--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
AMENDMENT NO. 1
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
-------------
Commission File Number 1-3880
-----------------------------
NATIONAL FUEL GAS COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 13-1086010
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Lafayette Square
Buffalo, New York 14203
------------------ -----
(Address of principal executive offices) (Zip Code)
(716) 857-6980
(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, 2000:
39,279,886 shares.
--------------------------------------------------------------------------------
<PAGE>
Explanatory Note
----------------
This amendment to National Fuel Gas Company's quarterly report on Form 10-Q for
the quarter and nine month periods ended June 30, 2000 includes changes from the
previous report to reflect reductions for the three and nine months ended June
30, 2000 in operating revenues and operating expenses of $8,556,000 and
$3,158,000, respectively, and a reduction as of June 30, 2000 in other assets of
$10,614,000, a reduction in current and accrued liabilities of $2,058,000 and a
reduction in deferred credits of $3,158,000. This amendment is required to
reflect the impact of additional mark-to-market losses related to derivative
financial instruments used by the Energy Marketing segment that did not qualify
for hedge accounting.
Company or Group of Companies for which Report is Filed:
--------------------------------------------------------
NATIONAL FUEL GAS COMPANY (Company or Registrant)
DIRECT SUBSIDIARIES: National Fuel Gas Distribution Corporation (Distribution
Corporation)
National Fuel Gas Supply Corporation (Supply Corporation)
Seneca Resources Corporation (Seneca)
Highland Forest Resources, 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)
NFR Power, Inc. (NFR Power)
Niagara Independence Marketing Company (NIM)
Seneca Independence Pipeline Company (SIP)
INDEX
Part I. Financial Information Page
----------------------------- ----
Item 1. Financial Statements
a. Consolidated Statements of Income and
Earnings Reinvested in the Business - Three
and Nine Months Ended June 30, 2000 and 1999 4 - 5
b. Consolidated Balance Sheets - June 30, 2000
and September 30, 1999 6 - 7
c. Consolidated Statement of Cash Flows - Nine Months
Ended June 30, 2000 and 1999 8
d. Consolidated Statement of Comprehensive Income - Three
and Nine Months Ended June 30, 2000 and 1999 9
e. Notes to Consolidated Financial Statements 10 - 18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19 - 41
Item 3. Quantitative and Qualitative Disclosures About Market Risk 42
Part II. Other Information
--------------------------
Item 1. Legal Proceedings 42
Item 2. Changes in Securities 42
Item 3. Defaults Upon Senior Securities o
Item 4. Submission of Matters to a Vote of Security Holders o
Item 5. Other Information 42
Item 6. Exhibits and Reports on Form 8-K 42 - 43
Signature 44
o 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" within the meaning of
Section 21E of the Securities Exchange Act of 1934. Forward-looking statements
should be read with the cautionary statements and important factors 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 "*" 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
---------------------
<TABLE>
<CAPTION>
National Fuel Gas Company
-------------------------
Consolidated Statements of Income and Earnings
----------------------------------------------
Reinvested in the Business
--------------------------
(Unaudited)
-----------
Three Months Ended
June 30,
(Dollars in Thousands, Except Per Common Share Amounts) 2000
(Restated) 1999
-----------------------------------
<S> <C> <C>
INCOME
Operating Revenues $281,201 $248,658
---------------------------------------------------------------------------------------------------------------------
Operating Expenses
Purchased Gas 94,883 64,449
Fuel Used in Heat and Electric Generation 9,896 9,530
Operation 79,469 77,058
Maintenance 5,710 5,753
Property, Franchise and Other Taxes 14,794 20,817
Depreciation, Depletion and Amortization 35,083 31,985
Income Taxes 11,323 7,747
--------------------------------------------------------------------------------------------------------------------
251,158 217,339
--------------------------------------------------------------------------------------------------------------------
Operating Income 30,043 31,319
Other Income 2,271 1,584
--------------------------------------------------------------------------------------------------------------------
Income Before Interest Charges and
Minority Interest in Foreign Subsidiaries 32,314 32,903
--------------------------------------------------------------------------------------------------------------------
Interest Charges
Interest on Long-Term Debt 17,550 16,180
Other Interest 6,115 5,231
--------------------------------------------------------------------------------------------------------------------
23,665 21,411
--------------------------------------------------------------------------------------------------------------------
Minority Interest in Foreign Subsidiaries 421 348
--------------------------------------------------------------------------------------------------------------------
Net Income Available for Common Stock 9,070 11,840
EARNINGS REINVESTED IN THE BUSINESS
Balance at April 1 552,198 492,233
--------------------------------------------------------------------------------------------------------------------
561,268 504,073
Dividends on Common Stock
(2000 - $0.48 per share; 1999 - $0.465 per share) 18,794 17,974
--------------------------------------------------------------------------------------------------------------------
Balance at June 30 $542,474 $486,099
====================================================================================================================
Earnings Per Common Share:
Basic $0.23 $0.31
====================================================================================================================
Diluted $0.23 $0.30
====================================================================================================================
Weighted Average Common Shares Outstanding:
Used in Basic Calculation 39,177,148 38,662,728
====================================================================================================================
Used in Diluted Calculation 39,677,909 39,000,553
====================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. Financial Statements (Cont.)
