, increased $5.3 million as compared with the prior year's
same period. This increase on a year-to-date basis, was mainly caused by higher
oil and gas production, due to the acquisitions on the West Coast in 1998, and
new production on certain Gulf Coast properties. However, lower weighted average
oil and gas prices, after hedging, higher lease operating costs, a
mark-to-market adjustment for written options (see further discussion in Note 4
- - Derivative Financial Instruments) and higher depletion expense, partly offset
the positive impacts of this higher production.
PRODUCTION VOLUMES
Exploration and Production.
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------- -----------------------
1999 1998 % Change 1999 1998 % Change
---- ---- -------- ---- ---- --------
Gas Production - (MMcf)
Gulf Coast 8,532 8,552 (0.2) 21,473 21,253 1.0
West Coast 1,050 697 50.6 2,839 1,109 156.0
Appalachia 1,069 1,193 (10.4) 3,381 3,677 (8.1)
------ ------ ------ ------
10,651 10,442 2.0 27,693 26,039 6.4
====== ====== ====== ======
Oil Production - (Thousands of Barrels)
Gulf Coast 352 312 12.8 1,022 921 11.0
West Coast 664 586 13.3 1,957 780 150.9
Appalachia 2 2 - 7 8 (12.5)
----- --- ----- -----
1,018 900 13.1 2,986 1,709 74.7
===== === ===== =====
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
AVERAGE PRICES
Exploration and Production.
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------- -----------------------
1999 1998 % Change 1999 1998 % Change
---- ---- -------- ---- ---- --------
Average Gas Price/Mcf
Gulf Coast $2.19 $2.29 (4.4) $1.99 $2.52 (21.0)
West Coast $2.30 $2.19 5.0 $2.17 $2.17 -
Appalachia $2.31 $2.72 (15.1) $2.42 $2.95 (18.0)
Weighted Average $2.22 $2.33 (4.7) $2.06 $2.57 (19.8)
Weighted Average After
Hedging $2.24 $2.32 (3.4) $2.22 $2.25 (1.3)
Average Oil Price/bbl
Gulf Coast $16.54 $12.70 30.2 $13.41 $15.54 (13.7)
West Coast $12.60 $ 8.75 44.0 $10.19 $10.10 0.9
Appalachia $14.95 $14.85 0.7 $13.19 $17.00 (22.4)
Weighted Average $13.97 $10.13 37.9 $11.30 $13.06 (13.5)
Weighted Average After
Hedging $14.02 $11.22 25.0 $11.92 $13.78 (13.5)
Seneca has entered into certain price swap agreements and options to
manage a portion of the market risk associated with fluctuations in the price of
natural gas and crude oil, in an effort to provide more stability to its
operating results (refer to the "Market Risk Sensitive Instruments" section of
this Item and to Note 4 - Derivative Financial Instruments for further
discussion). The following summarizes Seneca's settlements under its price swap
agreements and options.
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
Natural Gas Price Swap Agreements:
Notional Quantities -
Equivalent Bcf 6.6 6.0 17.9 19.1
Gain (Loss)
(thousands of dollars) $227,000 $(82,000) $4,357,000 $(8,167,000)
Crude Oil Price Swap Agreements:
Notional Quantities -
Equivalent bbls 232,000 219,000 547,000 672,000
Gain (thousands of dollars) $52,000 $982,000 $1,871,000 $ 1,221,000
Written Put Option on Crude Oil:
Notional Quantities -
Equivalent bbls - - 118,000 -
Gain (Loss)
(thousands of dollars) - - $(28) -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
International.
Operating income before income taxes for the International segment
decreased $2.7 million for the quarter ended June 30, 1999, compared with the
same period a year ago. This decrease resulted from warmer weather and lower
margins on heat and electric sales combined with higher O&M expense.
Operating income before income taxes for the nine months ended June
30, 1999, increased $11.0 million for this segment. This increase, as well as
the revenue increase shown in the "Operating Revenues" table above and the "Heat
and Electric Revenues" table below, resulted primarily from the operations of
Prvni severozapadni teplarenska, a.s. (PSZT), a district heating and power
generation plant located in the northern part of the Czech Republic. Horizon
first acquired 75.3% of the outstanding shares of PSZT in February 1998 and
currently owns 86.2%. The nine months ended June 30, 1998 reflected only five
months of operating revenues and income for PSZT.
The following table summarizes the heating and electricity sales of
the International segment for the quarter and nine months ended June 30, 1999
and 1998, respectively:
Heating and Electric Volumes
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
Heating (Gigajoules) 1,266,928 1,385,875 9,502,414 6,246,905
Electricity (Megawatt hours) 279,987 277,280 897,829 520,635
Heating and Electric Revenues
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
(in thousands) 1999 1998 1999 1998
---- ---- ---- ----
Heating $ 8,225 $ 9,516 $68,522 $43,222
Electricity $ 7,853 $ 9,827 $27,531 $15,907
Other Nonregulated.
Operating income before income taxes associated with this segment
increased $2.3 million and $7.4 million, respectively, for the quarter and nine
months ended June 30, 1999, compared with the same periods a year ago. The
increases can be attributed primarily to improved performance in the Company's
timber operations and principal energy marketing subsidiary. The increased
performance in the timber operations resulted from the 1998 purchase of timber
property and two lumber mills during 1998. The increased performance of NFR, the
Company's principal energy marketing subsidiary, was the result of increased
volumes and margins, offset in part by higher operating and maintenance expense.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
Income Taxes.
Income taxes decreased $4.1 million for the quarter ended June 30,
1999, primarily as a result of a decrease in pretax income. For the nine months
ended June 30, 1999, income taxes increased $35.2 million, primarily as a result
of an increase in pretax income (pretax income before cumulative effect, for the
nine months ended June 30, 1998). For further discussion of income taxes, refer
to "Note 2 - Income Taxes" in Part I, Item 1 of this report.
Other Income.
Other income decreased $4.1 million and $24.5 million, respectively,
for the quarter and nine months ended June 30, 1999. For the quarter, this
decrease is primarily the result of a buyout of a firm transportation agreement
by a Pipeline and Storage segment customer in the prior year's quarter in the
amount of $2.5 million combined with a gain of $1.2 million that was also
recorded in the prior year for U.S. dollar denominated debt carried on the
balance sheet of PSZT (until December 1998, at which time it was converted to a
Czech koruna denominated loan). The decrease for the nine months is due to the
same reasons noted in the quarter (the gain on U.S. dollar denominated debt was
$3.4 million for the nine month period) combined with $18.5 million of interest
income, which resulted from the settlement of IRS audits in March 1998. As an
offset to these decreases, $3.1 million of interest income was recorded in
December 1998 related to a final settlement of these audits.
Interest Charges.
Interest on long-term debt increased $1.5 million and $12.1 million
for the quarter and nine months ending June 30, 1999, respectively, mainly
because of a higher average amount of long-term debt outstanding compared to the
same periods a year ago. Long-term balances have grown significantly as a result
of last year's acquisitions of PSZT, HarCor, Whittier and BER, as well as last
year's additional investment in Severoceske teplarny, a.s. (SCT).
Other interest decreased $0.2 million and $9.5 million for the
quarter and nine-month period ended June 30, 1999. The decrease in the quarter
was the result of lower interest rates, partly offset by higher short-term debt
balances. The decrease in the nine-month period as compared to the prior year
was mainly the result of interest expense related to the previously mentioned
settlement of IRS audits. The nine months ended June 30, 1998 included $11.7
million of interest expense related to these IRS audits. The nine months ended
June 30, 1999 includes a reduction of interest expense of $1.3 million related
to the final settlement of these audits. Partly offsetting these decreases in
the nine months was higher interest on short-term borrowings as the result of
higher short-term debt balances, offset in part by lower interest rates.
Short-term debt balances are at a higher level due to the aforementioned
acquisitions in 1998, combined with the retirement of long-term debt in 1998.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary sources of cash during the nine month period
ended June 30, 1999, consisted of cash provided by operating activities,
long-term debt and short-term bank loans and commercial paper. These sources
were supplemented by issuances of common stock under the Company's stock and
benefit plans.
Operating Cash Flow.
Internally generated cash from operating activities consists of net
income available for common stock, adjusted for non-cash expenses, non-cash
income and changes in operating assets and liabilities. Non-cash items include
depreciation, depletion and amortization, deferred income taxes, minority
interest in foreign subsidiaries and allowance for funds used during
construction. For the nine months ended June 30, 1998, non-cash items also
included the cumulative effect of a change in accounting for depletion and the
impairment of oil and gas producing properties.
Cash provided by operating activities in the Utility and the Pipeline
and Storage segments may vary substantially from period to period because of the
impact of rate cases. In the Utility segment, pipeline company refunds, over- or
under-recovered purchased gas costs and weather also significantly impact cash
flow. The Company considers pipeline company 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 weather normalization clause and in the Pipeline and Storage
segment by Supply Corporation's SFV rate design.
Historically, because of the seasonal nature of the Company's heating
business, revenues have been relatively high during the nine months ended June
30 and receivables have increased between September and June because of winter
weather.
The storage gas inventory normally declines during the first and
second quarters of the year and is replenished during the third and fourth
quarters. For storage gas inventory accounted for under the last-in, first-out
(LIFO) method, the current cost of replacing gas withdrawn from storage is
recorded in the Consolidated Statement of Income and a reserve for gas
replacement is recorded in the Consolidated Balance Sheet and is included under
the caption "Other Accruals and Current Liabilities." Such reserve is reduced as
the inventory is replenished.
Net cash provided by operating activities totaled $252.1 million for
the nine months ended June 30, 1999, an increase of $9.5 million compared with
the $242.6 million provided by operating activities for the nine months ended
June 30, 1998. This slight increase is attributed primarily to the Utility
segment's contribution offset partly by a decrease to cash provided by
operations in the Exploration and Production segment. The increase in the
Utility segment can be attributed to lower cash disbursements for gas purchases,
taxes and interest, all of which more than offset lower cash receipts from gas
sales and transportation service. The decrease to cash provided by operations in
the Exploration and Production segment is primarily because of an increase in
interest payments stemming from the acquisitions made in 1998. An increase in
cash received from hedging transactions offset the decrease in cash receipts
from the Exploration and Production segment's sale of natural gas and crude oil
production.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
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 investments in corporations (stock
acquisitions) and/or partnerships. Such investments are treated separately in
the Statements of Cash Flows and further discussed in the segment discussion
below.
The Company's capital expenditures and other investments totaled
$213.5 million during the nine months ended June 30, 1999. The following table
summarizes the Company's capital expenditures and other investments by business
segment:
(in millions)
Other Total
Capital Investments Capital
Expenditures through Expenditures and
through 6/30/99 6/30/99 Other Investments
--------------- ----------- -----------------
Utility $ 30.6 $ - $ 30.6
Pipeline and Storage 19.4 3.6 23.0
Exploration and Production 80.5 - 80.5
International 23.6 - 23.6
Other Nonregulated 55.8 - 55.8
------ ----- ------
$209.9 $ 3.6 $213.5
====== ===== ======
Utility
- -------
The Utility capital expenditures were made primarily for replacement
of mains and main extensions, as well as for the replacement of service lines.
Pipeline and Storage
- --------------------
The Pipeline and Storage capital expenditures were made primarily for
additions, improvements, and replacements to this segment's transmission and
storage systems.
During the nine month period, SIP made a $3.6 million investment in
Independence Pipeline Company, a Delaware general partnership, bringing its
total investment through June 30, 1999 to $9.1 million. This investment
represents a one-third partnership interest. The investment has been financed
with short-term borrowings. Independence Pipeline Company intends to build a 370
mile natural gas pipeline (Independence Pipeline Project) 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 $9.0 to $13.0 million.
Exploration and Production
- --------------------------
The Exploration and Production segment's capital expenditures for the
nine months ended June 30, 1999 contained approximately $46.7 million for
Seneca's offshore program in the Gulf of Mexico, including offshore drilling
expenditures, offshore construction, lease acquisition costs and geological and
geophysical expenditures. Offshore drilling was concentrated on Vermilion
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
309, Galveston 239, Vermilion 253, Brazos 414S, Brazos 375, Brazos 376 and
Eugene Island Block 29. Offshore construction occurred primarily at Eugene
Island 47 and Galveston 239. Lease acquisition costs resulted from successful
bidding on six state of Texas tracts and five federal lease blocks in the Gulf
of Mexico. Offshore geological and geophysical expenditures were made for
purchases of 3-D seismic data.
The remaining $33.8 million of capital expenditures reflects, among
other things, onshore drilling, construction and recompletion costs for wells
located in Louisiana, Texas, Alabama and California as well as onshore
geological and geophysical costs, including the purchase of certain 3-D seismic
data and fixed asset purchases. The onshore capital expenditures were
concentrated on the California properties acquired through the Whittier and BER
asset purchases, as well as the HarCor stock purchase, all of which occurred in
1998. Another area of emphasis included the Thomas Ranch #1-H Well in Grimes
County, Texas.
During the quarter ended June 30, 1999, Seneca sold its 50% working
interest in the Jurassic Park prospect in Escambia and Monroe Counties, Alabama,
which included two producing wells and approximately 3,300 gross acres. Proceeds
from this sale, as well as other sales of assets within the Company, are
included in other investing activities in the Statement of Cash Flows.
International
- -------------
The International segment capital expenditures were made primarily by
PSZT for the construction of new fluidized-bed boilers at its district heating
and power generation plant in order 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 36,300
acres of land and timber purchased from PennzEnergy Company by Seneca and
Highland. The purchase price was approximately $47 million and was funded by
short-term borrowings. The remaining capital expenditures consisted of smaller
land and timber purchases for Seneca's timber operations, as well as the
installation of new equipment for Highland's sawmill and kiln operations.
The capital expenditure programs of the Company's subsidiaries are
under continuous review. The amounts are subject to modification for
opportunities in the natural gas industry such as the acquisition of attractive
oil and gas properties or storage facilities and the expansion of transmission
line capacities. While the majority of capital expenditures in the Utility
segment are necessitated by the continued need for replacement and upgrading of
mains and service lines, the magnitude of future capital expenditures in the
Company's other business segments depends, to a large degree, upon market
conditions.1
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
Financing Cash Flow.
Consolidated short-term debt increased by $24.7 million during the
first nine months of 1999. 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 pipeline company 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.
In February 1999, the Company issued $100.0 million of 6.0%
medium-term notes due to mature in March 2009. After deducting underwriting
discounts and commissions, the net proceeds to the Company amounted to $98.7
million. The proceeds of this debt issuance were used to redeem $100.0 million
of 5.58% medium-term notes which matured in March 1999.
In July 1999, the Company issued $100.0 million of 6.82% medium-term
notes due to mature in August 2004. After deducting underwriting discounts and
commissions, the net proceeds to the Company amounted to $99.5 million. The
proceeds of this debt issuance were used to redeem $50 million of 7.25%
medium-term notes which matured in July 1999 and to complete the redemption of
HarCor's 14.875% Senior Secured Notes, which is discussed below.
In March 1999, the Company redeemed $10.3 million of HarCor's 14.875%
Senior Secured Notes through an open market purchase. The total cost of this
redemption was $11.9 million, which included a redemption price of 110% and
accrued interest. The Company used short-term debt to finance this redemption.
In July 1999, the Company redeemed the remaining $43.5 million of HarCor's
14.875% Senior Secured Notes. The total cost of this redemption was $51.0
million, which included a redemption price of 110% and accrued interest. As
noted above, this redemption was financed primarily by proceeds from the
Company's July 1999 issuance of 6.82% medium-term notes. The redemption premiums
were accrued on the opening balance sheet when HarCor was acquired in 1998.
In March 1998, the Company obtained authorization from the SEC, under
the Public Utility Holding Company Act of 1935, to issue, in the aggregate,
long-term debt securities and equity securities amounting to $2.0 billion during
the order's authorization period, which extends to December 31, 2002. In July
1999, the Company filed a registration statement pursuant to the Securities Act
of 1933 to register up to $625 million of either debt or equity securities.
The Company's present liquidity position is believed to be adequate
to satisfy known demands.1 Under the Company's covenants contained in its
indenture covering long-term debt, at June 30, 1999, the Company would have been
permitted to issue up to a maximum of $499.0 million in additional long-term
unsecured indebtedness at projected market interest rates. In addition, at June
30, 1999, the Company had regulatory authorizations and unused short-term credit
lines that would have permitted it to borrow an additional $399.0 million of
short-term debt.
The amounts and timing of the issuance and sale of debt and/or equity
securities will depend on market conditions, regulatory authorizations, and the
requirements of the Company.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
The Company is involved in litigation arising in the normal course of
business. The Company is involved in regulatory matters arising in the normal
course of business that involve rate base, cost of service and purchased gas
cost issues, among other things. While the resolution of such litigation or
regulatory matters could have a material effect on earnings and cash flows in
the year of resolution, none of this litigation and none of these regulatory
matters are expected to change materially the Company's present liquidity
position, nor have a material adverse effect on the financial condition of the
Company at this time.1
Market Risk Sensitive Instruments.
For a complete discussion of market risk sensitive instruments, refer
to "Market Risk Sensitive Instruments" in Item 7 of the Company's 1998 Form 10-K
and Item 2 of the Company's December 31, 1998 Form 10-Q (see also "Note 4 -
Derivative Financial Instruments in this Form 10-Q). There have been no
subsequent material changes to the Company's exposure to market risk sensitive
instruments.
RATE MATTERS
Utility Operation.
New York Jurisdiction
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
predetermined share of excess earnings under a 1996 settlement. 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 its 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;
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
(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).1 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 was instructed to hold collaborative sessions with multiple parties to
discuss generic issues including reliability and market power regulation.
As of February 1, 1999, Staff had convened a multitude of
collaboratives, proceedings and discussions on various issues relating to
restructuring, including reliability of service, billing and allocation of
stranded costs. Distribution Corporation is participating in all facets of
Staff's effort.
The PSC's Order Terminating Capacity Assignment, included with the
---------------------------------------
Policy Statement, directed the state's LDCs to file proposed tariffs, by no
later than February 1, 1999, revising the current requirement that marketers
take assignment of an allocation of upstream capacity for each customer that
elects to purchase gas from a marketer other than the LDC. Although the order
states that the so-called "mandatory assignment" feature of aggregation service
was 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.
On February 1, 1999, Distribution Corporation filed revised tariff
sheets in compliance with the Order Terminating Capacity Assignment.
-------------------------------------------
Distribution Corporation's compliance filing is designed to comply with the
PSC's directives and operate in the same manner as the company's "System Wide
Energy Select" program approved for the Pennsylvania Division (described below).
In an order issued on March 24, 1999, the PSC rejected portions of the February
1, 1999 compliance filing without prejudice, and directed Distribution
Corporation to submit revised tariff sheets, effective April 1, 1999, to adopt a
new capacity option for retail marketers. The new capacity option eliminates
long line capacity upstream of Supply Corporation from the "mandatory capacity"
requirement described above. This change, effective April 1, 1999, allows
marketers to choose alternate capacity paths, if available, from the production
area to Supply Corporation's city gate. Marketers will continue to be obligated
to take release of Distribution Corporation's storage and transmission capacity
on Supply Corporation.
To the extent any stranded pipeline costs are generated by the above
proposal, they would be recoverable from firm service customers through a
"transition surcharge" mechanism.1
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
The effective date for the compliance filing was April 1, 1999.
On March 17, 1999, the PSC issued an order in Case 98-G-0122
directing the state's LDCs to file a uniform, basic
gas-for-electric-generation-service tariff to replace tariffs filed pursuant to
the PSC's 1991 Bypass Policy Statement. Distribution Corporation serves a number
of generation customers under tariffs designed pursuant to the 1991 Bypass
Policy Statement. Although existing contracts for service would not be disturbed
by the March 17, 1999 order, future contracts would be negotiated under the
terms of the new, uniform tariff. In its filing to comply with the March 17
order, Distribution Corporation proposed to implement the PSC's uniform tariff
while retaining flexibility for individual customer negotiations. The PSC has
not ruled on Distribution Corporation's filing and the outcome cannot be
ascertained at this time. To preserve its legal rights, however, Distribution
Corporation filed for rehearing of the March 17, 1999 order challenging several
features of the uniform tariff. That action remains pending.
On June 7, 1999, the PSC issued a notice requesting comments on a
proposal for a "single retailer" billing environment. The proposal recommends
that electric and gas utilities exit the billing function at an undetermined
future date. The retail billing function would then be performed solely by
unregulated marketers. Included in the billing proposal is a recommendation that
utilities design a "back-out" credit equal to the long run costs avoided by each
utility when billing is provided by another party. Distribution Corporation
filed comments opposing much of the proposal, but supporting a suggested interim
regime where multiple billing arrangements, including utility billing, would be
permitted. This proceeding remains pending.
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 lasted until April 1, 1999, allowed 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 was not a
supplier of gas in this pilot. Under Energy Select, Distribution Corporation
delivered the gas to the customer's home or business and remained responsible
for reading customer meters, the safety and maintenance of its pipeline system
and responding to gas emergencies. NFR was a participating supplier in Energy
Select.
Effective February 11, 1999, Distribution Corporation's System Wide
Energy Select tariff was approved by the PaPUC. This program is intended 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
were adopted. Most significantly, the new program includes Distribution
Corporation as a choice for retail consumers, in furtherance of Distribution
Corporation's objective to remain a merchant. Also departing
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
from the pilot scheme, Distribution Corporation resumes its role as provider of
last resort, and maintains customer contact by providing a billing service on
its own behalf and, as an option, for participating marketers. Finally, the
System Wide Energy Select program addresses upstream capacity requirements in a
manner substantially similar to the method proposed for Distribution
Corporation's New York compliance filing, described above.