----------------------------
<TABLE>
<CAPTION>
National Fuel Gas Company
-------------------------
Consolidated Statements of Income and Earnings
----------------------------------------------
Reinvested in the Business
--------------------------
(Unaudited)
-----------
Nine Months Ended
June 30,
(Dollars in Thousands, Except Per Common Share Amounts) 2000
(Restated) 1999
-----------------------------------
<S> <C> <C>
INCOME
Operating Revenues $1,175,999 $1,072,484
--------------------------------------------------------------------------------------------------------------------
Operating Expenses
Purchased Gas 441,912 377,273
Fuel Used in Heat and Electric Generation 46,563 47,311
Operation 241,350 232,221
Maintenance 17,101 17,400
Property, Franchise and Other Taxes 61,195 73,504
Depreciation, Depletion and Amortization 102,685 92,820
Income Taxes 73,839 60,327
--------------------------------------------------------------------------------------------------------------------
984,645 900,856
--------------------------------------------------------------------------------------------------------------------
Operating Income 191,354 171,628
Other Income 7,636 7,901
--------------------------------------------------------------------------------------------------------------------
Income Before Interest Charges and
Minority Interest in Foreign Subsidiaries 198,990 179,529
--------------------------------------------------------------------------------------------------------------------
Interest Charges
Interest on Long-Term Debt 50,446 49,630
Other Interest 21,300 16,755
--------------------------------------------------------------------------------------------------------------------
71,746 66,385
--------------------------------------------------------------------------------------------------------------------
Minority Interest in Foreign Subsidiaries (2,255) (2,540)
--------------------------------------------------------------------------------------------------------------------
Net Income Available for Common Stock 124,989 110,604
EARNINGS REINVESTED IN THE BUSINESS
Balance at October 1 472,517 428,112
--------------------------------------------------------------------------------------------------------------------
597,506 538,716
Dividends on Common Stock
(2000 - $1.41 per share; 1999 - $1.365 per share) 55,032 52,617
--------------------------------------------------------------------------------------------------------------------
Balance at June 30 $542,474 $486,099
====================================================================================================================
Earnings Per Common Share:
Basic $3.20 $2.86
====================================================================================================================
Diluted $3.17 $2.84
====================================================================================================================
Weighted Average Common Shares Outstanding:
Used in Basic Calculation 39,058,490 38,619,120
====================================================================================================================
Used in Diluted Calculation 39,470,417 38,969,822
====================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. Financial Statements (Cont.)
----------------------------
<TABLE>
<CAPTION>
National Fuel Gas Company
-------------------------
Consolidated Balance Sheets
---------------------------
(Unaudited)
-----------
June 30,
2000 September 30,
(Restated) 1999
----------------------------------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Property, Plant and Equipment $3,779,061 $3,390,875
Less - Accumulated Depreciation, Depletion
and Amortization 1,116,491 1,029,643
---------------------------------------------------------------------------------------------------------------------
2,662,570 2,361,232
---------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and Temporary Cash Investments 55,354 29,222
Receivables - Net 158,105 97,828
Unbilled Utility Revenue 17,756 18,674
Gas Stored Underground 23,406 41,099
Materials and Supplies - at average cost 29,740 23,631
Unrecovered Purchased Gas Costs 2,741 4,576
Prepayments 26,990 35,072
---------------------------------------------------------------------------------------------------------------------
314,092 250,102
---------------------------------------------------------------------------------------------------------------------
Other Assets
Recoverable Future Taxes 87,724 87,724
Unamortized Debt Expense 20,508 21,717
Other Regulatory Assets 20,247 25,214
Deferred Charges 11,341 14,266
Other 92,686 82,331
---------------------------------------------------------------------------------------------------------------------
232,506 231,252
---------------------------------------------------------------------------------------------------------------------
$3,209,168 $2,842,586
=====================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. Financial Statements (Cont.)
----------------------------
<TABLE>
<CAPTION>
National Fuel Gas Company
-------------------------
Consolidated Balance Sheets
---------------------------
(Unaudited)
-----------
June 30,
2000 September 30,
(Restated) 1999
----------------------------------------
(Thousands of Dollars)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
Capitalization:
Common Stock Equity
Common Stock, $1 Par Value
Authorized - 200,000,000 Shares; Issued
and Outstanding - 39,223,061 Shares and
38,837,499 Shares, Respectively $39,223 $38,837
Paid in Capital 448,115 431,952
Earnings Reinvested in the Business 542,474 472,517
Accumulated Other Comprehensive Loss (18,668) (4,013)
--------------------------------------------------------------------------------------------------------------------
Total Common Stock Equity 1,011,144 939,293
Long-Term Debt, Net of Current Portion 958,327 822,743
---------------------------------------------------------------------------------------------------------------------
Total Capitalization 1,969,471 1,762,036
---------------------------------------------------------------------------------------------------------------------
Minority Interest in Foreign Subsidiaries 26,052 27,589
---------------------------------------------------------------------------------------------------------------------
Current and Accrued Liabilities
Notes Payable to Banks and
Commercial Paper 518,774 393,495
Current Portion of Long-Term Debt 12,646 69,608
Accounts Payable 95,659 82,747
Amounts Payable to Customers 3,070 5,934
Other Accruals and Current Liabilities 138,609 87,310
---------------------------------------------------------------------------------------------------------------------
768,758 639,094
---------------------------------------------------------------------------------------------------------------------
Deferred Credits
Accumulated Deferred Income Taxes 305,777 275,008
Taxes Refundable to Customers 14,814 14,814
Unamortized Investment Tax Credit 10,214 11,007
Other Deferred Credits 114,082 113,038
---------------------------------------------------------------------------------------------------------------------
444,887 413,867
---------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies - -
---------------------------------------------------------------------------------------------------------------------
$3,209,168 $2,842,586
=====================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. Financial Statements (Cont.)
----------------------------
<TABLE>
<CAPTION>
National Fuel Gas Company
-------------------------
Consolidated Statement of Cash Flows
------------------------------------
(Unaudited)
-----------
Nine Months Ended
June 30,
-----------------------------------------
(Thousands of Dollars) 2000
(Restated) 1999
-----------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income Available for Common Stock $124,989 $110,604
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation, Depletion and Amortization 102,685 92,820
Deferred Income Taxes 11,399 12,912
Minority Interest in Foreign Subsidiaries 2,255 2,540
Other 5,102 5,597
Change in:
Receivables and Unbilled Utility Revenue (53,959) (56,195)
Gas Stored Underground and Materials and
Supplies 14,579 11,235
Unrecovered Purchased Gas Costs 1,835 6,316
Prepayments 9,415 (6,284)
Accounts Payable 561 (13,234)
Amounts Payable to Customers (2,864) 15,703
Other Accruals and Current Liabilities 51,810 46,637
Other Assets (7,826) (12,203)
Other Liabilities 1,030 31,576
----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by
Operating Activities 261,011 248,024
----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital Expenditures (184,862) (205,859)
Investment in Subsidiaries, Net of Cash Acquired (123,809) -
Investment in Partnerships (4,375) (3,633)
Other 11,390 3,519
----------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (301,656) (205,973)
----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Change in Notes Payable to Banks and Commercial Paper 125,450 24,700
Net Proceeds from Issuance of Long-Term Debt 149,334 98,736
Reduction of Long-Term Debt (161,499) (115,365)
Dividends Paid on Common Stock (54,253) (51,904)
Proceeds from Issuance of Common Stock 11,128 7,921
----------------------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used in) Financing 70,160 (35,912)
Activities
----------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rates on Cash (3,383) (728)
----------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Temporary Cash 26,132 5,411
Investments
Cash and Temporary Cash Investments at October 1 29,222 30,437
----------------------------------------------------------------------------------------------------------------------
Cash and Temporary Cash Investments at June 30 $55,354 $35,848
======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
Item 1. Financial Statements (Cont.)