In Pennsylvania, a natural gas restructuring bill was signed into law
on June 22, 1999. Entitled the Natural Gas Choice and Competition Act ("Act"),
the new law requires all Pennsylvania LDCs to file tariffs designed to provide
retail customers with direct access to competitive gas markets. Distribution
Corporation has been scheduled by the PaPUC to submit its compliance filing on
October 1, 1999, for an effective date on or about April 1, 2000. Distribution
Corporation is currently reviewing the filing requirements and preparing its
case. It is anticipated that the October 1 filing will largely mirror the Energy
Select program currently in effect, which substantially complies with the Act's
requirements.
Base rate adjustments in both the New York and Pennsylvania
jurisdictions do not reflect the recovery of purchased gas costs. Such costs are
recovered through operation of the purchased gas adjustment clauses of the
appropriate regulatory authorities.
Pipeline and Storage.
Supply Corporation currently does not have a rate case on file with the Federal
Energy Regulatory Commission (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.
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.1
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 $9.1 million to $10.1 million.1 At June 30, 1999, Distribution
Corporation has recorded the minimum liability of $9.1 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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
In New York and Pennsylvania, Distribution Corporation is recovering
site investigation and remediation costs in rates. Accordingly, the Consolidated
Balance Sheet at June 30, 1999 includes related regulatory assets in the amount
of approximately $11.7 million.
The Company, in its international operations in the Czech Republic,
is in the process of constructing new fluidized-bed boilers at the district
heating and power generation plant of PSZT in order to comply with certain clean
air standards mandated by the Czech Republic government. Capital expenditures
related to this construction incurred by PSZT for the nine months ended June 30,
1999 were approximately $20.4 million. An additional $12.6 million is budgeted
for this construction for the rest of 1999.
For further discussion, refer to Note H - Commitments and
Contingencies under the heading "Environmental Matters" in Item 8 of the
Company's 1998 Form 10-K.
Year 2000 Readiness Disclosure.
Numerous media reports have heightened concern that information
technology computer systems, software programs and semiconductors may not be
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 believes that all necessary work has been completed in
order to make its internal computer system Year 2000 ready.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 have been completed.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 has corrected 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 complete.1
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
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 has
completed testing and implementation of the vendor-supplied Year 2000 compliant
products and services.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 has completed testing and implementation of the products and
services of these vendors (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. Based on responses received to date
along with internal testing, the Company anticipates that all applications and
services under this category will be Year 2000 ready.1
Cost.
The cost of upgrading both vendor supplied and internally developed
systems and services is expensed as incurred and has amounted to approximately
$2.1 million in total. Minimal additional expenses related to Year 2000
administration are expected to be incurred.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
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
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 has replaced non-Year 2000
compliant hardware.
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 has developed Year 2000 strategic
contingency plans which have been prioritized in relation to the overall
corporation in the order of human safety, reliability/delivery of Company
services and administrative services. The Company will be adding the operational
specifics between now and mid-September. The pertinent portions of these plans
have been filed with the New York State Public Service Commission whose review
is ongoing. The Company is currently working with other utilities in its service
areas and regional Emergency Management Services to establish communication
channels and procedures in the low probability event of a serious Year 2000
disruption. 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
Safe Harbor for Forward-Looking Statements.
The Company is including the following cautionary statement in this
Form 10-Q to make applicable and take advantage of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of, the Company. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions and other statements which are
other than statements of historical facts. From time to time, the Company may
publish or otherwise make available forward-looking statements of this nature.
All such subsequent forward-looking statements, whether written or oral and
whether made by or on behalf of the Company, are also expressly qualified by
these cautionary statements. Certain statements contained herein, including
without limitation those which are designated with a "1",
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
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 statements:
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
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
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
17. Unanticipated problems related to the Company's internal Year 2000
initiative as well as potential adverse consequences related to third
party Year 2000 compliance.
The Company disclaims any obligation to update any forward-looking
statements to reflect events or circumstances after the date hereof.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Refer to the "Market Rate Sensitive Instruments" section in Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Part II. Other Information
- ---------------------------
Item 2. Changes in Securities
---------------------
On April 1, 1999, the Company issued 700 unregistered shares of
Company common stock to the seven non-employee directors of the Company. These
shares were issued as partial consideration for the directors' service as
directors during the quarter ended June 30, 1999, pursuant to the Company's
Retainer Policy for Non-Employee Directors.
These transactions were exempt from registration by Section 4(2) of
the Securities Act of 1933, as amended, as transactions not involving any public
offering.
Item 5. Other Information
-----------------
The Company's By-Laws were amended by the Board on June 17, 1999. The
amended By-Laws are included in this Form 10-Q as Exhibit 3(ii). Specifically,
the By-Laws were amended at Article I ("Meetings of Stockholders") to insert new
Sections 7 and 8. These amendments relate to both those matters which may
properly come before meetings of stockholders and the conduct of such meetings.
Among other things, as permitted by SEC Rule 14a-4(c) [17 CFR Section
240.14a-4(c)] the amendments incorporated into the By-Laws an "advance notice
provision" describing when a stockholder's notice of business or nominations to
be considered at a meeting of stockholders will be considered timely. Under most
circumstances, this provision requires that a stockholder provide such a notice
at least 110 days prior to the anniversary of the date on which the Company
mailed its proxy materials for the prior year's annual meeting of stockholders.
For example, since the Company mailed its proxy materials for the February 1999
annual meeting on December 31, 1998, a stockholder's notice of business or
nominations for the February 2000 annual meeting will be due on September 13,
1999.
<PAGE>
Item 5. Other Information (Cont.)
-------------------------
This requirement is separate and apart from the requirements of SEC
Rule 14 a-8 (17 CFR Section 240.14 a-8)that a stockholder must meet in order to
have a stockholder proposal included in the Company's proxy statement and form
of proxy.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
(3)(ii) By-Laws, as amended on June 17, 1999
(10) Material Contracts
10.1 Form of Employment Continuation and
Noncompetition Agreement, dated as of
December 11, 1998, with Philip C. Ackerman,
Walter E. DeForest, Joseph P. Pawlowski,
Dennis J. Seeley, David F. Smith and Gerald
T. Wehrlin.
10.2 Form of Employment Continuation and
Noncompetition Agreement, dated as of
December 11, 1998, with Bruce H. Hale and
Richard Hare.
10.3 Form of Employment Continuation and
Noncompetition Agreement, dated as of
December 11, 1998, with James A. Beck.
(12) Statements regarding Computation of Ratios:
Ratio of Earnings to Fixed Charges for the
Twelve Months Ended June 30, 1999 and the
Years Ended September 30, 1994 through 1998.
(27) Financial Data Schedules
27.1 Financial Data Schedule for the Nine Months
Ended June 30, 1999.
27.2 Amended Financial Data Schedule for the Nine
Months Ended June 30, 1998.
(99) National Fuel Gas Company Consolidated
Statement of Income for the Twelve Months
Ended June 30, 1999 and 1998.
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL FUEL GAS COMPANY
-------------------------
(Registrant)
/s/Joseph P. Pawlowski
--------------------------------
Joseph P. Pawlowski
Treasurer and
Principal Accounting Officer
Date: August 13, 1999
---------------
<PAGE>
EXHIBIT INDEX
(Form 10Q)
Exhibit 3(ii) By-Laws, as amended on June 17, 1999.
Exhibit 10.1 Form of Employment Continuation and
Noncompetition Agreement, dated as of December 11,
1998, with Philip C. Ackerman, Walter E. DeForest,
Joseph P. Pawlowski, Dennis J. Seeley David F. Smith
and Gerald T. Wehrlin.
Exhibit 10.2 Form of Employment Continuation and
Noncompetition Agreement, dated as of December 11,
1998, with Bruce H. Hale and Richard Hare.
Exhibit 10.3 Form of Employment Continuation and
Noncompetition Agreement, dated as of December 11,
1998, with James A. Beck.
Exhibit 12 Statements regarding Computation of Ratios:
Ratio of Earnings to Fixed Charges for the Twelve
Months Ended June 30, 1999 and the Years Ended
September 30, 1994 through 1998.
Exhibit 27.1 Financial Data Schedule for the Nine Months
Ended June 30, 1999.
Exhibit 27.2 Amended Financial Data Schedule for the Nine Months
Ended June 30, 1998.
Exhibit 99 National Fuel Gas Company Consolidated Statement
of Income for the Twelve Months Ended June 30, 1999
and 1998.
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
6/17/99
NATIONAL FUEL GAS COMPANY
-------------------------
BY-LAWS
-------
ARTICLE I
---------
Meeting of Stockholders
-----------------------
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
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.
7. A. Business transacted at an annual meeting of stockholders may
include all such business as may properly come before the meeting. Nominations
of persons for election to the Board of Directors and the proposal of business
to be considered by the stockholders may be made at an annual meeting of
stockholders:
(i) pursuant to the Corporation's notice of meeting;
(ii) by or at the direction of the Board of Directors;
or
(iii) by any stockholder who was a stockholder of
record at the time of giving of notice of the
meeting, who is entitled to vote at the meeting
and who complies with the notice procedures set
forth in this Section 7.
B. For nominations or other business to be properly brought before
an annual meeting by a stockholder, the stockholder must have given timely
notice thereof in writing to the Secretary of the Corporation and such other
business must otherwise be a proper matter for stockholder action. Such
stockholder's notice shall set forth:
(i) as to each person whom the stockholder proposes to
nominate for election or reelection as a director:
(a) the name, age, business address of such
person,
(b) the principal occupation of employment
of such person,
(c) the class and number of shares of the
Corporation which are owned beneficially
by such person, and
(d) all other information relating to such
person that is required to be disclosed
in solicitations of proxies for election
of directors in an election contest, or
is otherwise required, in each case
under applicable SEC regulations (as of
February 1999, Regulation 14A under the
Securities Exchange Act of 1934, as
amended, and Rule 14a-11 thereunder),
including such person's written consent
to being named in the proxy statement as
a nominee and to serving as a director
if elected;
(ii) as to any other business that the stockholder
proposes to bring before the meeting, a brief
description of the business desired to be brought
before the meeting, the reasons for conducting
such business at the meeting and any material
interest in such business of such stockholder and
the beneficial owner, if any, on whose behalf the
proposal is made; and
(iii) as to the stockholder giving the notice and the
beneficial owner, if any, on whose behalf the
nomination or proposal is made:
(a) the name and address of such
stockholder, as they appear on the
Corporation's books, and of
such beneficial owner, and
(b) the class and number of shares of the
Corporation which are owned beneficially
and of record by such stockholder and
such beneficial owner.
C. To be timely, a stockholder's notice under this Section 7 must
be delivered to the Secretary at the principal executive offices of the
Corporation not less than 110 days prior to the date corresponding to the date
on which the Corporation first mailed its proxy materials for the prior year's
annual meeting of stockholders; provided, however, that if both:
-----------------
(i) the date of the annual meeting is changed more
than 30 days from the date corresponding to the
date of the prior year's annual meeting; and
---
(ii) notice (or, if earlier, public disclosure of the
date of the annual meeting) is given or made to
the stockholders of the Corporation less than 120
days before the date corresponding to the date on
which the Corporation first mailed its proxy
materials for the prior year's meeting of
stockholders; then
----
(iii) a stockholder's notice to be timely must be so
received not later than the close of business on
the tenth day following the date on which such
notice (or, if earlier, such public disclosure of
the date of the annual meeting) was mailed or
made by the Corporation.
In no event shall the public announcement of an
adjournment of an annual meeting commence a new
time period for the giving of a stockholder's
notice under this Section 7.
D. Only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in accordance with
the procedures set forth in this Section 7. Other than persons nominated by the
full Board or any nominating committee thereof, only such persons who are
nominated in accordance with the procedures set forth in this Section 7 shall be
eligible to serve as directors. The chairman of the meeting shall have the power
and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made or proposed, as the case may be, in
accordance with the procedures set forth in this Section 7 and, if any proposed
nomination or business is not in compliance with this Section 7, to declare that
such defective proposal or nomination shall be disregarded, unless otherwise
provided by any applicable law.
E. Notwithstanding the foregoing provisions of this Section 7, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this Section 7. Nothing in this Section 7 shall be deemed to affect any
rights of:
(i) the stockholders to request inclusion of
proposals in the Corporation's proxy statement
pursuant to Rule 14a-8 under the Exchange Act; or
(ii) the holders of any series of Preferred Stock to
elect directors under specified circumstances.
F. Business transacted at a special meeting of the stockholders
shall be limited to the purposes set forth in the notice of the special meeting.
G. For purposes of this Section 7, the term "public disclosure"
shall mean disclosure in a news release reported by the Dow Jones News Service,
the Associated Press or a comparable national news service, or in a document
publicly filed by the Corporation with the Securities and Exchange Commission
pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as
amended.
8. At each meeting of stockholders, the chairman of the meeting shall
fix and announce the date and time of the opening and the closing of the polls
for each matter upon which the stockholders will vote at the meeting and shall
determine the order of business and all other matters of procedure. The Board of
Directors may adopt by resolution such rules and regulations for the conduct of
meetings of stockholders as it shall deem appropriate. Except to the extent
inconsistent with any such rules and regulations as adopted by the Board of
Directors, the chairman of the meeting may establish rules, which need not be in
writing, to maintain order and safety and for the conduct of the meeting.
Without limiting the foregoing, the chairman of the meeting may:
A. Determine and declare to the meeting that any business is not
properly before the meeting and therefore shall not be considered;
B. Restrict attendance at any time to bona fide shareholders of
record and their proxies and other persons in attendance at the invitation of
the chairman of the meeting;
C. Restrict dissemination of solicitation materials and use of
audio or visual recording devices at the meeting;
D. Adjourn the meeting without a vote of the stockholders, whether
or not there is a quorum present; and
E. Make rules governing speeches and debate, including time limits
and access to microphones.
ARTICLE II
----------
Board of Directors
------------------
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.
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)).
--------
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.
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
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).
--------
ARTICLE III
-----------
Officers
--------
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
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
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
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
----------
Executive Committee
-------------------
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
--------
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.
ARTICLE V
---------
Transfer of Shares
------------------
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
----------
Fiscal Year
-----------
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
-----------
Dividends and Working Capital
-----------------------------
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
------------
Closing of Transfer Books and
Fixing A Record Book
--------------------
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
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
----------
Waiver of Notice
----------------
1. Any notice required to be given by these By-Laws may be waived by
the person entitled thereto.
ARTICLE X
---------
Seal
----
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
----------
Amendment of By-Laws
--------------------
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.
NATIONAL FUEL GAS COMPANY
EMPLOYMENT CONTINUATION
AND
NONCOMPETITION AGREEMENT
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
1. Operation of Agreement.........................................2
a. Effective Date........................................2
b. Termination of Employment
Following a Potential Change in Control............2
2. Definitions....................................................2
a. Change in Control.....................................2
b. Potential Change in Control...........................3
3. Employment Period..............................................3
4. Position and Duties............................................3
5. Compensation...................................................4
a. Base Salary...........................................4
b. Annual Bonus..........................................4
c. Long-term Incentive Compensation Programs.............4
d. Benefit Plans.........................................4
e. Expenses..............................................5
f. Vacation and Fringe Benefits..........................5
g. Indemnification.......................................5
6. Termination....................................................5
a. Death, Disability or Retirement.......................5
b. Voluntary Termination.................................5
c. Cause.................................................6
d. Good Reason...........................................6
e. Notice of Termination.................................7
f. Date of Termination...................................7
7. Obligations of the Company upon Termination....................7
a. Death or Disability...................................7
b. Cause and Voluntary Termination.......................7
c. Termination by the Company other
than for Cause and Termination
by the Executive for Good Reason......................8
i. Severance Benefits................................8
ii. Continuation of Welfare Benefits..................8
iii.Qualification for Early Retirement................9
d. Discharge of the Company's Obligations...............10
e. Limit on Payments by the Company.....................10
i. Application of Section 7(e)......................10
ii. Calculation of Benefits..........................11
iii.Imposition of Payment Cap........................11
iv. Application of Section 280G......................11
v. Applicable Tax Rates.............................12
vi. Adjustments in Respect of the Payment Cap........12
f. If Termination of Employment Occurs
After the Executive Has Reached Age 62...............13
8. Non-exclusivity of Rights.....................................13
9. No Offset .................................................13
10. Non-Competition and Non-Solicitation..........................14
a. Noncompete...........................................14
b. Non-Solicitation of Employees........................14
c. Confidential Information.............................14
d. Non-disparagement....................................14
e. Company Property.....................................15
f. Additional Payment...................................15
11. Injunctive Relief and Other Remedies with
Respect to Covenants..........................................15
12. Successors .................................................15
13. Miscellaneous16
a. Applicable Law.......................................16
b. Arbitration..........................................16
c. Amendments...........................................16
d. Entire Agreement.....................................16
e. Notices..............................................17
f. Source of Payments...................................17
g. Tax Withholding......................................17
h. Severability; Reformation............................18
i. Waiver...............................................18
j. Counterparts.........................................18
k. Captions.............................................18
Signature Page.........................................................18
<PAGE>
EMPLOYMENT CONTINUATION AND
NONCOMPETITION AGREEMENT
THIS AGREEMENT between NATIONAL FUEL GAS DISTRIBUTION CORPORATION, a New
York corporation (the "Company"), NATIONAL FUEL GAS COMPANY, a New Jersey
corporation ("National"), and ________________________ (the "Executive"), dated
as of the 11th day of December, 1998.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Company and National wish to attract and retain well-qualified
executive and key personnel and to assure continuity of management, which will
be essential to its ability to evaluate and respond to any actual or threatened
Change in Control (as defined below) in the best interests of shareholders;
WHEREAS, the Executive is a valuable employee of the Company, an integral
part of its management team and a key participant in the decision making process
relative to short-term and long-term planning and policy for the Company;
WHEREAS, the Company and National understand that any actual or threatened
Change in Control will present significant concerns for the Executive with
respect to his financial and job security;
WHEREAS, the Company and National wish to encourage the Executive to
continue his career and services with the Company for the period during and
after an actual or threatened Change in Control and to assure to the Company the
Executive's services during the period in which such a Change in Control is
threatened, and to provide the Executive certain financial assurances to enable
the Executive to perform the responsibilities of his position without undue
distraction and to exercise his judgment without bias due to his personal
circumstances; and
WHEREAS, the Board of Directors of National, at its meeting on December 10,
1998, determined that it would be in the best interests of National and its
shareholders to assure continuity in the management of National in the event of
a Change in Control by entering into an employment continuation and noncompete
agreement with Executive;
WHEREAS, to achieve these objectives, the Company, National and the
Executive desire to enter into an agreement providing the Company and the
Executive with certain rights and obligations upon the occurrence of a Change in
Control or Potential Change in Control (as defined in Section 2).
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is hereby agreed by and between the Company, National and
the Executive as follows:
1. Operation of Agreement. (a) Effective Date. The effective date of this
----------------------- ---------------
Agreement shall be the date on which a Change in Control occurs (the "Effective
Date"), provided that, except as provided in Section 1(b), if the Executive is
not employed by the Company, National or any of their subsidiaries on the
Effective Date, this Agreement shall be void and without effect.
(b) Termination of Employment Following a Potential Change in Control.
----------------------------------------------------------------------
Notwithstanding Section 1(a), if (i) the Executive's employment is terminated by
the Company Without Cause (as defined in Section 6(c)) after the occurrence of a
Potential Change in Control and prior to the occurrence of a Change in Control
and (ii) a Change in Control occurs within two years of such termination, the
Executive shall be deemed, solely for purposes of determining his rights under
this Agreement, to have remained employed until the date such Change in Control
occurs and to have been terminated by the Company Without Cause immediately
after this Agreement becomes effective.
2. Definitions. (a) Change in Control. For the purposes of this Agreement,
------------ -----------------
a "Change in Control" shall be deemed to have occurred if any of the following
have occurred:
(i) either (a) the Company or National shall receive a report
-
on Schedule 13D, or an amendment to such a report, filed with the
Securities and Exchange Commission pursuant to Section 13(d) of the
Securities Exchange Act of 1934 (the "1934 Act") disclosing that any
person (as such term is used in Section 13(d) of the 1934 Act)
("Person"), is the beneficial owner, directly or indirectly, of twenty
(20) percent or more of the outstanding stock of National or (b) the
Company or National has actual knowledge of facts which would require
any Person to file such a report on Schedule 13D, or to make an
amendment to such a report, with the SEC (or would be required to file
such a report or amendment upon the lapse of the applicable period of
time specified in Section 13(d) of the 1934 Act) disclosing that such
Person is the beneficial owner, directly or indirectly, of twenty (20)
percent or more of the outstanding stock of National;
(ii) purchase by any Person, other than National or a
wholly-owned subsidiary of National or an employee benefit plan
sponsored or maintained by National or a wholly-owned subsidiary of
National, of shares pursuant to a tender or exchange offer to acquire
any stock of National (or securities convertible into stock) for cash,
securities or any other consideration provided that, after consummation
of the offer, such Person is the beneficial owner (as defined in Rule
13d-3 under the 1934 Act), directly or indirectly, of twenty (20)
percent or more of the outstanding stock of National (calculated as
provided in paragraph (d) of Rule 13d-3 under the 1934 Act in the case
of rights to acquire stock);
(iii) approval by the shareholders of National of (a) any
consolidation or merger of National in which National is not the
continuing or surviving corporation or pursuant to which shares of
stock of National would be converted into cash, securities or other
property, other than a consolidation or merger of National in which
holders of its stock immediately prior to the consolidation or merger
have substantially the same proportionate ownership of common stock of
the surviving corporation immediately after the consolidation or merger
as immediately before, or (b) any consolidation or merger in which
National is the continuing or surviving corporation but in which the
common shareholders of National immediately prior to the consolidation
or merger do not hold at least a majority of the outstanding common
stock of the continuing or surviving corporation (except where such
holders of common stock hold at least a majority of the common stock of
the corporation which owns all of the common stock of National), or (c)
any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all the assets
of National; or
(iv) a change in the majority of the members of the Board of
Directors of National (the "Board") within a 24-month period unless the
election or nomination for election by National's shareholders of each
new director was approved by the vote of at least two-thirds of the
directors then still in office who were in office at the beginning of
the 24-month period.
(b) Potential Change in Control. For the purposes of
----------------------------
this Agreement, a Potential Change in Control shall be deemed to have occurred
if:
(i) a Person commences a tender offer (with adequate
financing) for securities representing at least twenty (20) percent of
the outstanding stock of National (calculated as provided in paragraph
(d) of Rule 13d-3 under the 1934 Act in the case of rights to acquire
stock);
(ii) National enters into an agreement the consummation of
which would constitute a Change in Control;
(iii) proxies for the election of directors of National are
solicited by anyone other than National; or
(iv) any other event occurs which is deemed to be a Potential
Change in Control by the Board.
3. Employment Period. Subject to Section 6 of this Agreement,
-----------------
the Company agrees to continue the Executive in its employ, and the Executive
agrees to remain in the employ of the Company, for the period (the "Employment
Period") commencing on the Effective Date and ending on the earlier to occur of
(i) the third anniversary of the Effective Date and (ii) the date on which the
Executive attains age 65.
4. Position and Duties. During the Employment Period, the
-------------------
Executive's position (including titles), authority and responsibilities shall be
at least commensurate with those held, exercised and assigned immediately prior
to the Effective Date. It is understood that, for purposes of this Agreement,
such position, authority and responsibilities shall not be regarded as not
commensurate merely by virtue of the fact that a successor shall have acquired
all or substantially all of the business and/or assets of the Company as
contemplated by Section 12(b) of this Agreement. The Executive's services shall
be performed in the United States and within 30 miles of the location where the
Executive was employed immediately preceding the Effective Date.
5. Compensation. (a) Base Salary. During the Employment
------------- ------------
Period, the Executive shall receive a base salary at a monthly rate at least
equal to the monthly salary paid to the Executive by the Company and any of its
affiliated companies immediately prior to the Effective Date. The base salary
shall be reviewed at least once each year after the Effective Date, and shall be
increased annually at a rate at least equal to the greater of (i) the average
percentage increase for the same period in the compensation of salaried
employees of National and its subsidiaries who are not executives and (ii) the
percentage increase in the national Consumer Price Index for the last completed
calendar year. The Executive's base salary, as it shall be increased from time
to time, shall hereafter be referred to as "Base Salary". Neither the Base
Salary nor any increase in Base Salary after the Effective Date shall serve to
limit or reduce any other obligation of the Company hereunder.
(b) Annual Bonus. During the Employment Period, in addition to
------------
the Base Salary, for each fiscal year of the Company ending during the
Employment Period, the Executive shall be afforded the opportunity to receive an
annual bonus on terms and conditions no less favorable to the Executive (taking
into account reasonable changes in the Company's goals and objectives) than the
annual bonus opportunity that had been made available to the Executive for the
fiscal year ended immediately prior to the Effective Date (the "Annual Bonus
Opportunity"). Any amount payable in respect of the Annual Bonus Opportunity
shall be paid as soon as practicable following the year for which the amount (or
prorated portion) is earned or awarded, unless electively deferred by the
Executive pursuant to any deferral programs or arrangements that the Company may
make available to the Executive.
(c) Long-term Incentive Compensation Programs. During the
---------------------------------------------
Employment Period, the Executive shall participate in all long-term incentive
compensation programs for key executives at a level that is commensurate with
the Executive's participation in such plans immediately prior to the Effective
Date, or, if more favorable to the Executive, at the level made available to the
Executive or other similarly situated officers at any time thereafter.
(d) Benefit Plans. During the Employment Period, the Executive
-------------
(and, to the extent applicable, his dependents) shall be entitled to participate
in or be covered under all pension, retirement, deferred compensation, savings,
medical, dental, health, disability, group life, accidental death and travel
accident insurance plans and programs of the Company and its affiliated
companies at a level that is commensurate with the Executive's participation in
such plans immediately prior to the Effective Date, or, if more favorable to the
Executive, at the level made available to the Executive or other similarly
situated officers at any time thereafter.
(e) Expenses. During the Employment Period, the Executive
--------
shall be entitled to receive prompt reimbursement for all reasonable expenses
incurred by the Executive in accordance with the policies and procedures of the
Company as in effect immediately prior to the Effective Date. Notwithstanding
the foregoing, the Company may apply the policies and procedures in effect after
the Effective Date to the Executive, if such policies and procedures are not
less favorable to the Executive than those in effect immediately prior to the
Effective Date.
(f) Vacation and Fringe Benefits. During the Employment
-------------------------------
Period, the Executive shall be entitled to paid vacation and fringe benefits at
a level that is commensurate with the paid vacation and fringe benefits
available to the Executive immediately prior to the Effective Date, or, if more
favorable to the Executive, at the level made available from time to time to the
Executive or other similarly situated officers at any time thereafter.
(g) Indemnification. During and after the Employment Period,
---------------
National and the Company shall indemnify the Executive and hold the Executive
harmless from and against any claim, loss or cause of action arising from or out
of the Executive's performance as an officer, director or employee of National
or the Company or any of their subsidiaries or in any other capacity, including
any fiduciary capacity, in which the Executive serves at the request of National
or the Company to the maximum extent permitted by applicable law and the
Company's Certificate of Incorporation and By-Laws (the "Governing Documents"),
provided that in no event shall the protection afforded to the Executive
- --------------
hereunder be less than that afforded under the Governing Documents as in effect
immediately prior to the Effective Date.
6. Termination. (a) Death, Disability or Retirement. Subject
------------ -------------------------------
to the provisions of Section 1 hereof, this Agreement shall terminate
automatically upon the Executive's death, termination due to "Disability" (as
defined below) or voluntary retirement under any of the Company's retirement
plans as in effect from time to time. For purposes of this Agreement, Disability
shall mean the Executive's inability to perform the duties of his position, as
determined in accordance with the policies and procedures applicable with
respect to the Company's long-term disability plan, as in effect immediately
prior to the Effective Date.
(b) Voluntary Termination. Notwithstanding anything in this
----------------------
Agreement to the contrary, following a Change in Control the Executive may, upon
not less than 30 days' written notice to the Company, voluntarily terminate
employment for any reason (including early retirement under the terms of any of
the Company's retirement plans as in effect from time to time), provided that
-------------
any termination by the Executive pursuant to Section 6(d) on account of Good
Reason (as defined therein) shall not be treated as a voluntary termination
under this Section 6(b).
(c) Cause. The Company may terminate the Executive's
-----
employment for Cause. For purposes of this Agreement, "Cause" means the
Executive's gross misconduct, fraud or dishonesty, which has resulted or is
likely to result in material economic damage to the Company or National, as
determined in good faith by a vote of at least two-thirds of the non-employee
directors of National at a meeting of the Board at which the Executive is
provided an opportunity to be heard (with representation by counsel of his
choosing, should he so desire)
(d) Good Reason. Following the occurrence of a Change in
------------
Control, the Executive may terminate his employment for Good Reason. For
purposes of this Agreement, "Good Reason" means the occurrence of any of the
following, without the express written consent of the Executive, after the
occurrence of a Change in Control:
(i) (A) the assignment to the Executive of any duties
-
inconsistent in any material adverse respect with the Executive's
position, authority or responsibilities as contemplated by Section 4 of
this Agreement, or (B) any other material adverse change in such
-
position, including titles, authority or responsibilities;
(ii) any failure by the Company to comply with any of the
provisions of Section 5 of this Agreement, other than an insubstantial
or inadvertent failure remedied by the Company promptly after receipt
of notice thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at any
office or location outside of the United States and/or more than 30
miles (or such other lesser distance as shall be set forth in the
Company's relocation policy as in effect at the Effective Date) from
that location at which he performed his services specified under the
provisions of Section 4 immediately prior to the Change in Control,
except for travel reasonably required in the performance of the
Executive's responsibilities; or
(iv) any failure by the Company to obtain the assumption and
agreement to perform this Agreement by a successor as contemplated by
Section 12(b).
In no event shall the mere occurrence of a Change in Control, absent any further
impact on the Executive, be deemed to constitute Good Reason. In the event that
the Executive shall in good faith give a Notice of Termination for Good Reason
and it shall thereafter be determined that Good Reason did not exist, the
Executive shall, unless the Company and the Executive shall otherwise mutually
agree, return to employment with the Company within 5 business days of such
decision, without any impairment or other limitation of his rights hereunder,
except that he shall not be paid his base salary for any period he did not
perform services and his annual bonus opportunity for such year may be reduced
to reflect his period of absence.
(e) Notice of Termination. Any termination by the Company for
---------------------
Cause or by the Executive for Good Reason shall be communicated by Notice of
Termination given in accordance with Section 13(e). For purposes of this
Agreement, a "Notice of Termination" means a written notice given, in the case
of a termination for Cause, within 30 business days of the Company's having
actual knowledge of the events giving rise to such termination, and in the case
of a termination for Good Reason, within 180 days of the Executive's having
actual knowledge of the events giving rise to such termination, and which (i)
-
indicates the specific termination provision in this Agreement relied upon, (ii)
--
sets forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provision so
indicated, and (iii) if the termination date is other than the date of receipt
---
of such notice, specifies the termination date of this Agreement (which date
shall be not more than 15 days after the giving of such notice). The failure by
the Executive to set forth in the Notice of Termination any fact or circumstance
which contributes to a showing of Good Reason shall not waive any right of the
Executive hereunder or preclude the Executive from asserting such fact or
circumstance in enforcing his rights hereunder.
(f) Date of Termination. For the purpose of this Agreement,
--------------------
the term "Date of Termination" means (i) in the case of a termination for which
-
a Notice of Termination is required, the date of receipt of such Notice of
Termination or, if later, the date specified therein, as the case may be, and
(ii) in all other cases, the actual date on which the Executive's employment
--
terminates during the Employment Period.
7. Obligations of the Company upon Termination. (a) Death or
-------------------------------------------- --------
Disability. If the Executive's employment is terminated during the Employment
- ----------
Period by reason of the Executive's death or Disability, this Agreement shall
terminate without further obligations to the Executive or the Executive's legal
representatives under this Agreement other than those obligations accrued
hereunder at the Date of Termination, and the Company shall pay to the Executive
(or his beneficiary or estate) (i) the Executive's full Base Salary through the
-
Date of Termination (the "Earned Salary"), (ii) any vested amounts or benefits
--
owing to the Executive under the Company's otherwise applicable employee benefit
plans and programs, including any compensation previously deferred by the
Executive (together with any accrued earnings thereon) and not yet paid by the
Company (the "Accrued Obligations"), and (iii) any other benefits payable due to
---
the Executive's death or Disability under the Company's plans, policies or
programs (the "Additional Benefits").
Any Earned Salary shall be paid in cash in a single lump sum
as soon as practicable, but in no event more than 15 days (or at such earlier
date required by law), following the Date of Termination. Accrued Obligations
and Additional Benefits shall be paid in accordance with the terms of the
applicable plan, program or arrangement.
(b) Cause and Voluntary Termination. If, during the Employment
-------------------------------
Period, the Executive's employment shall be terminated for Cause or voluntarily
terminated by the Executive (other than on account of Good Reason following a
Change in Control), the Company shall pay the Executive (i) the Earned Salary in
-
cash in a single lump sum as soon as practicable, but in no event more than 10
days, following the Date of Termination, and (ii) the Accrued Obligations in
--
accordance with the terms of the applicable plan, program or arrangement.
(c) Termination by the Company other than for Cause and
---------------------------------------------------------
Termination by the Executive for Good Reason. Subject to Section 7(f) below, if,
- --------------------------------------------
during the Employment Period, the Company terminates the Executive's employment
other than for Cause, or the Executive terminates his employment for Good
Reason, the Company shall pay to the Executive the following amounts:
(i) Severance Benefits. The Executive shall be paid the
------------------
following:
(A) the Executive's Earned Salary;
(B) a cash amount (the "Severance Amount") equal to
(1) 1.99; times
(2) the sum of
(i) the Executive's annual Base Salary;
and
(ii) the average of the annual at risk
compensation incentive program
bonuses or other bonuses (excluding
sign-on bonuses) payable to the
Executive (including, for the
purposes of this calculation, any
amount of such bonuses paid in the
form of restricted stock (in lieu of
cash), to be valued at the date of
grant) for the two fiscal years of
the Company ending immediately prior
to the Effective Date (the "Average
Bonus") ; and
(C) the Accrued Obligations.
The Earned Salary and Severance Amount shall be paid in cash in a
single lump sum as soon as practicable, but in no event more than 10
days (or at such earlier date required by law), following the Date of
Termination; provided however that if the date payment would otherwise
---------------------
be due hereunder is after September 30, payment of the Severance Amount
shall be paid on the first business day in the following January.
Accrued Obligations shall be paid in accordance with the terms of the
applicable plan, program or arrangement.
(ii) Continuation of Welfare Benefits. If, during the
------------------------------------
Employment Period, the Company terminates the Executive's employment
other than for Cause, or following a Change in Control the Executive
terminates his employment for Good Reason, the Executive (and, to the
extent applicable, his dependents) shall be entitled, after the Date of
Termination until the earlier of (1) the third anniversary of the Date
-
of Termination (the "End Date") and (2) the date the Executive becomes
-
eligible for comparable benefits under a similar plan, policy or
program of a subsequent employer, to continue participation in all of
the Company's employee and executive welfare and fringe benefit plans,
excluding further vacation pay (the "Benefit Plans"). To the extent any
such benefits cannot be provided under the terms of the applicable
plan, policy or program, the Company shall provide a comparable benefit
under another plan or from the Company's general assets. The
Executive's participation in the Benefit Plans will be on the same
terms and conditions that would have applied had the Executive
continued to be employed by the Company through the End Date.
(iii) Qualification for Early Retirement. If the Executive is
----------------------------------
at least age 52 at his Date of Termination, the Executive shall be
deemed to have earned, and to have become vested in, the retirement
benefits (including, without limitation, any early retirement subsidy
or supplement, retiree life coverage or retiree medical benefits) that
would have been payable or made available to the Executive under any
employee benefit plan sponsored or maintained by the Company or any of
its subsidiaries for which the Executive was eligible at the Date of
Termination had he continued in service for three additional years
after the Date of Termination. The purpose and intent of this provision
is to provide the Executive with vesting and to bridge any gap of three
or fewer years of service to qualify for any additional benefits
available for an early retiree (such as the benefits under the
Executive Retirement Plan ("ERP") or the benefits available under the
Retirement Plan ("RP") including the so-called Rule of 90), and not to
increase the service taken into account for purpose of determining the
amount of benefits payable to the Executive beyond his actual period of
service through the Date of Termination.
The operation of this provision is illustrated by the following
examples:
Example 1: Assume that, at the Executive's Date of
-----------
Termination, the Executive is exactly 53 years old, and has exactly 4
years of service for purposes of the ERP. Assume further that the
relevant RP and ERP provisions have not changed since the date of the
execution of this Agreement. The Executive would receive a benefit (in
the form of a single life annuity) under the RP and ERP in the
aggregate in the form of a benefit beginning at age 56, equal to 4/5
times what he would otherwise have received under a combination of
those plans beginning at age 56. (Or, he could elect commencement of
benefits at age 55 in reduced amounts per the terms of the relevant
plans.) Five is used in the denominator because the current ERP vesting
policy is attainment of age 55 and at least 5 years of service.
Example 2: The assumptions are the same as in example 1,
-----------
except that the Executive has exactly 32 years of service (instead of
4). By reason of the additional credit provided under this Agreement,
the Executive would receive a benefit calculated as though payable
under the RP (in the form of a single life annuity), under the RP's
"Rule of 90," that would begin at age 55-1/2 and would equal [(53 +
32)/90] times what he would otherwise have received under the RP under
the Rule of 90 beginning at age 55-1/2 (the earliest date at which he
otherwise could have retired and commenced receiving benefits
determined under the Rule of 90).
In both examples, (i) any portion of the incremental benefit
-
that could not be paid under the RP will be paid from the ERP or the
Company's general assets, (ii) final average salaries would be
--
determined under those plans as of the Executive's Date of Termination
and (iii) the Executive would be entitled to elect forms of benefit
---
other than the single life annuity.
Other fact patterns, and examples respecting other
post-retirement benefits, would use similar principles, but might use
different math. For example, the current provisions concerning an
executive's vesting in early retirement benefits under the RP, and
concerning retiree medical benefit vesting, have years of service
requirements in excess of five years.
(d) Discharge of the Company's Obligations. Except as
-------------------------------------------
expressly provided in the last sentence of this Section 7(d), the amounts
payable to the Executive pursuant to this Section 7 (whether or not reduced
pursuant to Section 7(e)) following termination of his employment shall be in
full and complete satisfaction of the Executive's rights under this Agreement
and any other claims he may have in respect of his employment by the Company or
any of its subsidiaries. Such amounts shall constitute liquidated damages with
respect to any and all such rights and claims and, upon the Executive's receipt
of such amounts, the Company shall be released and discharged from any and all
liability to the Executive in connection with this Agreement or otherwise in
connection with the Executive's employment with the Company and its
subsidiaries. Nothing in this Section 7(d) shall be construed to release the
Company from its commitment to indemnify the Executive and hold the Executive
harmless from and against any claim, loss or cause of action arising from or out
of the Executive's performance as an officer, director or employee of the
Company or any of its subsidiaries or in any other capacity, including any
fiduciary capacity, in which the Executive served at the request of the Company
to the maximum extent permitted by applicable law and the Governing Documents.
(e) Limit on Payments by the Company.
--------------------------------
(i) Application of Section 7(e). In the event that any amount
---------------------------
or benefit paid or distributed to the Executive pursuant to this
Agreement, taken together with any amounts or benefits otherwise paid
or distributed to the Executive by the Company or any affiliated
company (collectively, the "Covered Payments"), would be an "excess
parachute payment" as defined in Section 280G of the Code and would
thereby subject the Executive to the tax (the "Excise Tax") imposed
under Section 4999 of the Code (or any similar tax that may hereafter
be imposed), the provisions of this Section 7(e) shall apply to
determine the amounts payable to the Executive pursuant to this
Agreement.
(ii) Calculation of Benefits. Immediately following delivery
-----------------------
of any Notice of Termination, the Company shall notify the Executive of
the aggregate present value of all termination benefits to which he
would be entitled under this Agreement and any other plan, program or
arrangement as of the projected Date of Termination, together with the
projected maximum payments, determined as of such projected Date of
Termination that could be paid without the Executive being subject to
the Excise Tax.
(iii) Imposition of Payment Cap. If
-------------------------
(x) the aggregate value of all compensation payments or
benefits to be paid or provided to the Executive
under this Agreement and any other plan, agreement or
arrangement with the Company exceeds the amount which
can be paid to the Executive without the Executive
incurring an Excise Tax and
(y) the net-after tax amount (taking into account all
applicable taxes payable by the Executive, including
any Excise Tax) that the Executive would receive if
the limitation contained in this Section 7(e)(iii)
were not imposed does not exceed the net-after tax
benefit the Executive would receive if such
limitation were imposed by more than $25,000,
then the amounts payable to the Executive under this Section 7 shall be
reduced (but not below zero) to the maximum amount which may be paid
hereunder without the Executive becoming subject to such an Excise Tax
(such reduced payments to be referred to as the "Payment Cap"). In the
event that the Executive receives reduced payments and benefits
hereunder, the Executive shall have the right to designate which of the
payments and benefits otherwise provided for in this Agreement that he
will receive in connection with the application of the Payment Cap.
(iv) Application of Section 280G. For purposes of determining
---------------------------
whether any of the Covered Payments will be subject to the Excise Tax
and the amount of such Excise Tax,
(A) such Covered Payments will be treated as
"parachute payments" within the meaning of Section
280G of the Code, and all "parachute payments" in
excess of the "base amount" (as defined under Section
280G(b)(3) of the Code) shall be treated as subject
to the Excise Tax, unless, and except to the extent
that, in the good faith judgment of the Company's
independent certified public accountants appointed
prior to the Effective Date or tax counsel selected
by such Accountants (the "Accountants"), the Company
has a reasonable basis to conclude that such Covered
Payments (in whole or in part) either do not
constitute "parachute payments" or represent
reasonable compensation for personal services
actually rendered (within the meaning of Section
280G(b)(4)(B) of the Code) in excess of the portion
of the "base amount" allocable to such Covered
Payments, or such "parachute payments" are otherwise
not subject to such Excise Tax, and
(B) the value of any noncash benefits or any
deferred payment or benefit shall be determined by
the Accountants in accordance with the principles of
Section 280G of the Code.
(v) Applicable Tax Rates. For purposes of determining whether
--------------------
the Executive would receive a greater net after-tax benefit were the
amounts payable under this Agreement reduced in accordance with
Paragraph 7(e)(iii), the Executive shall be deemed to pay:
(A) Federal income taxes at the highest
applicable marginal rate of Federal income taxation
for the calendar year in which the first amounts are
to be paid hereunder, and
(B) any applicable state and local income
taxes at the highest applicable marginal rate of
taxation for such calendar year, net of the maximum
reduction in Federal incomes taxes which could be
obtained from the deduction of such state or local
taxes if paid in such year;
provided, however, that the Executive may request that such
determination be made based on his individual tax circumstances, which
shall govern such determination so long as the Executive provides to
the Accountants such information and documents as the Accountants shall
reasonably request to determine such individual circumstances.