----------------------------
<TABLE>
<CAPTION>
National Fuel Gas Company
-------------------------
Consolidated Statement of Comprehensive Income
----------------------------------------------
(Unaudited)
-----------
Three Months Ended
June 30,
---------------------------------------------------
(Thousands of Dollars) 2000
(Restated) 1999
---------------------------------------------------
<S> <C> <C> <C> <C>
Net Income Available for Common Stock $9,070 $11,840
------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income, Before Tax:
Foreign Currency Translation Adjustment 762 2,326
Unrealized Gain on Securities Available for Sale
Arising During the Period 447 -
Less: Reclassification Adjustment for Gains
Realized in Net Income (103) -
----------- -----------
344 -
------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Gain, Before Tax 1,106 2,326
Income Tax Expense Related to Unrealized Gain
on Securities Available for Sale Arising During the Period (156) -
Less: Reclassification Adjustment for Income Tax
Expense on Gains Realized in Net Income 36 -
----------- -----------
(120) -
------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Gain, Net of Tax 986 2,326
------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $10,056 $14,166
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
-------------------------------------------------------
(Thousands of Dollars) 2000
(Restated) 1999
-------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income Available for Common Stock $124,989 $110,604
-------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income, Before Tax:
Foreign Currency Translation Adjustment (15,802) (16,719)
Unrealized Gain on Securities Available for Sale
Arising During the Period 1,867 -
Less: Reclassification Adjustment for Gains
Realized in Net Income (103) -
----------- -----------
1,764 -
-------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Loss, Before Tax (14,038) (16,719)
Income Tax Expense Related to Unrealized Gain on
Securities Available for Sale Arising During the Period (653) -
Less: Reclassification Adjustment for Income Tax
Expense on Gains Realized in Net Income 36 -
----------- -----------
(617) -
-------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Loss, Net of Tax (14,655) (16,719)
-------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $110,334 $93,885
=========================================================================================================================
</TABLE>
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 and 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, 1999, 1998 and 1997 that are included in
the Company's combined Annual Report to Shareholders/Form 10-K for 1999. The
2000 consolidated financial statements will be examined by the Company's
independent accountants after the end of the fiscal year.
The earnings for the nine months ended June 30, 2000 should not be
taken as a prediction of earnings for the entire fiscal year ending September
30, 2000. Most of the Company's business is seasonal in nature and is influenced
by weather conditions. Because of the seasonal nature of the Company's heating
business, earnings during the winter months normally represent a substantial
part of earnings for the entire fiscal year. The impact of abnormal weather on
earnings during the heating season is partially reduced by the operation of a
weather normalization clause (WNC) included in Distribution Corporation's New
York tariff. The WNC is effective for October through May billings. Distribution
Corporation's tariff for its Pennsylvania jurisdiction does not have a WNC. In
addition, Supply Corporation's straight fixed-variable rate design, which allows
for recovery of substantially all fixed costs in the demand or reservation
charge, reduces the earnings impact of weather fluctuations.
Consolidated Statement of Cash Flows. For purposes of the Consolidated Statement
of Cash Flows, the Company considers all highly liquid debt instruments
purchased with a maturity of generally three months or less to be cash
equivalents. Cash interest payments during the nine months ended June 30, 2000
and 1999 amounted to $70.8 million and $64.1 million, respectively. Income taxes
paid during the nine months ended June 30, 2000 and 1999 amounted to $33.0
million and $30.4 million, respectively. In November 1999, the Company entered
into a non-cash investing activity whereby it issued 54,674 shares of Company
common stock to Supply Corporation, which in turn exchanged those shares for the
assets of Cunningham Natural Gas Corporation. The assets included approximately
$1.2 million of property, plant and equipment and $1.6 million of other assets.
In June 2000, Seneca acquired 100% of the stock of Tri Link Resources,
Ltd. (Tri Link). Details of the acquisition are as follows (dollars in
millions):
Assets acquired $260.7
Liabilities assumed (136.9)
Cash acquired at acquisition -
------
Cash paid, net of cash acquired $123.8
======
Further discussion of this acquisition can be found at Note 3 - Stock
Acquisition.
<PAGE>
Item 1. Financial Statements (Cont.)
----------------------------
Reclassification. Certain prior year amounts have been reclassified to conform
with current year presentation.
Accumulated Other Comprehensive Income (Loss). The components of Accumulated
Other Comprehensive Income (Loss) are as follows (in thousands):
<TABLE>
<CAPTION>
At June 30, 2000 At September 30, 1999
---------------- ---------------------
<S> <C> <C>
Cumulative Foreign Currency Translation Adjustment $(20,274) $(4,472)
Net Unrealized Gain on Securities
Available for Sale 1,606 459
-------- -------
Accumulated Other Comprehensive Loss $(18,668) $(4,013)
======== =======
</TABLE>
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.
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 that could
result from the exercise of these stock options as determined using the Treasury
Stock Method.
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,
---------------------------------------
2000
(Restated) 1999
------------------ --------------------
Operating Expenses:
Current Income Taxes
Federal $49,979 $35,940
State 13,538 6,050
Deferred Income Taxes
Federal 6,927 13,585
State 409 1,706
Foreign Income Taxes 2,986 3,046
-------------------------------------------------------------------------------
73,839 60,327
Other Income:
Deferred Investment Tax Credit (788) (499)
Minority Interest in Foreign Subsidiaries (479) (705)
-------------------------------------------------------------------------------
Total Income Taxes $72,572 $59,123
===============================================================================
<PAGE>
Item 1. Financial Statements (Cont.)