(vi) Adjustments in Respect of the Payment Cap. If the
-----------------------------------------------
Executive receives reduced payments and benefits under this Section
7(e) (or this Section 7(e) is determined not to be applicable to the
Executive because the Accountants conclude that the Executive is not
subject to any Excise Tax) and it is established pursuant to a final
determination of a court or an Internal Revenue Service proceeding (a
"Final Determination") that, notwithstanding the good faith of the
Executive and the Company in applying the terms of this Agreement, the
aggregate "parachute payments" within the meaning of Section 280G of
the Code paid to the Executive or for his benefit are in an amount that
would result in the Executive being subject an Excise Tax, then the
amount equal to such excess parachute payments shall be deemed for all
purposes to be a loan to the Executive made on the date of receipt of
such excess payments, which the Executive shall have an obligation to
repay to the Company on demand, together with interest on such amount
at the applicable Federal rate (as defined in Section 1274(d) of the
Code) from the date of the payment hereunder to the date of repayment
by the Executive. If this Section 7(e) is not applied to reduce the
Executive's entitlement under this Section 7 because the Accountants
determine that the Executive would not receive a greater net-after tax
benefit by applying this Section 7(e) and it is established pursuant to
a Final Determination that, notwithstanding the good faith of the
Executive and the Company in applying the terms of this Agreement, the
Executive would have received a greater net after tax benefit by
subjecting his payments and benefits hereunder to the Payment Cap, then
the aggregate "parachute payments" paid to the Executive or for his
benefit in excess of the Payment Cap shall be deemed for all purposes a
loan to the Executive made on the date of receipt of such excess
payments, which the Executive shall have an obligation to repay to the
Company on demand, together with interest on such amount at the
applicable Federal rate (as defined in Section 1274(d) of the Code)
from the date of the payment hereunder to the date of repayment by the
Executive. If the Executive receives reduced payments and benefits by
reason of this Section 7(e) and it is established pursuant to a Final
Determination that the Executive could have received a greater amount
without exceeding the Payment Cap, then the Company shall promptly
thereafter pay the Executive the aggregate additional amount which
could have been paid without exceeding the Payment Cap, together with
interest on such amount at the applicable Federal rate (as defined in
Section 1274(d) of the Code) from the original payment due date to the
date of actual payment by the Company.
(f) If Termination of Employment Occurs After the Executive
----------------------------------------------------------
Has Reached Age 62. Notwithstanding anything else to the contrary contained in
- ------------------
this Section 7, if the Executive's employment with the Company terminates at any
time during the 3 year period ending on the first day of the month following the
Executive's sixty-fifth birthday (the "Normal Retirement Date"), and the
Executive would be entitled to receive severance benefits under paragraphs 7(c),
then (i) the multiplier in paragraph 7(c)(i)(B) shall not be 1.99, but shall be
-
a number equal to 1.99 times (x/1095), where x equals the number of days
remaining until the Executive's Normal Retirement Date, and (ii) the End Date
--
described in Section 7(c)(ii) shall not be the third anniversary of the Date of
Termination, but shall be the Executive's Normal Retirement Date.
8. Non-exclusivity of Rights. Except as expressly provided
--------------------------
herein, nothing in this Agreement shall prevent or limit the Executive's
continuing or future participation in any benefit, bonus, incentive or other
plan or program provided by the Company or any of its affiliated companies and
for which the Executive may qualify, nor shall anything herein limit or
otherwise prejudice such rights as the Executive may have under any other
agreements with the Company or any of its affiliated companies, including
employment agreements or stock option agreements. Amounts which are vested
benefits or which the Executive is otherwise entitled to receive under any plan
or program of the Company or any of its affiliated companies at or subsequent to
the Date of Termination shall be payable in accordance with such plan or
program.
9. No Offset. The Company's obligation to make the payments
---------
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Company may have against the Executive or others whether by reason of the
subsequent employment of the Executive or otherwise.
10. Non-Competition and Non-Solicitation. (a) Noncompete.
--------------------------------------- ----------
Unless the Executive otherwise elects by written notice to the Company prior to
his Date of Termination (or in the case of a Company initiated termination,
within 5 business days of receipt of a Notice of Termination, if such period
extends beyond the Date of Termination) not to be bound by the provisions of
this Section 10(a), during the one year period following the Executive's Date of
Termination for any reason (the "Restriction Period"), Executive shall not,
directly or indirectly, engage in, become employed by, serve as an agent or
consultant to, or become a partner, principal or stockholder (other than a
holder of less than 1% of the outstanding voting shares of any publicly held
company) of any business or entity that is engaged in any activity which is
competitive with the business of the Company, National and their respective
subsidiaries or affiliates in any geographic area in which the Company, National
and/or any of their respective subsidiaries or affiliates is engaged in such
competitive business.
(b) Non-Solicitation of Employees. Regardless of whether the
-----------------------------
Executive has elected to be bound by Section 10(a), during the Restriction
Period, the Executive shall not, directly or indirectly, for his own account or
for the account of any other person or entity with which he is or shall become
associated in any capacity, solicit for employment, employ or otherwise
interfere with the relationship of Employer with any person who at any time
during the six months preceding such solicitation, employment or interference is
or was employed by or otherwise engaged to perform services for Employer other
than any such solicitation or employment during the Executive's employment with
Employer on behalf of Employer.
(c) Confidential Information. Regardless of whether the
-------------------------
Executive has elected to be bound by Section 10(a), the Executive shall hold in
a fiduciary capacity for the benefit of National and the Company all secret or
confidential information, knowledge or data relating to National, the Company or
any of their affiliated companies, and their respective businesses, (i) obtained
-
by the Executive during his employment by the Company or any of its affiliated
companies and (ii) not otherwise public knowledge (other than by reason of an
--
unauthorized act by the Executive). After termination of the Executive's
employment with the Company, the Executive shall not, without the prior written
consent of the Company, unless compelled pursuant to an order of a court or
other body having jurisdiction over such matter, communicate or divulge any such
information, knowledge or data to anyone other than the Company and those
designated by it.
(d) Non-disparagement. Regardless of whether the Executive has
-----------------
elected to be bound by Section 10(a), the Executive shall not publicly or
privately disparage National or the Company, or any of their subsidiaries or
affiliates, including any aspect of their respective business, products,
employees, management or Board of Directors, in any manner which could adversely
effect the business of National, the Company or such subsidiaries or affiliates.
Furthermore, the Executive shall not, directly or indirectly, take any action or
fail to take any action with the purpose of interfering with, damaging or
disrupting the assets or business operations or affairs of National or the
Company or any of their respective subsidiaries or affiliates.
National and the Company shall not publicly or privately
disparage the Executive, either personally or professionally. Nothing in
this paragraph shall be construed to prevent any officer of National or the
Company from discussing the Executive's performance internally in the ordinary
course of business.
(e) Company Property. Except as expressly provided herein,
-----------------
promptly following the Executive's termination of employment, the Executive
shall return to the Company all property of National and the Company and all
copies thereof in the Executive's possession or under his control.
(f) Additional Payment. Unless the Executive has elected not
-------------------
to be bound by Section 10(a), the Company shall make an additional lump sum
payment to the Executive within 30 days following the Executive's Date of
Termination equal to one times the sum of (i) the Executive's annual Base Salary
-
and (ii) the Executive's Average Bonus as compensation for the covenant
--
contained in Section 10(a).
11. Injunctive Relief and Other Remedies with Respect to
---------------------------------------------------------
Covenants. The Executive acknowledges and agrees that the covenants and
- ---------
obligations of the Executive set forth in Section 10 relate to special, unique
and extraordinary matters and that a violation of any of the terms of such
covenants and obligations will cause the Company irreparable injury for which
adequate remedies are not available at law. Therefore, the Executive agrees that
the Company shall be entitled to an injunction, restraining order or such other
equitable relief (without the requirement to post bond) restraining the
Executive from committing any violation of the covenants and obligations
contained in Section 10 These remedies are cumulative and are in addition to any
other rights and remedies the Company may have at law or in equity. In no event
shall an asserted violation of the provisions of Section 10 constitute a basis
for deferring or withholding any amounts otherwise payable to the Executive
under this Agreement.
12. Successors. (a) This Agreement is personal to the
----------
Executive and, without the prior written consent of the Company, shall not be
assignable by the Executive otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit of and be enforceable by
the Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be
binding upon the Company and its successors. The Company shall require any
successor to all or substantially all of the business and/or assets of the
Company, whether direct or indirect, by purchase, merger, consolidation,
acquisition of stock, or otherwise, by an agreement in form and substance
satisfactory to the Executive, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent as the Company would be
required to perform if no such succession had taken place.
13. Miscellaneous. (a) Applicable Law. This Agreement
------------- --------------
shall be governed by and construed in accordance with the laws of the State of
New York, applied without reference to principles of conflict of laws.
(b) Arbitration. Except to the extent provided in Section 11,
-----------
in the event that any dispute, controversy or claim arises between the Company
or National and the Executive with respect to the subject matter of this
Agreement and the enforcement of rights hereunder, such dispute, controversy or
claim shall be resolved by binding arbitration before a panel of three
arbitrators selected in accordance with the American Arbitration Association
(the "AAA"). The arbitration shall be conducted in accordance with the Expedited
Employment Arbitration Rules of the American Arbitration Association then in
effect at the time of the arbitration (or such other rules as the parties may
agree to in writing), and otherwise in accordance with principles which would be
applied by a court of law or equity. The determination reached in such
arbitration shall be final and binding on both parties without any right of
appeal or further dispute. Execution of the determination by such arbitration
panel may be sought in any court of competent jurisdiction. The arbitrators
shall not be bound by judicial formalities and may abstain from following the
strict rules of evidence and shall interpret this Agreement as an honorable
engagement and not merely as a legal obligation. Unless otherwise agreed by the
parties, any such arbitration shall take place in a location selected by the
Company which is a convenient forum for such arbitration (taking into account
the availability of a sufficient pool of experienced arbitrators) and not more
than 100 miles from the Executive's principal place of employment at the
Effective Date (or at such other location as may be agreed upon by the parties),
and shall be conducted in accordance with the Rules of the AAA. In the event of
the occurrence of any proceeding (including the appeal of an arbitration
decision) between the Company or National and the Executive with respect to the
subject matter of this Agreement and the enforcement of rights hereunder, the
Company or National shall reimburse the Executive for all reasonable costs and
expenses relating to such proceeding, including reasonable attorneys' fees and
expenses, regardless of the final outcome, unless the arbitration panel
determines that recovery by the Executive of all or a part of such fees, costs
and expenses would be unjust. In no event shall the Executive reimburse the
Company for any of the costs and expenses relating to such litigation or other
proceeding.
(c) Amendments. This Agreement may not be amended or modified
----------
otherwise than by a written agreement executed by the parties hereto or their
respective successors and legal representatives.
(d) Entire Agreement. This Agreement constitutes the entire
-----------------
agreement between the parties hereto with respect to the matters referred to
herein and expressly supersedes the Change in Control Agreement by and between
the Executive, National and the Company dated as of May 1, 1992; provided,
---------
however, that this Agreement is not intended to impair any rights of the
- --------------
Executive under any prior written agreement, any employee benefit plan of the
Company or a Subsidiary or any written policy, program or procedure of the
Company or a Subsidiary unless and to the extent specifically provided herein.
No other agreement relating to the terms of the Executive's employment by the
Company, oral or otherwise, shall be binding between the parties unless it is in
writing and signed by the party against whom enforcement is sought. There are no
promises, representations, inducements or statements between the parties other
than those that are expressly contained herein. The Executive acknowledges that
he is entering into this Agreement of his own free will and accord, and with no
duress, that he has read this Agreement and that he understands it and its legal
consequences.
(e) Notices. All notices and other communications hereunder
-------
shall be in writing and shall be given by hand-delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive: at the home address of the Executive noted
on the records of the Company
If to the Company: National Fuel Gas Distribution Corporation
10 Lafayette Square
Buffalo, N.Y. 14203
Attention: Corporate Secretary
If to National: National Fuel Gas Company
10 Lafayette Square
Buffalo, NY 14203
Attention: Corporate Secretary
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(f) Source of Payments. All payments provided for in paragraph
------------------
3 above shall be paid in cash from the general funds of the Company or National;
provided, however, that such payments shall be reduced by the amount of any
payments made to the Executive or his dependents, beneficiaries or estate from
any trust or special or separate fund established by the Company or National to
assure such payments. The Company or National shall not be required to establish
a special or separate fund or other segregation of assets to assure such
payments, and, if the Company or National shall make any investments to aid it
in meeting its obligations hereunder, the Executive shall have no right, title
or interest whatever in or to any such investments except as may otherwise be
expressly provided in a separate written instrument relating to such
investments. Nothing contained in this Agreement, and no action taken pursuant
to its provisions, shall create or be construed to create a trust of any kind or
a fiduciary relationship, between the Company or National and the Executive or
any other person. To the extent that any person acquires a right to receive
payments from the Company or National such right shall be no greater than the
right of an unsecured creditor of the Company or National.
(g) Tax Withholding. The Company shall withhold from any
----------------
amounts payable under this Agreement such Federal, state or local taxes as shall
be required to be withheld pursuant to any applicable law or regulation.
(h) Severability; Reformation. In the event that one or more
--------------------------
of the provisions of this Agreement shall become invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby. In the
event that any of the provisions of any of Section 10 are not enforceable in
accordance with its terms, the Executive and the Company agree that such Section
shall be reformed to make such Section enforceable in a manner which provides
the Company the maximum rights permitted at law.
(i) Waiver. Waiver by any party hereto of any breach or
------
default by the other party of any of the terms of this Agreement shall not
operate as a waiver of any other breach or default, whether similar to or
different from the breach or default waived. No waiver of any provision of this
Agreement shall be implied from any course of dealing between the parties hereto
or from any failure by either party hereto to assert its or the Executive's
rights hereunder on any occasion or series of occasions.
(j) Counterparts. This Agreement may be executed in
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
(k) Captions. The captions of this Agreement are not part of
--------
the provisions hereof and shall have no force or effect.
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set his hand
and the Company has caused this Agreement to be executed in its name on its
behalf, and its corporate seal to be hereunto affixed and attested by its
Secretary, all as of the day and year first above written.
NATIONAL FUEL GAS DISTRIBUTION
CORPORATION
Attest: /s/ By: /s/
-------------------- -------------------------
Secretary Title: Chairman
NATIONAL FUEL GAS COMPANY
Attest: /s/ By: /s/
-------------------- -------------------------
Secretary Title: Chairman, President & CEO
EXECUTIVE:
/s/
-------------------------
NATIONAL FUEL GAS COMPANY
EMPLOYMENT CONTINUATION
AND
NONCOMPETITION AGREEMENT
<PAGE>
TABLE OF CONTENTS
Page
----
1. Operation of Agreement.......................................2
a. Effective Date......................................2
b. Termination of Employment Following a
Potential Change in Control.........................2
2. Definitions..................................................2
a. Change in Control...................................2
b. Potential Change in Control.........................3
3. Employment Period............................................3
4. Position and Duties..........................................3
5. Compensation.................................................4
a. Base Salary.........................................4
b. Annual Bonus........................................4
c. Long-term Incentive Compensation Programs...........4
d. Benefit Plans.......................................4
e. Expenses............................................5
f. Vacation and Fringe Benefits........................5
g. Indemnification.....................................5
6. Termination..................................................5
a. Death, Disability or Retirement.....................5
b. Voluntary Termination...............................5
c. Cause...............................................6
d. Good Reason.........................................6
e. Notice of Termination...............................7
f. Date of Termination.................................7
7. Obligations of the Company upon Termination..................7
a. Death or Disability.................................7
b. Cause and Voluntary Termination.....................7
c. Termination by the Company other
than for Cause and Termination
by the Executive for Good Reason....................8
i. Severance Benefits..............................8
ii. Continuation of Welfare Benefits................8
iii.Qualification for Early Retirement..............9
d. Discharge of the Company's Obligations.............10
e. Limit on Payments by the Company...................10
i. Application of Section 7(e)....................10
ii. Calculation of Benefits........................11
iii.Imposition of Payment Cap......................11
iv. Application of Section 280G....................11
v. Applicable Tax Rates...........................12
vi. Adjustments in Respect of the Payment Cap......12
f. If Termination of Employment Occurs
After the Executive Has
Reached Age 62.....................................13
8. Non-exclusivity of Rights...................................13
9. No Offset ...............................................13
10. Non-Competition and Non-Solicitation........................14
a. Noncompete.........................................14
b. Non-Solicitation of Employees......................14
c. Confidential Information...........................14
d. Non-disparagement..................................14
e. Company Property...................................15
f. Additional Payment.................................15
11. Injunctive Relief and Other Remedies
with Respect to Covenants...................................15
12. Successors ...............................................15
13. Miscellaneous16
a. Applicable Law.....................................16
b. Arbitration........................................16
c. Amendments.........................................16
d. Entire Agreement...................................16
e. Notices............................................17
f. Source of Payments.................................17
g. Tax Withholding....................................17
h. Severability; Reformation..........................18
i. Waiver.............................................18
j. Counterparts.......................................18
k. Captions...........................................18
Signature Page.......................................................18
<PAGE>
EMPLOYMENT CONTINUATION AND
NONCOMPETITION AGREEMENT
THIS AGREEMENT between NATIONAL FUEL GAS SUPPLY CORPORATION, a Pennsylvania
corporation (the "Company"), NATIONAL FUEL GAS COMPANY, a New Jersey corporation
("National"), and __________________ (the "Executive"), dated as of the 11th day
of December, 1998.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Company and National wish to attract and retain well-qualified
executive and key personnel and to assure continuity of management, which will
be essential to its ability to evaluate and respond to any actual or threatened
Change in Control (as defined below) in the best interests of shareholders;
WHEREAS, the Executive is a valuable employee of the Company, an integral
part of its management team and a key participant in the decision making process
relative to short-term and long-term planning and policy for the Company;
WHEREAS, the Company and National understand that any actual or threatened
Change in Control will present significant concerns for the Executive with
respect to his financial and job security;
WHEREAS, the Company and National wish to encourage the Executive to
continue his career and services with the Company for the period during and
after an actual or threatened Change in Control and to assure to the Company the
Executive's services during the period in which such a Change in Control is
threatened, and to provide the Executive certain financial assurances to enable
the Executive to perform the responsibilities of his position without undue
distraction and to exercise his judgment without bias due to his personal
circumstances; and
WHEREAS, the Board of Directors of National, at its meeting on December 10,
1998, determined that it would be in the best interests of National and its
shareholders to assure continuity in the management of National in the event of
a Change in Control by entering into an employment continuation and noncompete
agreement with Executive;
WHEREAS, to achieve these objectives, the Company, National and the
Executive desire to enter into an agreement providing the Company and the
Executive with certain rights and obligations upon the occurrence of a Change in
Control or Potential Change in Control (as defined in Section 2).
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is hereby agreed by and between the Company, National and
the Executive as follows:
1. Operation of Agreement. (a) Effective Date. The effective
---------------------- ---------------
date of this Agreement shall be the date on which a Change in Control occurs
(the "Effective Date"), provided that, except as provided in Section 1(b), if
the Executive is not employed by the Company, National or any of their
subsidiaries on the Effective Date, this Agreement shall be void and without
effect.
(b) Termination of Employment Following a Potential Change in
----------------------------------------------------------
Control. Notwithstanding Section 1(a), if (i) the Executive's employment is
- ------- -
terminated by the Company Without Cause (as defined in Section 6(c)) after the
occurrence of a Potential Change in Control and prior to the occurrence of a
Change in Control and (ii) a Change in Control occurs within two years of such
--
termination, the Executive shall be deemed, solely for purposes of determining
his rights under this Agreement, to have remained employed until the date such
Change in Control occurs and to have been terminated by the Company Without
Cause immediately after this Agreement becomes effective.
2. Definitions. (a) Change in Control. For the purposes of
----------- -----------------
this Agreement, a "Change in Control" shall be deemed to have occurred if any of
the following have occurred:
(i) either (a) the Company or National shall receive a report
-
on Schedule 13D, or an amendment to such a report, filed with the
Securities and Exchange Commission pursuant to Section 13(d) of the
Securities Exchange Act of 1934 (the "1934 Act") disclosing that any
person (as such term is used in Section 13(d) of the 1934 Act)
("Person"), is the beneficial owner, directly or indirectly, of twenty
(20) percent or more of the outstanding stock of National or (b) the
-
Company or National has actual knowledge of facts which would require
any Person to file such a report on Schedule 13D, or to make an
amendment to such a report, with the SEC (or would be required to file
such a report or amendment upon the lapse of the applicable period of
time specified in Section 13(d) of the 1934 Act) disclosing that such
Person is the beneficial owner, directly or indirectly, of twenty (20)
percent or more of the outstanding stock of National;
(ii) purchase by any Person, other than National or a
wholly-owned subsidiary of National or an employee benefit plan
sponsored or maintained by National or a wholly-owned subsidiary of
National, of shares pursuant to a tender or exchange offer to acquire
any stock of National (or securities convertible into stock) for cash,
securities or any other consideration provided that, after consummation
of the offer, such Person is the beneficial owner (as defined in Rule
13d-3 under the 1934 Act), directly or indirectly, of twenty (20)
percent or more of the outstanding stock of National (calculated as
provided in paragraph (d) of Rule 13d-3 under the 1934 Act in the case
of rights to acquire stock);
(iii) approval by the shareholders of National of (a) any
consolidation or merger of National in which National is not the
continuing or surviving corporation or pursuant to which shares of
stock of National would be converted into cash, securities or other
property, other than a consolidation or merger of National in which
holders of its stock immediately prior to the consolidation or merger
have substantially the same proportionate ownership of common stock of
the surviving corporation immediately after the consolidation or merger
as immediately before, or (b) any consolidation or merger in which
National is the continuing or surviving corporation but in which the
common shareholders of National immediately prior to the consolidation
or merger do not hold at least a majority of the outstanding common
stock of the continuing or surviving corporation (except where such
holders of common stock hold at least a majority of the common stock of
the corporation which owns all of the common stock of National), or (c)
any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all the assets
of National; or
(iv) a change in the majority of the members of the Board of
Directors of National (the "Board") within a 24-month period unless the
election or nomination for election by National's shareholders of each
new director was approved by the vote of at least two-thirds of the
directors then still in office who were in office at the beginning of
the 24-month period.
(b) Potential Change in Control. For the purposes of this
-----------------------------
Agreement, a Potential Change in Control shall be deemed to have occurred if:
(i) a Person commences a tender offer (with adequate
financing) for securities representing at least twenty (20) percent of
the outstanding stock of National (calculated as provided in paragraph
(d) of Rule 13d-3 under the 1934 Act in the case of rights to acquire
stock);
(ii) National enters into an agreement the consummation of
which would constitute a Change in Control;
(iii) proxies for the election of directors of National are
solicited by anyone other than National; or
(iv) any other event occurs which is deemed to be a Potential
Change in Control by the Board.
3. Employment Period. Subject to Section 6 of this Agreement,
-----------------
the Company agrees to continue the Executive in its employ, and the Executive
agrees to remain in the employ of the Company, for the period (the "Employment
Period") commencing on the Effective Date and ending on the earlier to occur of
(i) the third anniversary of the Effective Date and (ii) the date on which the
Executive attains age 65.
4. Position and Duties. During the Employment Period, the
-------------------
Executive's position (including titles), authority and responsibilities shall be
at least commensurate with those held, exercised and assigned immediately prior
to the Effective Date. It is understood that, for purposes of this Agreement,
such position, authority and responsibilities shall not be regarded as not
commensurate merely by virtue of the fact that a successor shall have acquired
all or substantially all of the business and/or assets of the Company as
contemplated by Section 12(b) of this Agreement. The Executive's services shall
be performed in the United States and within 30 miles of the location where the
Executive was employed immediately preceding the Effective Date.
5. Compensation. (a) Base Salary. During the Employment
------------ ------------
Period, the Executive shall receive a base salary at a monthly rate at least
equal to the monthly salary paid to the Executive by the Company and any of its
affiliated companies immediately prior to the Effective Date. The base salary
shall be reviewed at least once each year after the Effective Date, and shall be
increased annually at a rate at least equal to the greater of (i) the average
percentage increase for the same period in the compensation of salaried
employees of National and its subsidiaries who are not executives and (ii) the
percentage increase in the national Consumer Price Index for the last completed
calendar year. The Executive's base salary, as it shall be increased from time
to time, shall hereafter be referred to as "Base Salary". Neither the Base
Salary nor any increase in Base Salary after the Effective Date shall serve to
limit or reduce any other obligation of the Company hereunder.
(b) Annual Bonus. During the Employment Period, in addition to
------------
the Base Salary, for each fiscal year of the Company ending during the
Employment Period, the Executive shall be afforded the opportunity to receive an
annual bonus on terms and conditions no less favorable to the Executive (taking
into account reasonable changes in the Company's goals and objectives) than the
annual bonus opportunity that had been made available to the Executive for the
fiscal year ended immediately prior to the Effective Date (the "Annual Bonus
Opportunity"). Any amount payable in respect of the Annual Bonus Opportunity
shall be paid as soon as practicable following the year for which the amount (or
prorated portion) is earned or awarded, unless electively deferred by the
Executive pursuant to any deferral programs or arrangements that the Company may
make available to the Executive.
(c) Long-term Incentive Compensation Programs. During the
--------------------------------------------
Employment Period, the Executive shall participate in all long-term incentive
compensation programs for key executives at a level that is commensurate with
the Executive's participation in such plans immediately prior to the Effective
Date, or, if more favorable to the Executive, at the level made available to the
Executive or other similarly situated officers at any time thereafter.
(d) Benefit Plans. During the Employment Period, the Executive
-------------
(and, to the extent applicable, his dependents) shall be entitled to participate
in or be covered under all pension, retirement, deferred compensation, savings,
medical, dental, health, disability, group life, accidental death and travel
accident insurance plans and programs of the Company and its affiliated
companies at a level that is commensurate with the Executive's participation in
such plans immediately prior to the Effective Date, or, if more favorable to the
Executive, at the level made available to the Executive or other similarly
situated officers at any time thereafter.
(e) Expenses. During the Employment Period, the Executive
--------
shall be entitled to receive prompt reimbursement for all reasonable expenses
incurred by the Executive in accordance with the policies and procedures of the
Company as in effect immediately prior to the Effective Date. Notwithstanding
the foregoing, the Company may apply the policies and procedures in effect after
the Effective Date to the Executive, if such policies and procedures are not
less favorable to the Executive than those in effect immediately prior to the
Effective Date.
(f) Vacation and Fringe Benefits. During the Employment
-------------------------------
Period, the Executive shall be entitled to paid vacation and fringe benefits at
a level that is commensurate with the paid vacation and fringe benefits
available to the Executive immediately prior to the Effective Date, or, if more
favorable to the Executive, at the level made available from time to time to the
Executive or other similarly situated officers at any time thereafter.
(g) Indemnification. During and after the Employment Period,
---------------
National and the Company shall indemnify the Executive and hold the Executive
harmless from and against any claim, loss or cause of action arising from or out
of the Executive's performance as an officer, director or employee of National
or the Company or any of their subsidiaries or in any other capacity, including
any fiduciary capacity, in which the Executive serves at the request of National
or the Company to the maximum extent permitted by applicable law and the
Company's Certificate of Incorporation and By-Laws (the "Governing Documents"),
provided that in no event shall the protection afforded to the Executive
- --------------
hereunder be less than that afforded under the Governing Documents as in effect
immediately prior to the Effective Date.
6. Termination. (a) Death, Disability or Retirement. Subject
----------- -------------------------------
to the provisions of Section 1 hereof, this Agreement shall terminate
automatically upon the Executive's death, termination due to "Disability" (as
defined below) or voluntary retirement under any of the Company's retirement
plans as in effect from time to time. For purposes of this Agreement, Disability
shall mean the Executive's inability to perform the duties of his position, as
determined in accordance with the policies and procedures applicable with
respect to the Company's long-term disability plan, as in effect immediately
prior to the Effective Date.
(b) Voluntary Termination. Notwithstanding anything in this
----------------------
Agreement to the contrary, following a Change in Control the Executive may, upon
not less than 30 days' written notice to the Company, voluntarily terminate
employment for any reason (including early retirement under the terms of any of
the Company's retirement plans as in effect from time to time), provided that
-------------
any termination by the Executive pursuant to Section 6(d) on account of Good
Reason (as defined therein) shall not be treated as a voluntary termination
under this Section 6(b).
(c) Cause. The Company may terminate the Executive's
-----
employment for Cause. For purposes of this Agreement, "Cause" means the
Executive's gross misconduct, fraud or dishonesty, which has resulted or is
likely to result in material economic damage to the Company or National, as
determined in good faith by a vote of at least two-thirds of the non-employee
directors of National at a meeting of the Board at which the Executive is
provided an opportunity to be heard (with representation by counsel of his
choosing, should he so desire)
(d) Good Reason. Following the occurrence of a Change in
------------
Control, the Executive may terminate his employment for Good Reason. For
purposes of this Agreement, "Good Reason" means the occurrence of any of the
following, without the express written consent of the Executive, after the
occurrence of a Change in Control:
(i) (A) the assignment to the Executive of any duties
-
inconsistent in any material adverse respect with the Executive's
position, authority or responsibilities as contemplated by Section 4 of
this Agreement, or (B) any other material adverse change in such
-
position, including titles, authority or responsibilities;
(ii) any failure by the Company to comply with any of the
provisions of Section 5 of this Agreement, other than an insubstantial
or inadvertent failure remedied by the Company promptly after receipt
of notice thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at any
office or location outside of the United States and/or more than 30
miles (or such other lesser distance as shall be set forth in the
Company's relocation policy as in effect at the Effective Date) from
that location at which he performed his services specified under the
provisions of Section 4 immediately prior to the Change in Control,
except for travel reasonably required in the performance of the
Executive's responsibilities; or
(iv) any failure by the Company to obtain the assumption and
agreement to perform this Agreement by a successor as contemplated by
Section 12(b).
In no event shall the mere occurrence of a Change in Control, absent any further
impact on the Executive, be deemed to constitute Good Reason. In the event that
the Executive shall in good faith give a Notice of Termination for Good Reason
and it shall thereafter be determined that Good Reason did not exist, the
Executive shall, unless the Company and the Executive shall otherwise mutually
agree, return to employment with the Company within 5 business days of such
decision, without any impairment or other limitation of his rights hereunder,
except that he shall not be paid his base salary for any period he did not
perform services and his annual bonus opportunity for such year may be reduced
to reflect his period of absence.
(e) Notice of Termination. Any termination by the Company for
---------------------
Cause or by the Executive for Good Reason shall be communicated by Notice of
Termination given in accordance with Section 13(e). For purposes of this
Agreement, a "Notice of Termination" means a written notice given, in the case
of a termination for Cause, within 30 business days of the Company's having
actual knowledge of the events giving rise to such termination, and in the case
of a termination for Good Reason, within 180 days of the Executive's having
actual knowledge of the events giving rise to such termination, and which (i)
-
indicates the specific termination provision in this Agreement relied upon, (ii)
--
sets forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provision so
indicated, and (iii) if the termination date is other than the date of receipt
---
of such notice, specifies the termination date of this Agreement (which date
shall be not more than 15 days after the giving of such notice). The failure by
the Executive to set forth in the Notice of Termination any fact or circumstance
which contributes to a showing of Good Reason shall not waive any right of the
Executive hereunder or preclude the Executive from asserting such fact or
circumstance in enforcing his rights hereunder.
(f) Date of Termination. For the purpose of this Agreement,
--------------------
the term "Date of Termination" means (i) in the case of a termination for which
-
a Notice of Termination is required, the date of receipt of such Notice of
Termination or, if later, the date specified therein, as the case may be, and
(ii) in all other cases, the actual date on which the Executive's employment
--
terminates during the Employment Period.
7. Obligations of the Company upon Termination. (a) Death or
-------------------------------------------- --------
Disability. If the Executive's employment is terminated during the Employment
- ----------
Period by reason of the Executive's death or Disability, this Agreement shall
terminate without further obligations to the Executive or the Executive's legal
representatives under this Agreement other than those obligations accrued
hereunder at the Date of Termination, and the Company shall pay to the Executive
(or his beneficiary or estate) (i) the Executive's full Base Salary through the
-
Date of Termination (the "Earned Salary"), (ii) any vested amounts or benefits
--
owing to the Executive under the Company's otherwise applicable employee benefit
plans and programs, including any compensation previously deferred by the
Executive (together with any accrued earnings thereon) and not yet paid by the
Company (the "Accrued Obligations"), and (iii) any other benefits payable due to
---
the Executive's death or Disability under the Company's plans, policies or
programs (the "Additional Benefits").
Any Earned Salary shall be paid in cash in a single lump sum
as soon as practicable, but in no event more than 15 days (or at such earlier
date required by law), following the Date of Termination. Accrued Obligations
and Additional Benefits shall be paid in accordance with the terms of the
applicable plan, program or arrangement.
(b) Cause and Voluntary Termination. If, during the Employment
-------------------------------
Period, the Executive's employment shall be terminated for Cause or voluntarily
terminated by the Executive (other than on account of Good Reason following a
Change in Control), the Company shall pay the Executive (i) the Earned Salary in
-
cash in a single lump sum as soon as practicable, but in no event more than 10
days, following the Date of Termination, and (ii) the Accrued Obligations in
--
accordance with the terms of the applicable plan, program or arrangement.
(c) Termination by the Company other than for Cause and
---------------------------------------------------------
Termination by the Executive for Good Reason. Subject to Section 7(f) below, if,
- --------------------------------------------
during the Employment Period, the Company terminates the Executive's employment
other than for Cause, or the Executive terminates his employment for Good
Reason, the Company shall pay to the Executive the following amounts:
(i) Severance Benefits. The Executive shall be paid the
------------------
following:
(A) the Executive's Earned Salary;
(B) a cash amount (the "Severance Amount") equal to
(1) 1.99; times
(2) the sum of
(i) the Executive's annual Base Salary;
-
and
(ii) the average of the annual at risk
--
compensation incentive program
bonuses or other bonuses (excluding
sign-on bonuses) payable to the
Executive (including, for the
purposes of this calculation, any
amount of such bonuses paid in the
form of restricted stock (in lieu of
cash), to be valued at the date of
grant) for the two fiscal years of
the Company ending immediately prior
to the Effective Date (the "Average
Bonus") ; and
(C) the Accrued Obligations.
The Earned Salary and Severance Amount shall be paid in cash in a
single lump sum as soon as practicable, but in no event more than 10
days (or at such earlier date required by law), following the Date of
Termination; provided however that if the date payment would otherwise
---------------------
be due hereunder is after September 30, payment of the Severance Amount
shall be paid on the first business day in the following January.
Accrued Obligations shall be paid in accordance with the terms of the
applicable plan, program or arrangement.
(ii) Continuation of Welfare Benefits. If, during the
------------------------------------
Employment Period, the Company terminates the Executive's employment
other than for Cause, or following a Change in Control the Executive
terminates his employment for Good Reason, the Executive (and, to the
extent applicable, his dependents) shall be entitled, after the Date of
Termination until the earlier of (1) the third anniversary of the Date
-
of Termination (the "End Date") and (2) the date the Executive becomes
-
eligible for comparable benefits under a similar plan, policy or
program of a subsequent employer, to continue participation in all of
the Company's employee and executive welfare and fringe benefit plans,
excluding further vacation pay (the "Benefit Plans"). To the extent any
such benefits cannot be provided under the terms of the applicable
plan, policy or program, the Company shall provide a comparable benefit
under another plan or from the Company's general assets. The
Executive's participation in the Benefit Plans will be on the same
terms and conditions that would have applied had the Executive
continued to be employed by the Company through the End Date.
(iii) Qualification for Early Retirement. If the Executive is
----------------------------------
at least age 52 at his Date of Termination, the Executive shall be
deemed to have earned, and to have become vested in, the retirement
benefits (including, without limitation, any early retirement subsidy
or supplement, retiree life coverage or retiree medical benefits) that
would have been payable or made available to the Executive under any
employee benefit plan sponsored or maintained by the Company or any of
its subsidiaries for which the Executive was eligible at the Date of
Termination had he continued in service for three additional years
after the Date of Termination. The purpose and intent of this provision
is to provide the Executive with vesting and to bridge any gap of three
or fewer years of service to qualify for any additional benefits
available for an early retiree (such as the benefits under the
Executive Retirement Plan ("ERP") or the benefits available under the
Retirement Plan ("RP") including the so-called Rule of 90), and not to
increase the service taken into account for purpose of determining the
amount of benefits payable to the Executive beyond his actual period of
service through the Date of Termination.
The operation of this provision is illustrated by the
following examples:
Example 1: Assume that, at the Executive's Date of
----------
Termination, the Executive is exactly 53 years old, and has exactly 4
years of service for purposes of the ERP. Assume further that the
relevant RP and ERP provisions have not changed since the date of the
execution of this Agreement. The Executive would receive a benefit (in
the form of a single life annuity) under the RP and ERP in the
aggregate in the form of a benefit beginning at age 56, equal to 4/5
times what he would otherwise have received under a combination of
those plans beginning at age 56. (Or, he could elect commencement of
benefits at age 55 in reduced amounts per the terms of the relevant
plans.) Five is used in the denominator because the current ERP vesting
policy is attainment of age 55 and at least 5 years of service.
Example 2: The assumptions are the same as in example 1,
----------
except that the Executive has exactly 32 years of service (instead of
4). By reason of the additional credit provided under this Agreement,
the Executive would receive a benefit calculated as though payable
under the RP (in the form of a single life annuity), under the RP's
"Rule of 90," that would begin at age 55-1/2 and would equal [(53 +
32)/90] times what he would otherwise have received under the RP under
the Rule of 90 beginning at age 55-1/2 (the earliest date at which he
otherwise could have retired and commenced receiving benefits
determined under the Rule of 90).
In both examples, (i) any portion of the incremental benefit
-
that could not be paid under the RP will be paid from the ERP or the
Company's general assets, (ii) final average salaries would be
--
determined under those plans as of the Executive's Date of Termination
and (iii) the Executive would be entitled to elect forms of benefit
---
other than the single life annuity.
Other fact patterns, and examples respecting other
post-retirement benefits, would use similar principles, but might use
different math. For example, the current provisions concerning an
executive's vesting in early retirement benefits under the RP, and
concerning retiree medical benefit vesting, have years of service
requirements in excess of five years.
(d) Discharge of the Company's Obligations. Except as
-------------------------------------------
expressly provided in the last sentence of this Section 7(d), the amounts
payable to the Executive pursuant to this Section 7 (whether or not reduced
pursuant to Section 7(e)) following termination of his employment shall be in
full and complete satisfaction of the Executive's rights under this Agreement
and any other claims he may have in respect of his employment by the Company or
any of its subsidiaries. Such amounts shall constitute liquidated damages with
respect to any and all such rights and claims and, upon the Executive's receipt
of such amounts, the Company shall be released and discharged from any and all
liability to the Executive in connection with this Agreement or otherwise in
connection with the Executive's employment with the Company and its
subsidiaries. Nothing in this Section 7(d) shall be construed to release the
Company from its commitment to indemnify the Executive and hold the Executive
harmless from and against any claim, loss or cause of action arising from or out
of the Executive's performance as an officer, director or employee of the
Company or any of its subsidiaries or in any other capacity, including any
fiduciary capacity, in which the Executive served at the request of the Company
to the maximum extent permitted by applicable law and the Governing Documents.
(e) Limit on Payments by the Company.
--------------------------------
(i) Application of Section 7(e). In the event that any amount
---------------------------
or benefit paid or distributed to the Executive pursuant to this
Agreement, taken together with any amounts or benefits otherwise paid
or distributed to the Executive by the Company or any affiliated
company (collectively, the "Covered Payments"), would be an "excess
parachute payment" as defined in Section 280G of the Code and would
thereby subject the Executive to the tax (the "Excise Tax") imposed
under Section 4999 of the Code (or any similar tax that may hereafter
be imposed), the provisions of this Section 7(e) shall apply to
determine the amounts payable to the Executive pursuant to this
Agreement.
(ii) Calculation of Benefits. Immediately following delivery
-----------------------
of any Notice of Termination, the Company shall notify the Executive of
the aggregate present value of all termination benefits to which he
would be entitled under this Agreement and any other plan, program or
arrangement as of the projected Date of Termination, together with the
projected maximum payments, determined as of such projected Date of
Termination that could be paid without the Executive being subject to
the Excise Tax.
(iii) Imposition of Payment Cap. If
-------------------------
(x) the aggregate value of all compensation payments or
benefits to be paid or provided to the Executive
under this Agreement and any other plan, agreement or
arrangement with the Company exceeds the amount which
can be paid to the Executive without the Executive
incurring an Excise Tax and
(y) the net-after tax amount (taking into account all
applicable taxes payable by the Executive, including
any Excise Tax) that the Executive would receive if
the limitation contained in this Section 7(e)(iii)
were not imposed does not exceed the net-after tax
benefit the Executive would receive if such
limitation were imposed by more than $25,000,
then the amounts payable to the Executive under this Section 7 shall be
reduced (but not below zero) to the maximum amount which may be paid
hereunder without the Executive becoming subject to such an Excise Tax
(such reduced payments to be referred to as the "Payment Cap"). In the
event that the Executive receives reduced payments and benefits
hereunder, the Executive shall have the right to designate which of the
payments and benefits otherwise provided for in this Agreement that he
will receive in connection with the application of the Payment Cap.
(iv) Application of Section 280G. For purposes of determining
---------------------------
whether any of the Covered Payments will be subject to the Excise Tax
and the amount of such Excise Tax,
(A) such Covered Payments will be treated as
"parachute payments" within the meaning of Section
280G of the Code, and all "parachute payments" in
excess of the "base amount" (as defined under Section
280G(b)(3) of the Code) shall be treated as subject
to the Excise Tax, unless, and except to the extent
that, in the good faith judgment of the Company's
independent certified public accountants appointed
prior to the Effective Date or tax counsel selected
by such Accountants (the "Accountants"), the Company
has a reasonable basis to conclude that such Covered
Payments (in whole or in part) either do not
constitute "parachute payments" or represent
reasonable compensation for personal services
actually rendered (within the meaning of Section
280G(b)(4)(B) of the Code) in excess of the portion
of the "base amount" allocable to such Covered
Payments, or such "parachute payments" are otherwise
not subject to such Excise Tax, and
(B) the value of any noncash benefits or any
deferred payment or benefit shall be determined by
the Accountants in accordance with the principles of
Section 280G of the Code.
(v) Applicable Tax Rates. For purposes of determining whether
--------------------
the Executive would receive a greater net after-tax benefit were the
amounts payable under this Agreement reduced in accordance with
Paragraph 7(e)(iii), the Executive shall be deemed to pay:
(A) Federal income taxes at the highest
applicable marginal rate of Federal income taxation
for the calendar year in which the first amounts are
to be paid hereunder, and
(B) any applicable state and local income
taxes at the highest applicable marginal rate of
taxation for such calendar year, net of the maximum
reduction in Federal incomes taxes which could be
obtained from the deduction of such state or local
taxes if paid in such year;
provided, however, that the Executive may request that such
determination be made based on his individual tax circumstances, which
shall govern such determination so long as the Executive provides to
the Accountants such information and documents as the Accountants shall
reasonably request to determine such individual circumstances.