----------------------------
The U.S. and foreign components of income before income taxes are as follows (in
thousands):
Nine Months Ended
June 30,
2000
(Restated) 1999
--------------------------------------------------------------------------
U.S. $184,486 $155,553
Foreign 13,075 14,174
--------------------------------------------------------------------------
$197,561 $169,727
==========================================================================
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,
-----------------------------------
2000
(Restated) 1999
-----------------------------------
Net income available for common stock $124,989 $110,604
Total income taxes 72,572 59,123
-------------------------------------------------------------------------------
Income before income taxes $197,561 $169,727
===============================================================================
Income tax expense, computed at
statutory rate of 35% $ 69,146 $ 59,404
Increase (reduction) in taxes resulting from:
State income taxes 9,229 5,045
Depreciation 1,387 1,492
Prior years tax adjustment 37 (1,329)
Foreign tax in excess of (less than)
statutory rate (2,629) (2,620)
Miscellaneous (4,598) (2,869)
-------------------------------------------------------------------------------
Total Income Taxes $ 72,572 $ 59,123
===============================================================================
Significant components of the Company's deferred tax liabilities
(assets) were as follows (in thousands):
<TABLE>
<CAPTION>
At June 30, 2000
(Restated) At September 30, 1999
--------------------------------------------------------------
<S> <C> <C>
Deferred Tax Liabilities:
Excess of tax over book depreciation $219,521 $227,881
Exploration and intangible well drilling costs 118,237 95,034
Other 59,663 39,040
---------------------------------------------------------------------------------------------------------------------
Total Deferred Tax Liabilities 397,421 361,955
---------------------------------------------------------------------------------------------------------------------
Deferred Tax Assets:
Capitalized overheads (29,345) (26,861)
Other (62,299) (60,086)
---------------------------------------------------------------------------------------------------------------------
Total Deferred Tax Assets (91,644) (86,947)
---------------------------------------------------------------------------------------------------------------------
Total Net Deferred Income Taxes $305,777 $275,008
=====================================================================================================================
</TABLE>
<PAGE>
Item 1. Financial Statements (Cont.)
----------------------------
The Internal Revenue Service audits of the Company for the years 1977
- 1994 were settled during December 1998. Net income for the nine months ended
June 30, 1999 was increased by approximately $3.9 million as a result of
interest, net of tax and other adjustments, related to this settlement.
Note 3 - Stock Acquisition
In June 2000, National Fuel Exploration Corporation (NFEC), a wholly-owned
subsidiary of Seneca, acquired the outstanding shares of Tri Link, a
Calgary-Alberta based oil and gas exploration and production company. The cost
of acquiring the outstanding shares of Tri Link was approximately $123.8
million. The acquisition was financed with short-term borrowings. Upon
completing this acquisition, Tri Link was amalgamated under the name of NFEC.
The acquisition of Tri Link was accounted for in accordance with the
purchase method as specified by Accounting Principles Board Opinion No. 16.
NFEC's results of operations were incorporated into the Company's consolidated
financial statements for the period subsequent to the completion of the
acquisition of Tri Link on June 15, 2000. See Note 4 - Capitalization for
discussion of the redemption of long-term debt, which was assumed as part of the
Tri Link stock acquisition.
Note 4 - Capitalization
Common Stock. During the nine months ended June 30, 2000, the Company issued
330,888 shares of common stock under the Company's stock and benefit plans. As
previously discussed, 54,674 shares were issued for the purchase of the assets
of Cunningham Natural Gas Corporation.
On February 17, 2000, 725,500 stock options were granted at an
exercise price of $46.66 per share. On March 17, 2000, 25,000 stock options were
granted at an exercise price of $41.56 per share. On June 15, 2000, 140,600
stock options were granted at an exercise price of $49.72 per share.
In February 2000, the Company issued $150.0 million of 7.30%
medium-term notes due in February 2003. After deducting underwriting discounts
and commissions, the net proceeds to the Company amounted to $149.3 million. The
proceeds of this debt issuance were used to redeem $50.0 million of 6.60%
medium-term notes which matured in February 2000 and to reduce short-term debt.
On June 27, 2000, NFEC paid approximately $96.2 million to redeem the
bank loans (CND 70.0 million, USD 47.2 million) and subordinated convertible
debentures (CND 72.7 million, USD 49.0 million) of the former Tri Link.
Short-term debt was used to redeem the bank loans and subordinated convertible
debentures.