(vi) Adjustments in Respect of the Payment Cap. If the
-----------------------------------------------
Executive receives reduced payments and benefits under this Section
7(e) (or this Section 7(e) is determined not to be applicable to the
Executive because the Accountants conclude that the Executive is not
subject to any Excise Tax) and it is established pursuant to a final
determination of a court or an Internal Revenue Service proceeding (a
"Final Determination") that, notwithstanding the good faith of the
Executive and the Company in applying the terms of this Agreement, the
aggregate "parachute payments" within the meaning of Section 280G of
the Code paid to the Executive or for his benefit are in an amount that
would result in the Executive being subject an Excise Tax, then the
amount equal to such excess parachute payments shall be deemed for all
purposes to be a loan to the Executive made on the date of receipt of
such excess payments, which the Executive shall have an obligation to
repay to the Company on demand, together with interest on such amount
at the applicable Federal rate (as defined in Section 1274(d) of the
Code) from the date of the payment hereunder to the date of repayment
by the Executive. If this Section 7(e) is not applied to reduce the
Executive's entitlement under this Section 7 because the Accountants
determine that the Executive would not receive a greater net-after tax
benefit by applying this Section 7(e) and it is established pursuant to
a Final Determination that, notwithstanding the good faith of the
Executive and the Company in applying the terms of this Agreement, the
Executive would have received a greater net after tax benefit by
subjecting his payments and benefits hereunder to the Payment Cap, then
the aggregate "parachute payments" paid to the Executive or for his
benefit in excess of the Payment Cap shall be deemed for all purposes a
loan to the Executive made on the date of receipt of such excess
payments, which the Executive shall have an obligation to repay to the
Company on demand, together with interest on such amount at the
applicable Federal rate (as defined in Section 1274(d) of the Code)
from the date of the payment hereunder to the date of repayment by the
Executive. If the Executive receives reduced payments and benefits by
reason of this Section 7(e) and it is established pursuant to a Final
Determination that the Executive could have received a greater amount
without exceeding the Payment Cap, then the Company shall promptly
thereafter pay the Executive the aggregate additional amount which
could have been paid without exceeding the Payment Cap, together with
interest on such amount at the applicable Federal rate (as defined in
Section 1274(d) of the Code) from the original payment due date to the
date of actual payment by the Company.
(f) If Termination of Employment Occurs After the Executive
----------------------------------------------------------
Has Reached Age 62. Notwithstanding anything else to the contrary contained in
- ------------------
this Section 7, if the Executive's employment with the Company terminates at any
time during the 3 year period ending on the first day of the month following the
Executive's sixty-fifth birthday (the "Normal Retirement Date"), and the
Executive would be entitled to receive severance benefits under paragraphs 7(c),
then (i) the multiplier in paragraph 7(c)(i)(B) shall not be 1.99, but shall be
-
a number equal to 1.99 times (x/1095), where x equals the number of days
remaining until the Executive's Normal Retirement Date, and (ii) the End Date
--
described in Section 7(c)(ii) shall not be the third anniversary of the Date of
Termination, but shall be the Executive's Normal Retirement Date.
8. Non-exclusivity of Rights. Except as expressly provided
--------------------------
herein, nothing in this Agreement shall prevent or limit the Executive's
continuing or future participation in any benefit, bonus, incentive or other
plan or program provided by the Company or any of its affiliated companies and
for which the Executive may qualify, nor shall anything herein limit or
otherwise prejudice such rights as the Executive may have under any other
agreements with the Company or any of its affiliated companies, including
employment agreements or stock option agreements. Amounts which are vested
benefits or which the Executive is otherwise entitled to receive under any plan
or program of the Company or any of its affiliated companies at or subsequent to
the Date of Termination shall be payable in accordance with such plan or
program.
9. No Offset. The Company's obligation to make the payments
---------
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Company may have against the Executive or others whether by reason of the
subsequent employment of the Executive or otherwise.
10. Non-Competition and Non-Solicitation. (a) Noncompete.
-------------------------------------- ----------
Unless the Executive otherwise elects by written notice to the Company prior to
his Date of Termination (or in the case of a Company initiated termination,
within 5 business days of receipt of a Notice of Termination, if such period
extends beyond the Date of Termination) not to be bound by the provisions of
this Section 10(a), during the one year period following the Executive's Date of
Termination for any reason (the "Restriction Period"), Executive shall not,
directly or indirectly, engage in, become employed by, serve as an agent or
consultant to, or become a partner, principal or stockholder (other than a
holder of less than 1% of the outstanding voting shares of any publicly held
company) of any business or entity that is engaged in any activity which is
competitive with the business of the Company, National and their respective
subsidiaries or affiliates in any geographic area in which the Company, National
and/or any of their respective subsidiaries or affiliates is engaged in such
competitive business.
(b) Non-Solicitation of Employees. Regardless of whether the
-----------------------------
Executive has elected to be bound by Section 10(a), during the Restriction
Period, the Executive shall not, directly or indirectly, for his own account or
for the account of any other person or entity with which he is or shall become
associated in any capacity, solicit for employment, employ or otherwise
interfere with the relationship of Employer with any person who at any time
during the six months preceding such solicitation, employment or interference is
or was employed by or otherwise engaged to perform services for Employer other
than any such solicitation or employment during the Executive's employment with
Employer on behalf of Employer.
(c) Confidential Information. Regardless of whether the
-------------------------
Executive has elected to be bound by Section 10(a), the Executive shall hold in
a fiduciary capacity for the benefit of National and the Company all secret or
confidential information, knowledge or data relating to National, the Company or
any of their affiliated companies, and their respective businesses, (i) obtained
-
by the Executive during his employment by the Company or any of its affiliated
companies and (ii) not otherwise public knowledge (other than by reason of an
--
unauthorized act by the Executive). After termination of the Executive's
employment with the Company, the Executive shall not, without the prior written
consent of the Company, unless compelled pursuant to an order of a court or
other body having jurisdiction over such matter, communicate or divulge any such
information, knowledge or data to anyone other than the Company and those
designated by it.
(d) Non-disparagement. Regardless of whether the Executive has
-----------------
elected to be bound by Section 10(a), the Executive shall not publicly or
privately disparage National or the Company, or any of their subsidiaries or
affiliates, including any aspect of their respective business, products,
employees, management or Board of Directors, in any manner which could adversely
effect the business of National, the Company or such subsidiaries or affiliates.
Furthermore, the Executive shall not, directly or indirectly, take any action or
fail to take any action with the purpose of interfering with, damaging or
disrupting the assets or business operations or affairs of National or the
Company or any of their respective subsidiaries or affiliates.
National and the Company shall not publicly or privately
disparage the Executive, either personally or professionally. Nothing in this
paragraph shall be construed to prevent any officer of National or the Company
from discussing the Executive's performance internally in the ordinary course of
business.
(e) Company Property. Except as expressly provided herein,
-----------------
promptly following the Executive's termination of employment, the Executive
shall return to the Company all property of National and the Company and all
copies thereof in the Executive's possession or under his control.
(f) Additional Payment. Unless the Executive has elected not
-------------------
to be bound by Section 10(a), the Company shall make an additional lump sum
payment to the Executive within 30 days following the Executive's Date of
Termination equal to one times the sum of (i) the Executive's annual Base Salary
-
and (ii) the Executive's Average Bonus as compensation for the covenant
--
contained in Section 10(a).
11. Injunctive Relief and Other Remedies with Respect to
---------------------------------------------------------
Covenants. The Executive acknowledges and agrees that the covenants and
- ---------
obligations of the Executive set forth in Section 10 relate to special, unique
and extraordinary matters and that a violation of any of the terms of such
covenants and obligations will cause the Company irreparable injury for which
adequate remedies are not available at law. Therefore, the Executive agrees that
the Company shall be entitled to an injunction, restraining order or such other
equitable relief (without the requirement to post bond) restraining the
Executive from committing any violation of the covenants and obligations
contained in Section 10 These remedies are cumulative and are in addition to any
other rights and remedies the Company may have at law or in equity. In no event
shall an asserted violation of the provisions of Section 10 constitute a basis
for deferring or withholding any amounts otherwise payable to the Executive
under this Agreement.
12. Successors. (a) This Agreement is personal to the
----------
Executive and, without the prior written consent of the Company, shall not be
assignable by the Executive otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit of and be enforceable by
the Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be
binding upon the Company and its successors. The Company shall require any
successor to all or substantially all of the business and/or assets of the
Company, whether direct or indirect, by purchase, merger, consolidation,
acquisition of stock, or otherwise, by an agreement in form and substance
satisfactory to the Executive, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent as the Company would be
required to perform if no such succession had taken place.
13. Miscellaneous. (a) Applicable Law. This Agreement shall be
------------- --------------
governed by and construed in accordance with the laws of the State of New York,
applied without reference to principles of conflict of laws.
(b) Arbitration. Except to the extent provided in Section 11,
-----------
in the event that any dispute, controversy or claim arises between the Company
or National and the Executive with respect to the subject matter of this
Agreement and the enforcement of rights hereunder, such dispute, controversy or
claim shall be resolved by binding arbitration before a panel of three
arbitrators selected in accordance with the American Arbitration Association
(the "AAA"). The arbitration shall be conducted in accordance with the Expedited
Employment Arbitration Rules of the American Arbitration Association then in
effect at the time of the arbitration (or such other rules as the parties may
agree to in writing), and otherwise in accordance with principles which would be
applied by a court of law or equity. The determination reached in such
arbitration shall be final and binding on both parties without any right of
appeal or further dispute. Execution of the determination by such arbitration
panel may be sought in any court of competent jurisdiction. The arbitrators
shall not be bound by judicial formalities and may abstain from following the
strict rules of evidence and shall interpret this Agreement as an honorable
engagement and not merely as a legal obligation. Unless otherwise agreed by the
parties, any such arbitration shall take place in a location selected by the
Company which is a convenient forum for such arbitration (taking into account
the availability of a sufficient pool of experienced arbitrators) and not more
than 100 miles from the Executive's principal place of employment at the
Effective Date (or at such other location as may be agreed upon by the parties),
and shall be conducted in accordance with the Rules of the AAA. In the event of
the occurrence of any proceeding (including the appeal of an arbitration
decision) between the Company or National and the Executive with respect to the
subject matter of this Agreement and the enforcement of rights hereunder, the
Company or National shall reimburse the Executive for all reasonable costs and
expenses relating to such proceeding, including reasonable attorneys' fees and
expenses, regardless of the final outcome, unless the arbitration panel
determines that recovery by the Executive of all or a part of such fees, costs
and expenses would be unjust. In no event shall the Executive reimburse the
Company for any of the costs and expenses relating to such litigation or other
proceeding.
(c) Amendments. This Agreement may not be amended or modified
----------
otherwise than by a written agreement executed by the parties hereto or their
respective successors and legal representatives.
(d) Entire Agreement. This Agreement constitutes the entire
-----------------
agreement between the parties hereto with respect to the matters referred to
herein and expressly supersedes the Change in Control Agreement by and between
the Executive, National and the Company dated as of May 1, 1992; provided,
---------
however, that this Agreement is not intended to impair any rights of the
- --------------
Executive under any prior written agreement, any employee benefit plan of the
Company or a Subsidiary or any written policy, program or procedure of the
Company or a Subsidiary unless and to the extent specifically provided herein.
No other agreement relating to the terms of the Executive's employment by the
Company, oral or otherwise, shall be binding between the parties unless it is in
writing and signed by the party against whom enforcement is sought. There are no
promises, representations, inducements or statements between the parties other
than those that are expressly contained herein. The Executive acknowledges that
he is entering into this Agreement of his own free will and accord, and with no
duress, that he has read this Agreement and that he understands it and its legal
consequences.
(e) Notices. All notices and other communications hereunder
-------
shall be in writing and shall be given by hand-delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive: at the home address of the Executive noted
on the records of the Company
If to the Company: National Fuel Gas Supply Corporation
10 Lafayette Square
Buffalo, N.Y. 14203
Attention: Corporate Secretary
If to National: National Fuel Gas Company
10 Lafayette Square
Buffalo, NY 14203
Attention: Corporate Secretary
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(f) Source of Payments. All payments provided for in paragraph
------------------
3 above shall be paid in cash from the general funds of the Company or National;
provided, however, that such payments shall be reduced by the amount of any
payments made to the Executive or his dependents, beneficiaries or estate from
any trust or special or separate fund established by the Company or National to
assure such payments. The Company or National shall not be required to establish
a special or separate fund or other segregation of assets to assure such
payments, and, if the Company or National shall make any investments to aid it
in meeting its obligations hereunder, the Executive shall have no right, title
or interest whatever in or to any such investments except as may otherwise be
expressly provided in a separate written instrument relating to such
investments. Nothing contained in this Agreement, and no action taken pursuant
to its provisions, shall create or be construed to create a trust of any kind or
a fiduciary relationship, between the Company or National and the Executive or
any other person. To the extent that any person acquires a right to receive
payments from the Company or National such right shall be no greater than the
right of an unsecured creditor of the Company or National.
(g) Tax Withholding. The Company shall withhold from any
----------------
amounts payable under this Agreement such Federal, state or local taxes as shall
be required to be withheld pursuant to any applicable law or regulation.
(h) Severability; Reformation. In the event that one or more
--------------------------
of the provisions of this Agreement shall become invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby. In the
event that any of the provisions of any of Section 10 are not enforceable in
accordance with its terms, the Executive and the Company agree that such Section
shall be reformed to make such Section enforceable in a manner which provides
the Company the maximum rights permitted at law.
(i) Waiver. Waiver by any party hereto of any breach or
------
default by the other party of any of the terms of this Agreement shall not
operate as a waiver of any other breach or default, whether similar to or
different from the breach or default waived. No waiver of any provision of this
Agreement shall be implied from any course of dealing between the parties hereto
or from any failure by either party hereto to assert its or the Executive's
rights hereunder on any occasion or series of occasions.
(j) Counterparts. This Agreement may be executed in
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
(k) Captions. The captions of this Agreement are not part of
--------
the provisions hereof and shall have no force or effect.
IN WITNESS WHEREOF, the Executive has hereunto set his hand
and the Company has caused this Agreement to be executed in its name on its
behalf, and its corporate seal to be hereunto affixed and attested by its
Secretary, all as of the day and year first above written.
NATIONAL FUEL GAS
SUPPLY CORPORATION
Attest: /s/ By: /s/
-------------------- -----------------------
Secretary Title: President
NATIONAL FUEL GAS COMPANY
Attest: /s/ By: /s/
-------------------- -----------------------
Secretary Title: Chairman, President & CEO
EXECUTIVE:
/s/
-------------------------
NATIONAL FUEL GAS COMPANY
EMPLOYMENT CONTINUATION
AND
NONCOMPETITION AGREEMENT
<PAGE>
TABLE OF CONTENTS
Page
----
1. Operation of Agreement...........................................2
a. Effective Date..........................................2
b. Termination of Employment
Following a Potential Change in Control.................2
2. Definitions......................................................2
a. Change in Control.......................................2
b. Potential Change in Control.............................3
3. Employment Period................................................3
4. Position and Duties..............................................3
5. Compensation.....................................................4
a. Base Salary.............................................4
b. Annual Bonus............................................4
c. Long-term Incentive Compensation Programs...............4
d. Benefit Plans...........................................4
e. Expenses................................................5
f. Vacation and Fringe Benefits............................5
g. Indemnification.........................................5
6. Termination......................................................5
a. Death, Disability or Retirement.........................5
b. Voluntary Termination...................................5
c. Cause...................................................6
d. Good Reason.............................................6
e. Notice of Termination...................................7
f. Date of Termination.....................................7
7. Obligations of the Company upon Termination......................7
a. Death or Disability.....................................7
b. Cause and Voluntary Termination.........................7
c. Termination by the Company other
than for Cause and Termination
by the Executive for Good Reason........................8
i. Severance Benefits..................................8
ii. Continuation of Welfare Benefits....................8
iii.Qualification for Early Retirement..................9
d. Discharge of the Company's Obligations.................10
e. Limit on Payments by the Company.......................10
i. Application of Section 7(e)........................10
ii. Calculation of Benefits............................11
iii.Imposition of Payment Cap..........................11
iv. Application of Section 280G........................11
v. Applicable Tax Rates...............................12
vi. Adjustments in Respect of the Payment Cap..........12
f. If Termination of Employment
Occurs After the Executive Has
Reached Age 62.........................................13
8. Non-exclusivity of Rights.......................................13
9. No Offset ...................................................13
10. Non-Competition and Non-Solicitation............................14
a. Noncompete.............................................14
b. Non-Solicitation of Employees..........................14
c. Confidential Information...............................14
d. Non-disparagement......................................14
e. Company Property.......................................15
f. Additional Payment.....................................15
11. Injunctive Relief and Other Remedies with
Respect to Covenants............................................15
12. Successors ...................................................15
13. Miscellaneous16
a. Applicable Law.........................................16
b. Arbitration............................................16
c. Amendments.............................................16
d. Entire Agreement.......................................16
e. Notices................................................17
f. Source of Payments.....................................17
g. Tax Withholding........................................17
h. Severability; Reformation..............................18
i. Waiver.................................................18
j. Counterparts...........................................18
k. Captions...............................................18
Signature Page...........................................................18
<PAGE>
EMPLOYMENT CONTINUATION AND
NONCOMPETITION AGREEMENT
THIS AGREEMENT between SENECA RESOURCES CORPORATION, a Pennsylvania
corporation (the "Company"), NATIONAL FUEL GAS COMPANY, a New Jersey corporation
("National"), and ___________________ (the "Executive"), dated as of the 11th
day of December, 1998.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Company and National wish to attract and retain well-qualified
executive and key personnel and to assure continuity of management, which will
be essential to its ability to evaluate and respond to any actual or threatened
Change in Control (as defined below) in the best interests of shareholders;
WHEREAS, the Executive is a valuable employee of the Company, an integral
part of its management team and a key participant in the decision making process
relative to short-term and long-term planning and policy for the Company;
WHEREAS, the Company and National understand that any actual or threatened
Change in Control will present significant concerns for the Executive with
respect to his financial and job security;
WHEREAS, the Company and National wish to encourage the Executive to
continue his career and services with the Company for the period during and
after an actual or threatened Change in Control and to assure to the Company the
Executive's services during the period in which such a Change in Control is
threatened, and to provide the Executive certain financial assurances to enable
the Executive to perform the responsibilities of his position without undue
distraction and to exercise his judgment without bias due to his personal
circumstances; and
WHEREAS, the Board of Directors of National, at its meeting on December 10,
1998, determined that it would be in the best interests of National and its
shareholders to assure continuity in the management of National in the event of
a Change in Control by entering into an employment continuation and noncompete
agreement with Executive;
WHEREAS, to achieve these objectives, the Company, National and the
Executive desire to enter into an agreement providing the Company and the
Executive with certain rights and obligations upon the occurrence of a Change in
Control or Potential Change in Control (as defined in Section 2).
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is hereby agreed by and between the Company, National and
the Executive as follows:
1. Operation of Agreement. (a) Effective Date. The effective
---------------------- ---------------
date of this Agreement shall be the date on which a Change in Control occurs
(the "Effective Date"), provided that, except as provided in Section 1(b), if
-------------
the Executive is not employed by the Company, National or any of their
subsidiaries on the Effective Date, this Agreement shall be void and without
effect.
(b) Termination of Employment Following a Potential Change in
----------------------------------------------------------
Control. Notwithstanding Section 1(a), if (i) the Executive's employment is
- ------- -
terminated by the Company Without Cause (as defined in Section 6(c)) after the
occurrence of a Potential Change in Control and prior to the occurrence of a
Change in Control and (ii) a Change in Control occurs within two years of such
--
termination, the Executive shall be deemed, solely for purposes of determining
his rights under this Agreement, to have remained employed until the date such
Change in Control occurs and to have been terminated by the Company Without
Cause immediately after this Agreement becomes effective.
2. Definitions. (a) Change in Control. For the purposes of
----------- -----------------
this Agreement, a "Change in Control" shall be deemed to have occurred if any of
the following have occurred:
(i) either (a) the Company or National shall receive a report
-
on Schedule 13D, or an amendment to such a report, filed with the
Securities and Exchange Commission pursuant to Section 13(d) of the
Securities Exchange Act of 1934 (the "1934 Act") disclosing that any
person (as such term is used in Section 13(d) of the 1934 Act)
("Person"), is the beneficial owner, directly or indirectly, of twenty
(20) percent or more of the outstanding stock of National or (b) the
-
Company or National has actual knowledge of facts which would require
any Person to file such a report on Schedule 13D, or to make an
amendment to such a report, with the SEC (or would be required to file
such a report or amendment upon the lapse of the applicable period of
time specified in Section 13(d) of the 1934 Act) disclosing that such
Person is the beneficial owner, directly or indirectly, of twenty (20)
percent or more of the outstanding stock of National;
(ii) purchase by any Person, other than National or a
wholly-owned subsidiary of National or an employee benefit plan
sponsored or maintained by National or a wholly-owned subsidiary of
National, of shares pursuant to a tender or exchange offer to acquire
any stock of National (or securities convertible into stock) for cash,
securities or any other consideration provided that, after consummation
of the offer, such Person is the beneficial owner (as defined in Rule
13d-3 under the 1934 Act), directly or indirectly, of twenty (20)
percent or more of the outstanding stock of National (calculated as
provided in paragraph (d) of Rule 13d-3 under the 1934 Act in the case
of rights to acquire stock);
(iii) approval by the shareholders of National of (a) any
-
consolidation or merger of National in which National is not the
continuing or surviving corporation or pursuant to which shares of
stock of National would be converted into cash, securities or other
property, other than a consolidation or merger of National in which
holders of its stock immediately prior to the consolidation or merger
have substantially the same proportionate ownership of common stock of
the surviving corporation immediately after the consolidation or merger
as immediately before, or (b) any consolidation or merger in which
-
National is the continuing or surviving corporation but in which the
common shareholders of National immediately prior to the consolidation
or merger do not hold at least a majority of the outstanding common
stock of the continuing or surviving corporation (except where such
holders of common stock hold at least a majority of the common stock of
the corporation which owns all of the common stock of National), or (c)
-
any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all the assets
of National; or
(iv) a change in the majority of the members of the Board of
Directors of National (the "Board") within a 24-month period unless the
election or nomination for election by National's shareholders of each
new director was approved by the vote of at least two-thirds of the
directors then still in office who were in office at the beginning of
the 24-month period.