Note 5 - Derivative Financial Instruments
Seneca has entered into certain price swap agreements, no cost collars 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 derivative financial instruments are not held for
trading purposes. The price swap agreements call for Seneca to receive monthly
payments from (or make payments to) other parties based upon the difference
between a fixed and a variable price as specified by the agreement. The no cost
collars call for Seneca to receive monthly payments from (or make payments to)
other parties when a variable price falls below an established floor price
(Seneca receives payment from the counterparty) or exceeds an established
ceiling price (Seneca pays the counterparty). The variable prices specified in
the price swap agreements and the no cost collars are either a crude oil price
quoted on the New York Mercantile Exchange or a natural gas price quoted in
"Inside FERC." These variable prices are highly correlated with the market
prices received by Seneca for its natural gas and crude oil production. The fair
value of outstanding natural gas and crude oil price swap agreements, no cost
collars and options discussed below reflect the estimated amounts Seneca would
pay or receive to terminate its derivative financial instruments at June 30,
2000.
<PAGE>
Item 1. Financial Statements (Cont.)
----------------------------
At June 30, 2000, Seneca had natural gas price swap agreements
covering a notional amount of 36.4 billion cubic feet (Bcf) extending through
2003 at a weighted average fixed rate of $2.85 per thousand cubic feet (Mcf).
Seneca also had crude oil price swap agreements covering a notional amount of
8,703,895 barrels (bbls) extending through 2003 at a weighted average fixed rate
of $20.34 per bbl. The fair value of Seneca's outstanding natural gas and crude
oil price swap agreements at June 30, 2000 was a net loss of approximately $74.6
million. This loss was offset by corresponding unrecognized gains from Seneca's
anticipated natural gas and crude oil production over the terms of the price
swap agreements.
Seneca recognized net losses of $12.6 million and $23.0 million
related to settlements of its price swap agreements during the quarter and nine
months ended June 30, 2000, respectively. During the quarter and nine months
ended June 30, 1999, Seneca recognized net gains of $0.3 million and $6.2
million, respectively, related to its price swap agreements. Gains or losses
from Seneca's price swap agreements are accrued in operating revenues on the
Consolidated Statement of Income at the contract settlement dates. These gains
or losses were offset by corresponding gains or losses from Seneca's natural gas
and crude oil production.
At June 30, 2000, Seneca had no cost collars on natural gas covering
a notional amount of 3.1 Bcf in 2001 with a weighted average floor price of
$3.69 per Mcf and a weighted average ceiling price of $6.00 per Mcf. Seneca also
had no cost collars on crude oil covering a notional amount of 1,500,000 bbls
extending through 2002 with a weighted average floor price of $22.00 per bbl and
a weighted average ceiling price of $29.03 per bbl. The fair value of Seneca's
outstanding no cost collars on natural gas and crude oil at June 30, 2000 was a
net loss of approximately $0.1 million. This loss was offset by corresponding
gains or losses from Seneca's natural gas and crude oil production.
At June 30, 2000, Seneca had the following options outstanding:
<TABLE>
<CAPTION>
Type of Option Notional Amount Weighted Average Strike Price
-------------- --------------- -----------------------------
<S> <C> <C>
Written Call Options (1) 7.0 Bcf or 368,000 bbls $2.58/Mcf or $18.00/bbl
Written Put Option 368,000 bbls $12.50/bbl
Purchased Call Option 368,000 bbls $20.00/bbl
</TABLE>
(1) The counterparty has a choice between a natural gas call option and a crude
oil call option, depending on whichever option has greater value to the
counterparty.
Seneca's call and put options are being marked-to-market 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,
2000 was a loss of $7.4 million. The mark-to-market adjustment for the quarter
and nine months ended June 30, 1999 was a loss of $1.1 million. The fair value
of the call and put options at June 30, 2000 was a net liability of $11.1
million. During the quarter and nine months ended June 30, 2000, Seneca paid the
counterparty $4.1 million and $7.5 million, respectively, related to the
exercise of a portion of the written call options and received $3.1 million and
$8.0 million, respectively, from the counterparty related to Seneca's exercise
of a portion of the $20.00 per bbl call options that it had purchased.
Settlements related to Seneca's call and put options during the quarter and nine
months ended June 30, 1999 were minor payments of less than $100,000.
The Company is exposed to credit risk on the price swap agreements and
no cost collars 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 counterparties pursuant to
the terms of their contractual obligations. To mitigate such credit risk,
management performs an initial credit check and then on an ongoing basis
monitors counterparty credit exposure.
<PAGE>
Item 1. Financial Statements (Cont.)
----------------------------
NFR utilizes exchange-traded futures and exchange-traded 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, 2000, NFR had natural gas futures contracts that qualify
for hedge accounting covering 0.3 Bcf of gas on a net basis (net long position)
extending through 2002 at a weighted average contract price of $3.87 per Mcf.
NFR had purchased natural gas options outstanding that qualify for hedge
accounting covering 2.6 Bcf of gas extending through 2001 at a weighted average
strike price of $3.41 per Mcf. NFR also had sold natural gas options outstanding
that qualify for hedge accounting covering 2.6 Bcf of gas extending through 2001
at a weighted average strike price of $4.27 per Mcf. The exchange-traded futures
and exchange-traded options are used to hedge NFR's purchase and sale
commitments and storage gas inventory. The fair value of NFR's outstanding
exchange-traded futures and exchange-traded options at June 30, 2000 was a net
liability of approximately $2.0 million. This fair value reflects the estimated
net amount that NFR would pay to terminate its exchange-traded futures and
exchange-traded options at June 30, 2000. This liability was substantially
offset by corresponding unrecognized gains from the related commodity
transaction. NFR recognized net gains of $2.2 million and $4.0 million related
to these futures contracts and options during the quarter and nine months ended
June 30, 2000, respectively. During the quarter and nine months ended June 30,
1999, NFR recognized net losses of $1.1 million and $6.5 million, respectively,
related to these futures contracts and options. These gains or losses were
substantially offset by the related commodity transaction. NFR's accounting
policy is to defer gains or losses from the natural gas futures that qualify for
hedge accounting in either Other Deferred Credits or Deferred Charges on the
Consolidated Balance Sheet until the hedged commodity transaction occurs, at
which point they are reflected in operating revenues on the Consolidated
Statement of Income. NFR's accounting policy for options that qualify for hedge
accounting is to defer the premium paid or received on the Consolidated Balance
Sheet and amortize the premium over the life of the option.
At June 30, 2000, NFR had purchased natural gas options outstanding
that do not qualify for hedge accounting covering a notional amount of 67.7 Bcf
extending through 2001 at a weighted average strike price of $4.24 per Mcf at
June 30, 2000. It had also sold natural gas options outstanding that do not
qualify for hedge accounting covering a notional amount of 90.0 Bcf extending
through 2001 at a weighted average strike price of $4.51 per Mcf. The
outstanding exchange-traded futures contracts that do not qualify for hedge
accounting amounted to 1.2 Bcf of gas on a net basis (net short position),
extending through 2001, at a weighted average contract price of $3.91 per Mcf.
All of NFR's exchange-traded options and exchange-traded futures that do not
qualify for hedge accounting are marked-to-market on a quarterly basis with
resulting gains or losses recorded in operating revenues on the Consolidated
Statement of Income. The mark-to-market adjustment for these instruments was a
loss of $13.8 million for the quarter ending June 30, 2000. The fair value of
these exchange-traded options and exchange-traded futures at June 30, 2000 was a
net liability of $9.1 million. This fair value reflects the estimated net amount
that NFR would pay to terminate its exchange-traded options and exchange-traded
futures at June 30, 2000.
Privni severozapadni teplarenska, a.s. (PSZT) utilizes an interest rate
swap to mitigate interest rate fluctuations on its Czech koruna (CZK)
1,436,331,600 term loan ($38.5 million at June 30, 2000), which carries a
variable interest rate of six month Prague Interbank Offered Rate (PRIBOR) plus
0.475%. Under the terms of the interest rate swap, which extends until 2002,
PSZT pays a fixed rate of 8.31% and receives a floating rate of six month
PRIBOR. PSZT recognized a loss of approximately $0.3 million and $0.7 million
related to this interest rate swap during the quarter and nine months ended June
30, 2000, respectively. The fair value of PSZT's interest rate swap at June 30,
2000 was a loss of approximately $1.8 million.
<PAGE>
Item 1. Financial Statements (Cont.)
----------------------------
Note 6 - Commitments and Contingencies
Environmental Matters. It is the Company's policy to accrue estimated
environmental clean-up costs (investigation and remediation) when such amounts
can reasonably be estimated and it is probable that the Company will be required
to incur such costs. Distribution Corporation and Supply Corporation have
estimated their clean-up costs related to former manufactured gas plant and
former gasoline plant sites and third party waste disposal sites will be in the
range of $8.1 million to $9.1 million. The minimum liability of $8.1 million has
been recorded on the Consolidated Balance Sheet at June 30, 2000. Other than as
discussed in Note H of the 1999 Form 10-K (referred to below), 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.
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 comply with regulatory policies and
procedures.