(b) Potential Change in Control. For the purposes of this
-----------------------------
Agreement, a Potential Change in Control shall be deemed to have occurred if:
(i) a Person commences a tender offer (with adequate
financing) for securities representing at least twenty (20) percent of
the outstanding stock of National (calculated as provided in paragraph
(d) of Rule 13d-3 under the 1934 Act in the case of rights to acquire
stock);
(ii) National enters into an agreement the consummation of
which would constitute a Change in Control;
(iii) proxies for the election of directors of National are
solicited by anyone other than National; or
(iv) any other event occurs which is deemed to be a Potential
Change in Control by the Board.
3. Employment Period. Subject to Section 6 of this Agreement,
-----------------
the Company agrees to continue the Executive in its employ, and the Executive
agrees to remain in the employ of the Company, for the period (the "Employment
Period") commencing on the Effective Date and ending on the earlier to occur of
(i) the third anniversary of the Effective Date and (ii) the date on which the
- --
Executive attains age 65.
4. Position and Duties. During the Employment Period, the
-------------------
Executive's position (including titles), authority and responsibilities shall be
at least commensurate with those held, exercised and assigned immediately prior
to the Effective Date. It is understood that, for purposes of this Agreement,
such position, authority and responsibilities shall not be regarded as not
commensurate merely by virtue of the fact that a successor shall have acquired
all or substantially all of the business and/or assets of the Company as
contemplated by Section 12(b) of this Agreement. The Executive's services shall
be performed in the United States and within 30 miles of the location where the
Executive was employed immediately preceding the Effective Date.
5. Compensation. (a) Base Salary. During the Employment
------------ ------------
Period, the Executive shall receive a base salary at a monthly rate at least
equal to the monthly salary paid to the Executive by the Company and any of its
affiliated companies immediately prior to the Effective Date. The base salary
shall be reviewed at least once each year after the Effective Date, and shall be
increased annually at a rate at least equal to the greater of (i) the average
-
percentage increase for the same period in the compensation of salaried
employees of National and its subsidiaries who are not executives and (ii) the
--
percentage increase in the national Consumer Price Index for the last completed
calendar year. The Executive's base salary, as it shall be increased from time
to time, shall hereafter be referred to as "Base Salary". Neither the Base
Salary nor any increase in Base Salary after the Effective Date shall serve to
limit or reduce any other obligation of the Company hereunder.
(b) Annual Bonus. During the Employment Period, in addition to
------------
the Base Salary, for each fiscal year of the Company ending during the
Employment Period, the Executive shall be afforded the opportunity to receive an
annual bonus on terms and conditions no less favorable to the Executive (taking
into account reasonable changes in the Company's goals and objectives) than the
annual bonus opportunity that had been made available to the Executive for the
fiscal year ended immediately prior to the Effective Date (the "Annual Bonus
Opportunity"). Any amount payable in respect of the Annual Bonus Opportunity
shall be paid as soon as practicable following the year for which the amount (or
prorated portion) is earned or awarded, unless electively deferred by the
Executive pursuant to any deferral programs or arrangements that the Company may
make available to the Executive.
(c) Long-term Incentive Compensation Programs. During the
--------------------------------------------
Employment Period, the Executive shall participate in all long-term incentive
compensation programs for key executives at a level that is commensurate with
the Executive's participation in such plans immediately prior to the Effective
Date, or, if more favorable to the Executive, at the level made available to the
Executive or other similarly situated officers at any time thereafter.
(d) Benefit Plans. During the Employment Period, the Executive
-------------
(and, to the extent applicable, his dependents) shall be entitled to participate
in or be covered under all pension, retirement, deferred compensation, savings,
medical, dental, health, disability, group life, accidental death and travel
accident insurance plans and programs of the Company and its affiliated
companies at a level that is commensurate with the Executive's participation in
such plans immediately prior to the Effective Date, or, if more favorable to the
Executive, at the level made available to the Executive or other similarly
situated officers at any time thereafter.
(e) Expenses. During the Employment Period, the Executive
--------
shall be entitled to receive prompt reimbursement for all reasonable expenses
incurred by the Executive in accordance with the policies and procedures of the
Company as in effect immediately prior to the Effective Date. Notwithstanding
the foregoing, the Company may apply the policies and procedures in effect after
the Effective Date to the Executive, if such policies and procedures are not
less favorable to the Executive than those in effect immediately prior to the
Effective Date.
(f) Vacation and Fringe Benefits. During the Employment
-------------------------------
Period, the Executive shall be entitled to paid vacation and fringe benefits at
a level that is commensurate with the paid vacation and fringe benefits
available to the Executive immediately prior to the Effective Date, or, if more
favorable to the Executive, at the level made available from time to time to the
Executive or other similarly situated officers at any time thereafter.
(g) Indemnification. During and after the Employment Period,
---------------
National and the Company shall indemnify the Executive and hold the Executive
harmless from and against any claim, loss or cause of action arising from or out
of the Executive's performance as an officer, director or employee of National
or the Company or any of their subsidiaries or in any other capacity, including
any fiduciary capacity, in which the Executive serves at the request of National
or the Company to the maximum extent permitted by applicable law and the
Company's Certificate of Incorporation and By-Laws (the "Governing Documents"),
provided that in no event shall the protection afforded to the Executive
- --------------
hereunder be less than that afforded under the Governing Documents as in effect
immediately prior to the Effective Date.
6. Termination. (a) Death, Disability or Retirement. Subject
----------- -------------------------------
to the provisions of Section 1 hereof, this Agreement shall terminate
automatically upon the Executive's death, termination due to "Disability" (as
defined below) or voluntary retirement under any of the Company's retirement
plans as in effect from time to time. For purposes of this Agreement, Disability
shall mean the Executive's inability to perform the duties of his position, as
determined in accordance with the policies and procedures applicable with
respect to the Company's long-term disability plan, as in effect immediately
prior to the Effective Date.
(b) Voluntary Termination. Notwithstanding anything in this
----------------------
Agreement to the contrary, following a Change in Control the Executive may, upon
not less than 30 days' written notice to the Company, voluntarily terminate
employment for any reason (including early retirement under the terms of any of
the Company's retirement plans as in effect from time to time), provided that
-------------
any termination by the Executive pursuant to Section 6(d) on account of Good
Reason (as defined therein) shall not be treated as a voluntary termination
under this Section 6(b).
(c) Cause. The Company may terminate the Executive's
-----
employment for Cause. For purposes of this Agreement, "Cause" means the
Executive's gross misconduct, fraud or dishonesty, which has resulted or is
likely to result in material economic damage to the Company or National, as
determined in good faith by a vote of at least two-thirds of the non-employee
directors of National at a meeting of the Board at which the Executive is
provided an opportunity to be heard (with representation by counsel of his
choosing, should he so desire)
(d) Good Reason. Following the occurrence of a Change in
------------
Control, the Executive may terminate his employment for Good Reason. For
purposes of this Agreement, "Good Reason" means the occurrence of any of the
following, without the express written consent of the Executive, after the
occurrence of a Change in Control:
(i) (A) the assignment to the Executive of any duties
-
inconsistent in any material adverse respect with the Executive's
position, authority or responsibilities as contemplated by Section 4 of
this Agreement, or (B) any other material adverse change in such
-
position, including titles, authority or responsibilities;
(ii) any failure by the Company to comply with any of the
provisions of Section 5 of this Agreement, other than an insubstantial
or inadvertent failure remedied by the Company promptly after receipt
of notice thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at any
office or location outside of the United States and/or more than 30
miles (or such other lesser distance as shall be set forth in the
Company's relocation policy as in effect at the Effective Date) from
that location at which he performed his services specified under the
provisions of Section 4 immediately prior to the Change in Control,
except for travel reasonably required in the performance of the
Executive's responsibilities; or
(iv) any failure by the Company to obtain the assumption and
agreement to perform this Agreement by a successor as contemplated by
Section 12(b).
In no event shall the mere occurrence of a Change in Control, absent any further
impact on the Executive, be deemed to constitute Good Reason. In the event that
the Executive shall in good faith give a Notice of Termination for Good Reason
and it shall thereafter be determined that Good Reason did not exist, the
Executive shall, unless the Company and the Executive shall otherwise mutually
agree, return to employment with the Company within 5 business days of such
decision, without any impairment or other limitation of his rights hereunder,
except that he shall not be paid his base salary for any period he did not
perform services and his annual bonus opportunity for such year may be reduced
to reflect his period of absence.
(e) Notice of Termination. Any termination by the Company for
---------------------
Cause or by the Executive for Good Reason shall be communicated by Notice of
Termination given in accordance with Section 13(e). For purposes of this
Agreement, a "Notice of Termination" means a written notice given, in the case
of a termination for Cause, within 30 business days of the Company's having
actual knowledge of the events giving rise to such termination, and in the case
of a termination for Good Reason, within 180 days of the Executive's having
actual knowledge of the events giving rise to such termination, and which (i)
-
indicates the specific termination provision in this Agreement relied upon, (ii)
--
sets forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provision so
indicated, and (iii) if the termination date is other than the date of receipt
---
of such notice, specifies the termination date of this Agreement (which date
shall be not more than 15 days after the giving of such notice). The failure by
the Executive to set forth in the Notice of Termination any fact or circumstance
which contributes to a showing of Good Reason shall not waive any right of the
Executive hereunder or preclude the Executive from asserting such fact or
circumstance in enforcing his rights hereunder.
(f) Date of Termination. For the purpose of this Agreement,
--------------------
the term "Date of Termination" means (i) in the case of a termination for which
-
a Notice of Termination is required, the date of receipt of such Notice of
Termination or, if later, the date specified therein, as the case may be, and
(ii) in all other cases, the actual date on which the Executive's employment
--
terminates during the Employment Period.
7. Obligations of the Company upon Termination. (a) Death or
-------------------------------------------- --------
Disability. If the Executive's employment is terminated during the Employment
- ----------
Period by reason of the Executive's death or Disability, this Agreement shall
terminate without further obligations to the Executive or the Executive's legal
representatives under this Agreement other than those obligations accrued
hereunder at the Date of Termination, and the Company shall pay to the Executive
(or his beneficiary or estate) (i) the Executive's full Base Salary through the
-
Date of Termination (the "Earned Salary"), (ii) any vested amounts or benefits
--
owing to the Executive under the Company's otherwise applicable employee benefit
plans and programs, including any compensation previously deferred by the
Executive (together with any accrued earnings thereon) and not yet paid by the
Company (the "Accrued Obligations"), and (iii) any other benefits payable due to
---
the Executive's death or Disability under the Company's plans, policies or
programs (the "Additional Benefits").
Any Earned Salary shall be paid in cash in a single lump sum
as soon as practicable, but in no event more than 15 days (or at such earlier
date required by law), following the Date of Termination. Accrued Obligations
and Additional Benefits shall be paid in accordance with the terms of the
applicable plan, program or arrangement.
(b) Cause and Voluntary Termination. If, during the Employment
-------------------------------
Period, the Executive's employment shall be terminated for Cause or voluntarily
terminated by the Executive (other than on account of Good Reason following a
Change in Control), the Company shall pay the Executive (i) the Earned Salary in
-
cash in a single lump sum as soon as practicable, but in no event more than 10
days, following the Date of Termination, and (ii) the Accrued Obligations in
--
accordance with the terms of the applicable plan, program or arrangement.
(c) Termination by the Company other than for Cause and
---------------------------------------------------------
Termination by the Executive for Good Reason. Subject to Section 7(f) below, if,
- --------------------------------------------
during the Employment Period, the Company terminates the Executive's employment
other than for Cause, or the Executive terminates his employment for Good
Reason, the Company shall pay to the Executive the following amounts:
(i) Severance Benefits. The Executive shall be paid the
------------------
following:
(A) the Executive's Earned Salary;
(B) a cash amount (the "Severance Amount") equal to
(1) 1.99; times
(2) the sum of
(i) the Executive's annual Base Salary;
-
and
(ii) the average of the annual at risk
--
compensation incentive program
bonuses or other bonuses (excluding
sign-on bonuses) payable to the
Executive (including, for the
purposes of this calculation, any
amount of such bonuses paid in the
form of restricted stock (in lieu of
cash), to be valued at the date of
grant) for the two fiscal years of
the Company ending immediately prior
to the Effective Date (the "Average
Bonus") ; and
(C) the Accrued Obligations.
The Earned Salary and Severance Amount shall be paid in cash in a
single lump sum as soon as practicable, but in no event more than 10
days (or at such earlier date required by law), following the Date of
Termination; provided however that if the date payment would otherwise
---------------------
be due hereunder is after September 30, payment of the Severance Amount
shall be paid on the first business day in the following January.
Accrued Obligations shall be paid in accordance with the terms of the
applicable plan, program or arrangement.
(ii) Continuation of Welfare Benefits. If, during the
------------------------------------
Employment Period, the Company terminates the Executive's employment
other than for Cause, or following a Change in Control the Executive
terminates his employment for Good Reason, the Executive (and, to the
extent applicable, his dependents) shall be entitled, after the Date of
Termination until the earlier of (1) the third anniversary of the Date
-
of Termination (the "End Date") and (2) the date the Executive becomes
-
eligible for comparable benefits under a similar plan, policy or
program of a subsequent employer, to continue participation in all of
the Company's employee and executive welfare and fringe benefit plans,
excluding further vacation pay (the "Benefit Plans"). To the extent any
such benefits cannot be provided under the terms of the applicable
plan, policy or program, the Company shall provide a comparable benefit
under another plan or from the Company's general assets. The
Executive's participation in the Benefit Plans will be on the same
terms and conditions that would have applied had the Executive
continued to be employed by the Company through the End Date.
(iii) Qualification for Early Retirement. If the Executive is
----------------------------------
at least age 52 at his Date of Termination, the Executive shall be
deemed to have earned, and to have become vested in, the retirement
benefits (including, without limitation, any early retirement subsidy
or supplement, retiree life coverage or retiree medical benefits) that
would have been payable or made available to the Executive under any
employee benefit plan sponsored or maintained by the Company or any of
its subsidiaries for which the Executive was eligible at the Date of
Termination had he continued in service for three additional years
after the Date of Termination. The purpose and intent of this provision
is to provide the Executive with vesting and to bridge any gap of three
or fewer years of service to qualify for any additional benefits
available for an early retiree (such as the benefits under the
Executive Retirement Plan ("ERP") or the benefits available under the
Retirement Plan ("RP") including the so-called Rule of 90), and not to
increase the service taken into account for purpose of determining the
amount of benefits payable to the Executive beyond his actual period of
service through the Date of Termination.
The operation of this provision is illustrated by the
following examples:
Example 1: Assume that, at the Executive's Date of
----------
Termination, the Executive is exactly 53 years old, and has exactly 4
years of service for purposes of the ERP. Assume further that the
relevant RP and ERP provisions have not changed since the date of the
execution of this Agreement. The Executive would receive a benefit (in
the form of a single life annuity) under the RP and ERP in the
aggregate in the form of a benefit beginning at age 56, equal to 4/5
times what he would otherwise have received under a combination of
those plans beginning at age 56. (Or, he could elect commencement of
benefits at age 55 in reduced amounts per the terms of the relevant
plans.) Five is used in the denominator because the current ERP vesting
policy is attainment of age 55 and at least 5 years of service.
Example 2: The assumptions are the same as in example 1,
----------
except that the Executive has exactly 32 years of service (instead of
4). By reason of the additional credit provided under this Agreement,
the Executive would receive a benefit calculated as though payable
under the RP (in the form of a single life annuity), under the RP's
"Rule of 90," that would begin at age 55-1/2 and would equal [(53 +
32)/90] times what he would otherwise have received under the RP under
the Rule of 90 beginning at age 55-1/2 (the earliest date at which he
otherwise could have retired and commenced receiving benefits
determined under the Rule of 90).
In both examples, (i) any portion of the incremental benefit
-
that could not be paid under the RP will be paid from the ERP or the
Company's general assets, (ii) final average salaries would be
--
determined under those plans as of the Executive's Date of Termination
and (iii) the Executive would be entitled to elect forms of benefit
---
other than the single life annuity.
Other fact patterns, and examples respecting other
post-retirement benefits, would use similar principles, but might use
different math. For example, the current provisions concerning an
executive's vesting in early retirement benefits under the RP, and
concerning retiree medical benefit vesting, have years of service
requirements in excess of five years.
(d) Discharge of the Company's Obligations. Except as
-------------------------------------------
expressly provided in the last sentence of this Section 7(d), the amounts
payable to the Executive pursuant to this Section 7 (whether or not reduced
pursuant to Section 7(e)) following termination of his employment shall be in
full and complete satisfaction of the Executive's rights under this Agreement
and any other claims he may have in respect of his employment by the Company or
any of its subsidiaries. Such amounts shall constitute liquidated damages with
respect to any and all such rights and claims and, upon the Executive's receipt
of such amounts, the Company shall be released and discharged from any and all
liability to the Executive in connection with this Agreement or otherwise in
connection with the Executive's employment with the Company and its
subsidiaries. Nothing in this Section 7(d) shall be construed to release the
Company from its commitment to indemnify the Executive and hold the Executive
harmless from and against any claim, loss or cause of action arising from or out
of the Executive's performance as an officer, director or employee of the
Company or any of its subsidiaries or in any other capacity, including any
fiduciary capacity, in which the Executive served at the request of the Company
to the maximum extent permitted by applicable law and the Governing Documents.
(e) Limit on Payments by the Company.
--------------------------------
(i) Application of Section 7(e). In the event that any amount
---------------------------
or benefit paid or distributed to the Executive pursuant to this
Agreement, taken together with any amounts or benefits otherwise paid
or distributed to the Executive by the Company or any affiliated
company (collectively, the "Covered Payments"), would be an "excess
parachute payment" as defined in Section 280G of the Code and would
thereby subject the Executive to the tax (the "Excise Tax") imposed
under Section 4999 of the Code (or any similar tax that may hereafter
be imposed), the provisions of this Section 7(e) shall apply to
determine the amounts payable to the Executive pursuant to this
Agreement.
(ii) Calculation of Benefits. Immediately following delivery
-----------------------
of any Notice of Termination, the Company shall notify the Executive of
the aggregate present value of all termination benefits to which he
would be entitled under this Agreement and any other plan, program or
arrangement as of the projected Date of Termination, together with the
projected maximum payments, determined as of such projected Date of
Termination that could be paid without the Executive being subject to
the Excise Tax.
(iii) Imposition of Payment Cap. If
-------------------------
(x) the aggregate value of all compensation payments or
benefits to be paid or provided to the Executive
under this Agreement and any other plan, agreement or
arrangement with the Company exceeds the amount which
can be paid to the Executive without the Executive
incurring an Excise Tax and
(y) the net-after tax amount (taking into account all
applicable taxes payable by the Executive, including
any Excise Tax) that the Executive would receive if
the limitation contained in this Section 7(e)(iii)
were not imposed does not exceed the net-after tax
benefit the Executive would receive if such
limitation were imposed by more than $25,000,
then the amounts payable to the Executive under this Section 7 shall be
reduced (but not below zero) to the maximum amount which may be paid
hereunder without the Executive becoming subject to such an Excise Tax
(such reduced payments to be referred to as the "Payment Cap"). In the
event that the Executive receives reduced payments and benefits
hereunder, the Executive shall have the right to designate which of the
payments and benefits otherwise provided for in this Agreement that he
will receive in connection with the application of the Payment Cap.
(iv) Application of Section 280G. For purposes of determining
---------------------------
whether any of the Covered Payments will be subject to the Excise Tax
and the amount of such Excise Tax,
(A) such Covered Payments will be treated as
"parachute payments" within the meaning of Section
280G of the Code, and all "parachute payments" in
excess of the "base amount" (as defined under Section
280G(b)(3) of the Code) shall be treated as subject
to the Excise Tax, unless, and except to the extent
that, in the good faith judgment of the Company's
independent certified public accountants appointed
prior to the Effective Date or tax counsel selected
by such Accountants (the "Accountants"), the Company
has a reasonable basis to conclude that such Covered
Payments (in whole or in part) either do not
constitute "parachute payments" or represent
reasonable compensation for personal services
actually rendered (within the meaning of Section
280G(b)(4)(B) of the Code) in excess of the portion
of the "base amount" allocable to such Covered
Payments, or such "parachute payments" are otherwise
not subject to such Excise Tax, and
(B) the value of any noncash benefits or any
deferred payment or benefit shall be determined by
the Accountants in accordance with the principles of
Section 280G of the Code.
(v) Applicable Tax Rates. For purposes of determining whether
--------------------
the Executive would receive a greater net after-tax benefit were the
amounts payable under this Agreement reduced in accordance with
Paragraph 7(e)(iii), the Executive shall be deemed to pay:
(A) Federal income taxes at the highest
applicable marginal rate of Federal income taxation
for the calendar year in which the first amounts are
to be paid hereunder, and
(B) any applicable state and local income
taxes at the highest applicable marginal rate of
taxation for such calendar year, net of the maximum
reduction in Federal incomes taxes which could be
obtained from the deduction of such state or local
taxes if paid in such year;
provided, however, that the Executive may request that such
determination be made based on his individual tax circumstances, which
shall govern such determination so long as the Executive provides to
the Accountants such information and documents as the Accountants shall
reasonably request to determine such individual circumstances.