For further discussion refer to Note H - Commitments and Contingencies
under the heading "Environmental Matters" in Item 8 of the Company's 1999 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 in the year of resolution,
none of this litigation, and none of these regulatory matters, are expected to
have a material adverse effect on the financial condition of the Company at this
time.
Note 7 - Business Segment Information. The Company has six reportable segments:
Utility, Pipeline and Storage, Exploration and Production, International, Energy
Marketing, and Timber. The breakdown of the Company's reportable segments is
based upon a combination of factors including differences in products and
services, regulatory environment and geographic factors.
The data presented in the tables below reflect the reportable segments
and reconciliations to consolidated amounts. There have been no changes in the
basis of segmentation nor in the basis of measuring segment profit or loss from
those used in the 1999 Form 10-K. There have been no material changes in the
amount of assets for any operating segment from the amounts disclosed in the
1999 Form 10-K, except for the Exploration and Production segment. On June 15,
2000, the Exploration and Production segment, through NFEC, acquired the
outstanding shares of Tri Link, which included assets of $260.7 million. See
further discussion of this acquisition in Note 3 - Stock Acquisition.
<PAGE>
Item 1. Financial Statements (Cont.)
-----------------------------
<TABLE>
<CAPTION>
Quarter Ended June 30, 2000 (Thousands)
-----------------------------------------------------------------------------------------------------------------------------------
Total
Pipeline Exploration Energy Reportable Corporate and Total
and and Marketing Segments Intersegment Consolidated
Utility Storage Production International (Restated) Timber (Restated) All Other Eliminations (Restated)
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue from
External $160,428 $19,736 $53,447 $15,303 $25,653 $10,662 $285,229 $(4,028) $ - $281,201
Customers
Intersegment
Revenues 4,022 22,104 - - - - 26,126 4,322 (30,448) -
Segment Profit:
Net Income (Loss) 5,565 7,324 6,026 (1,394) (9,390) 1,155 9,286 (315) 99 9,070
Nine Months Ended June 30, 2000 (Thousands)
-----------------------------------------------------------------------------------------------------------------------------------
Total
Pipeline Exploration Energy Reportable Corporate and Total
and and Marketing Segments Intersegment Consolidated
Utility Storage Production International (Restated) Timber (Restated) All Other Eliminations (Restated)
-----------------------------------------------------------------------------------------------------------------------------------
Revenue from
External $727,172 $61,775 $153,591 $92,985 $108,561 $30,933 $1,175,017 $982 $ - $1,175,999
Customers
Intersegment
Revenues 16,868 66,425 224 - - - 83,517 4,323 (87,840) -
Segment Profit:
Net Income (Loss) 68,843 26,762 21,910 7,606 (7,942) 6,175 123,354 212 1,423 124,989
Quarter Ended June 30, 1999 (Thousands)
-----------------------------------------------------------------------------------------------------------------------------------
Pipeline Exploration Total Corporate and
and and Energy Reportable Intersegment Total
Utility Storage Production International Marketing Timber Segments All Other Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
Revenue from
External $141,960 $19,544 $38,655 $16,089 $25,979 $6,333 $248,560 $98 $ - $248,658
Customers
Intersegment
Revenues 1,236 20,925 1,507 - - - 23,668 - (23,668) -
Segment Profit:
Net Income (Loss) 3,439 6,995 2,576 (2,495) 847 586 11,948 (43) (65) 11,840
Nine Months Ended June 30, 1999 (Thousands)
-----------------------------------------------------------------------------------------------------------------------------------
Pipeline Exploration Total Corporate and
and and Energy Reportable Intersegment Total
Utility Storage Production International Marketing Timber Segments All Other Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
Revenue from
External
Customers $705,581 $62,837 $99,001 $97,166 $82,253 $24,110 $1,070,948 $1,536 $ - $1,072,484
Intersegment
Revenues 5,269 63,839 6,449 - - - 75,557 - (75,557) -
Segment Profit:
Net Income 62,438 30,094 2,982 7,996 1,730 4,445 109,685 162 757 110,604
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Item 1. Financial Statements (Concl.)
-----------------------------
Note 8 - Restatement. The Company's financial statements at June 30, 2000 and
for the three months and nine months ended June 30, 2000 have been restated from
amounts previously reported to reflect the impact of additional mark-to-market
losses related to derivative financial instruments used by the Energy Marketing
segment that did not qualify for hedge accounting. The following table shows the
income statement and balance sheet line items that have been restated:
Restated As Previously Reported
-------- ----------------------
<S> <C> <C>
Operating Revenues:
Three Months Ended June 30, 2000 $ 281,201 $ 289,757
Nine Months Ended June 30, 2000 1,175,999 1,184,555
Income Taxes:
Three Months Ended June 30, 2000 11,323 14,481
Nine Months