(vi) Adjustments in Respect of the Payment Cap. If the
-----------------------------------------------
Executive receives reduced payments and benefits under this Section
7(e) (or this Section 7(e) is determined not to be applicable to the
Executive because the Accountants conclude that the Executive is not
subject to any Excise Tax) and it is established pursuant to a final
determination of a court or an Internal Revenue Service proceeding (a
"Final Determination") that, notwithstanding the good faith of the
Executive and the Company in applying the terms of this Agreement, the
aggregate "parachute payments" within the meaning of Section 280G of
the Code paid to the Executive or for his benefit are in an amount that
would result in the Executive being subject an Excise Tax, then the
amount equal to such excess parachute payments shall be deemed for all
purposes to be a loan to the Executive made on the date of receipt of
such excess payments, which the Executive shall have an obligation to
repay to the Company on demand, together with interest on such amount
at the applicable Federal rate (as defined in Section 1274(d) of the
Code) from the date of the payment hereunder to the date of repayment
by the Executive. If this Section 7(e) is not applied to reduce the
Executive's entitlement under this Section 7 because the Accountants
determine that the Executive would not receive a greater net-after tax
benefit by applying this Section 7(e) and it is established pursuant to
a Final Determination that, notwithstanding the good faith of the
Executive and the Company in applying the terms of this Agreement, the
Executive would have received a greater net after tax benefit by
subjecting his payments and benefits hereunder to the Payment Cap, then
the aggregate "parachute payments" paid to the Executive or for his
benefit in excess of the Payment Cap shall be deemed for all purposes a
loan to the Executive made on the date of receipt of such excess
payments, which the Executive shall have an obligation to repay to the
Company on demand, together with interest on such amount at the
applicable Federal rate (as defined in Section 1274(d) of the Code)
from the date of the payment hereunder to the date of repayment by the
Executive. If the Executive receives reduced payments and benefits by
reason of this Section 7(e) and it is established pursuant to a Final
Determination that the Executive could have received a greater amount
without exceeding the Payment Cap, then the Company shall promptly
thereafter pay the Executive the aggregate additional amount which
could have been paid without exceeding the Payment Cap, together with
interest on such amount at the applicable Federal rate (as defined in
Section 1274(d) of the Code) from the original payment due date to the
date of actual payment by the Company.
(f) If Termination of Employment Occurs After the Executive
----------------------------------------------------------
Has Reached Age 62. Notwithstanding anything else to the contrary contained in
- ------------------
this Section 7, if the Executive's employment with the Company terminates at any
time during the 3 year period ending on the first day of the month following the
Executive's sixty-fifth birthday (the "Normal Retirement Date"), and the
Executive would be entitled to receive severance benefits under paragraphs 7(c),
then (i) the multiplier in paragraph 7(c)(i)(B) shall not be 1.99, but shall be
-
a number equal to 1.99 times (x/1095), where x equals the number of days
remaining until the Executive's Normal Retirement Date, and (ii) the End Date
--
described in Section 7(c)(ii) shall not be the third anniversary of the Date of
Termination, but shall be the Executive's Normal Retirement Date.
8. Non-exclusivity of Rights. Except as expressly provided
--------------------------
herein, nothing in this Agreement shall prevent or limit the Executive's
continuing or future participation in any benefit, bonus, incentive or other
plan or program provided by the Company or any of its affiliated companies and
for which the Executive may qualify, nor shall anything herein limit or
otherwise prejudice such rights as the Executive may have under any other
agreements with the Company or any of its affiliated companies, including
employment agreements or stock option agreements. Amounts which are vested
benefits or which the Executive is otherwise entitled to receive under any plan
or program of the Company or any of its affiliated companies at or subsequent to
the Date of Termination shall be payable in accordance with such plan or
program.
9. No Offset. The Company's obligation to make the payments
---------
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Company may have against the Executive or others whether by reason of the
subsequent employment of the Executive or otherwise.
10. Non-Competition and Non-Solicitation. (a) Noncompete.
-------------------------------------- ----------
Unless the Executive otherwise elects by written notice to the Company prior to
his Date of Termination (or in the case of a Company initiated termination,
within 5 business days of receipt of a Notice of Termination, if such period
extends beyond the Date of Termination) not to be bound by the provisions of
this Section 10(a), during the one year period following the Executive's Date of
Termination for any reason (the "Restriction Period"), Executive shall not,
directly or indirectly, engage in, become employed by, serve as an agent or
consultant to, or become a partner, principal or stockholder (other than a
holder of less than 1% of the outstanding voting shares of any publicly held
company) of any business or entity that is engaged in any activity which is
competitive with the business of the Company, National and their respective
subsidiaries or affiliates in any geographic area in which the Company, National
and/or any of their respective subsidiaries or affiliates is engaged in such
competitive business.
(b) Non-Solicitation of Employees. Regardless of whether the
-----------------------------
Executive has elected to be bound by Section 10(a), during the Restriction
Period, the Executive shall not, directly or indirectly, for his own account or
for the account of any other person or entity with which he is or shall become
associated in any capacity, solicit for employment, employ or otherwise
interfere with the relationship of Employer with any person who at any time
during the six months preceding such solicitation, employment or interference is
or was employed by or otherwise engaged to perform services for Employer other
than any such solicitation or employment during the Executive's employment with
Employer on behalf of Employer.
(c) Confidential Information. Regardless of whether the
-------------------------
Executive has elected to be bound by Section 10(a), the Executive shall hold in
a fiduciary capacity for the benefit of National and the Company all secret or
confidential information, knowledge or data relating to National, the Company or
any of their affiliated companies, and their respective businesses, (i) obtained
-
by the Executive during his employment by the Company or any of its affiliated
companies and (ii) not otherwise public knowledge (other than by reason of an
--
unauthorized act by the Executive). After termination of the Executive's
employment with the Company, the Executive shall not, without the prior written
consent of the Company, unless compelled pursuant to an order of a court or
other body having jurisdiction over such matter, communicate or divulge any such
information, knowledge or data to anyone other than the Company and those
designated by it.
(d) Non-disparagement. Regardless of whether the Executive has
-----------------
elected to be bound by Section 10(a), the Executive shall not publicly or
privately disparage National or the Company, or any of their subsidiaries or
affiliates, including any aspect of their respective business, products,
employees, management or Board of Directors, in any manner which could adversely
effect the business of National, the Company or such subsidiaries or affiliates.
Furthermore, the Executive shall not, directly or indirectly, take any action or
fail to take any action with the purpose of interfering with, damaging or
disrupting the assets or business operations or affairs of National or the
Company or any of their respective subsidiaries or affiliates.
National and the Company shall not publicly or privately
disparage the Executive, either personally or professionally. Nothing in this
paragraph shall be construed to prevent any officer of National or the Company
from discussing the Executive's performance internally in the ordinary course of
business.
(e) Company Property. Except as expressly provided herein,
-----------------
promptly following the Executive's termination of employment, the Executive
shall return to the Company all property of National and the Company and all
copies thereof in the Executive's possession or under his control.
(f) Additional Payment. Unless the Executive has elected not
-------------------
to be bound by Section 10(a), the Company shall make an additional lump sum
payment to the Executive within 30 days following the Executive's Date of
Termination equal to one times the sum of (i) the Executive's annual Base Salary
-
and (ii) the Executive's Average Bonus as compensation for the covenant
--
contained in Section 10(a).
11. Injunctive Relief and Other Remedies with Respect to
---------------------------------------------------------
Covenants. The Executive acknowledges and agrees that the covenants and
- ---------
obligations of the Executive set forth in Section 10 relate to special, unique
and extraordinary matters and that a violation of any of the terms of such
covenants and obligations will cause the Company irreparable injury for which
adequate remedies are not available at law. Therefore, the Executive agrees that
the Company shall be entitled to an injunction, restraining order or such other
equitable relief (without the requirement to post bond) restraining the
Executive from committing any violation of the covenants and obligations
contained in Section 10 These remedies are cumulative and are in addition to any
other rights and remedies the Company may have at law or in equity. In no event
shall an asserted violation of the provisions of Section 10 constitute a basis
for deferring or withholding any amounts otherwise payable to the Executive
under this Agreement.
12. Successors. (a) This Agreement is personal to the
----------
Executive and, without the prior written consent of the Company, shall not be
assignable by the Executive otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit of and be enforceable by
the Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be
binding upon the Company and its successors. The Company shall require any
successor to all or substantially all of the business and/or assets of the
Company, whether direct or indirect, by purchase, merger, consolidation,
acquisition of stock, or otherwise, by an agreement in form and substance
satisfactory to the Executive, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent as the Company would be
required to perform if no such succession had taken place.
13. Miscellaneous. (a) Applicable Law. This Agreement shall be
------------- --------------
governed by and construed in accordance with the laws of the State of New York,
applied without reference to principles of conflict of laws.
(b) Arbitration. Except to the extent provided in Section 11,
-----------
in the event that any dispute, controversy or claim arises between the Company
or National and the Executive with respect to the subject matter of this
Agreement and the enforcement of rights hereunder, such dispute, controversy or
claim shall be resolved by binding arbitration before a panel of three
arbitrators selected in accordance with the American Arbitration Association
(the "AAA"). The arbitration shall be conducted in accordance with the Expedited
Employment Arbitration Rules of the American Arbitration Association then in
effect at the time of the arbitration (or such other rules as the parties may
agree to in writing), and otherwise in accordance with principles which would be
applied by a court of law or equity. The determination reached in such
arbitration shall be final and binding on both parties without any right of
appeal or further dispute. Execution of the determination by such arbitration
panel may be sought in any court of competent jurisdiction. The arbitrators
shall not be bound by judicial formalities and may abstain from following the
strict rules of evidence and shall interpret this Agreement as an honorable
engagement and not merely as a legal obligation. Unless otherwise agreed by the
parties, any such arbitration shall take place in a location selected by the
Company which is a convenient forum for such arbitration (taking into account
the availability of a sufficient pool of experienced arbitrators) and not more
than 100 miles from the Executive's principal place of employment at the
Effective Date (or at such other location as may be agreed upon by the parties),
and shall be conducted in accordance with the Rules of the AAA. In the event of
the occurrence of any proceeding (including the appeal of an arbitration
decision) between the Company or National and the Executive with respect to the
subject matter of this Agreement and the enforcement of rights hereunder, the
Company or National shall reimburse the Executive for all reasonable costs and
expenses relating to such proceeding, including reasonable attorneys' fees and
expenses, regardless of the final outcome, unless the arbitration panel
determines that recovery by the Executive of all or a part of such fees, costs
and expenses would be unjust. In no event shall the Executive reimburse the
Company for any of the costs and expenses relating to such litigation or other
proceeding.
(c) Amendments. This Agreement may not be amended or modified
----------
otherwise than by a written agreement executed by the parties hereto or their
respective successors and legal representatives.
(d) Entire Agreement. This Agreement constitutes the entire
-----------------
agreement between the parties hereto with respect to the matters referred to
herein and expressly supersedes the Change in Control Agreement by and between
the Executive, National and the Company dated as of March 16, 1995; provided,
---------
however, that this Agreement is not intended to impair any rights of the
- --------------
Executive under any prior written agreement, any employee benefit plan of the
Company or a Subsidiary or any written policy, program or procedure of the
Company or a Subsidiary unless and to the extent specifically provided herein.
No other agreement relating to the terms of the Executive's employment by the
Company, oral or otherwise, shall be binding between the parties unless it is in
writing and signed by the party against whom enforcement is sought. There are no
promises, representations, inducements or statements between the parties other
than those that are expressly contained herein. The Executive acknowledges that
he is entering into this Agreement of his own free will and accord, and with no
duress, that he has read this Agreement and that he understands it and its legal
consequences.
(e) Notices. All notices and other communications hereunder
-------
shall be in writing and shall be given by hand-delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive: at the home address of the Executive noted
on the records of the Company
If to the Company: Seneca Resources Corporation
1201 Louisiana Street, Suite 400
Houston, TX 77002
Attention: Corporate Secretary
If to National: National Fuel Gas Company
10 Lafayette Square
Buffalo, NY 14203
Attention: Corporate Secretary
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(f) Source of Payments. All payments provided for in paragraph
------------------
3 above shall be paid in cash from the general funds of the Company or National;
provided, however, that such payments shall be reduced by the amount of any
payments made to the Executive or his dependents, beneficiaries or estate from
any trust or special or separate fund established by the Company or National to
assure such payments. The Company or National shall not be required to establish
a special or separate fund or other segregation of assets to assure such
payments, and, if the Company or National shall make any investments to aid it
in meeting its obligations hereunder, the Executive shall have no right, title
or interest whatever in or to any such investments except as may otherwise be
expressly provided in a separate written instrument relating to such
investments. Nothing contained in this Agreement, and no action taken pursuant
to its provisions, shall create or be construed to create a trust of any kind or
a fiduciary relationship, between the Company or National and the Executive or
any other person. To the extent that any person acquires a right to receive
payments from the Company or National such right shall be no greater than the
right of an unsecured creditor of the Company or National.
(g) Tax Withholding. The Company shall withhold from any
----------------
amounts payable under this Agreement such Federal, state or local taxes as shall
be required to be withheld pursuant to any applicable law or regulation.
(h) Severability; Reformation. In the event that one or more
--------------------------
of the provisions of this Agreement shall become invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby. In the
event that any of the provisions of any of Section 10 are not enforceable in
accordance with its terms, the Executive and the Company agree that such Section
shall be reformed to make such Section enforceable in a manner which provides
the Company the maximum rights permitted at law.
(i) Waiver. Waiver by any party hereto of any breach or
------
default by the other party of any of the terms of this Agreement shall not
operate as a waiver of any other breach or default, whether similar to or
different from the breach or default waived. No waiver of any provision of this
Agreement shall be implied from any course of dealing between the parties hereto
or from any failure by either party hereto to assert its or the Executive's
rights hereunder on any occasion or series of occasions.
(j) Counterparts. This Agreement may be executed in
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
(k) Captions. The captions of this Agreement are not part of
--------
the provisions hereof and shall have no force or effect.
IN WITNESS WHEREOF, the Executive has hereunto set his hand
and the Company has caused this Agreement to be executed in its name on its
behalf, and its corporate seal to be hereunto affixed and attested by its
Secretary, all as of the day and year first above written.
SENECA RESOURCES CORPORATION
Attest: /s/ By: /s/
-------------------- -----------------------
Secretary Title: Chairman
NATIONAL FUEL GAS COMPANY
Attest: /s/ By: /s/
-------------------- -----------------------
Secretary Title: Chairman, President & CEO
EXECUTIVE:
/s/
-------------------------
<TABLE>
<CAPTION>
EXHIBIT 12
COMPUTATION OF RATIO OF
EARNINGS TO FIXED CHARGES
UNAUDITED
Twelve Months Fiscal Year Ended September 30
Ended -------------------------------------------------------
June 30, 1999 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------
(Thousands of Dollars)
EARNINGS:
Income Before Interest Charges and Minority
Interest in Foreign Subsidiaries (2) $195,334 $118,085 $169,783 $159,599 $128,061 $127,885
Allowance for Borrowed Funds Used in
Construction 299 110 346 205 195 209
Federal Income Tax 21,891 43,626 57,807 55,148 30,522 36,630
State Income Tax 5,870 6,635 7,067 7,266 4,905 6,309
Deferred Inc. Taxes - Net (3) 31,508 (26,237) 3,800 3,907 8,452 4,853
Investment Tax Credit - Net (711) (663) (665) (665) (672) (682)
Rentals (1) 4,131 4,672 5,328 5,640 5,422 5,730
-------- ------- -------- -------- -------- --------
$258,322 $146,228 $243,466 $231,100 $176,885 $180,934
======== ======== ======== ======== ======== ========
FIXED CHARGES:
Interest & Amortization of Premium and
Discount of Funded Debt $65,267 $53,154 $42,131 $40,872 $40,896 $36,699
Interest on Commercial Paper and
Short-Term Notes Payable 17,074 13,605 8,808 7,872 6,745 5,599
Other Interest (2) 3,448 16,919 4,502 6,389 4,721 3,361
Rentals (1) 4,131 4,672 5,328 5,640 5,422 5,730
------- ------- ------- ------- ------- -------
$89,920 $88,350 $60,769 $60,773 $57,784 $51,389
======= ======= ======= ======= ======= =======
RATIO OF EARNINGS TO FIXED CHARGES 2.87 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) Twelve months ended June 30, 1999 and, fiscal 1998, 1997, 1996, 1995
and 1994 reflect the reclassification of $1,805, $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.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NATIONAL FUEL
GAS COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 09-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,327,021
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 258,006
<TOTAL-DEFERRED-CHARGES> 13,736
<OTHER-ASSETS> 228,401
<TOTAL-ASSETS> 2,827,164
<COMMON> 38,751
<CAPITAL-SURPLUS-PAID-IN> 428,273
<RETAINED-EARNINGS> 486,099
<TOTAL-COMMON-STOCKHOLDERS-EQ> 943,669
0
0
<LONG-TERM-DEBT-NET> 726,272
<SHORT-TERM-NOTES> 218,500
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 132,500
<LONG-TERM-DEBT-CURRENT-PORT> 159,696
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 646,527
<TOT-CAPITALIZATION-AND-LIAB> 2,827,164
<GROSS-OPERATING-REVENUE> 1,072,484
<INCOME-TAX-EXPENSE> 60,327
<OTHER-OPERATING-EXPENSES> 840,529
<TOTAL-OPERATING-EXPENSES> 900,856
<OPERATING-INCOME-LOSS> 171,628
<OTHER-INCOME-NET> 7,901
<INCOME-BEFORE-INTEREST-EXPEN> 179,529
<TOTAL-INTEREST-EXPENSE> 66,385
<NET-INCOME> 110,604
0
<EARNINGS-AVAILABLE-FOR-COMM> 110,604
<COMMON-STOCK-DIVIDENDS> 52,617
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 252,083
<EPS-BASIC> 2.86
<EPS-DILUTED> 2.84
</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-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,171,854
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 261,103
<TOTAL-DEFERRED-CHARGES> 9,521
<OTHER-ASSETS> 237,739
<TOTAL-ASSETS> 2,680,217
<COMMON> 38,389
<CAPITAL-SURPLUS-PAID-IN> 412,925
<RETAINED-EARNINGS> 448,448
<TOTAL-COMMON-STOCKHOLDERS-EQ> 898,703
0
0
<LONG-TERM-DEBT-NET> 795,968
<SHORT-TERM-NOTES> 143,900
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 58,000
<LONG-TERM-DEBT-CURRENT-PORT> 153,437
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 630,209
<TOT-CAPITALIZATION-AND-LIAB> 2,680,217
<GROSS-OPERATING-REVENUE> 1,070,592
<INCOME-TAX-EXPENSE> 25,085
<OTHER-OPERATING-EXPENSES> 975,728
<TOTAL-OPERATING-EXPENSES> 1,000,813
<OPERATING-INCOME-LOSS> 69,779
<OTHER-INCOME-NET> 32,413
<INCOME-BEFORE-INTEREST-EXPEN> 102,192
<TOTAL-INTEREST-EXPENSE> 63,777
<NET-INCOME> 26,263
0
<EARNINGS-AVAILABLE-FOR-COMM> 26,263
<COMMON-STOCK-DIVIDENDS> 50,410
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 242,624
<EPS-BASIC> .69
<EPS-DILUTED> .68
</TABLE>
Exhibit 99
Form 10-Q
June 30, 1999
NATIONAL FUEL GAS
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Twelve Months Ended
June 30,
--------------------
1999 1998
(Thousands of Dollars, Except Per
Common Share Amounts)
INCOME
Operating Revenues $1,249,892 $1,228,156
---------- ----------
Operating Expenses
Purchased Gas 400,790 448,221
Fuel Used in Heat and Electric Generation 54,988 30,160
Operation 308,108 277,817
Maintenance 23,846 26,744
Property, Franchise and Other Taxes 90,715 92,729
Depreciation, Depletion and Amortization 126,398 115,615
Impairment of Oil & Gas Producing Properties - 128,996
Income Taxes - Net 59,266 24,040
---------- ----------
1,064,111 1,144,322
---------- ----------
Operation Income 185,781 83,834
Other Income 11,358 33,012
---------- ----------
Income Before Interest Charges and
Minority Interest in Foreign Subsidiary 197,139 116,846
---------- ----------
Interest Charges
Interest on Long-Term Debt 65,267 48,980
Other Interest 22,626 29,367
---------- ----------
87,893 78,347
---------- ----------
Minority Interest in Foreign Subsidiary (1,717) (3,036)
---------- ----------
Income Before Cumulative Effect 107,529 35,463
Cumulative Effect of Change in Accounting for
Depletion - (9,116)
---------- ----------
Net Income Available for Common Stock $ 107,529 $ 26,347
========== ==========
Basic Earnings (Loss) Per Common Share
Income Before Cumulative Effect $ 2.79 $ 0.93
Cumulative Effect fo Change in Accounting
for Depletion - (0.24)
--------- ---------
Net Income Available for Common Stock $ 2.79 $ 0.69
========= =========
Diluted Earnings (Loss) Per Common Share
Income Before Cumulative Effect $ 2.76 $ 0.92
Cumulative Effect of Change in Accounting
for Depletion - (0.24)
--------- ---------
Net Income Available for Common Stock $ 2.76 $ 0.68
========= =========
Weighted Average Common Shares Outstanding
Used in Basic Calculation 38,574,864 38,242,231
========== ==========
Used in Diluted Calculation 38,917,221 38,649,662
========== ==========
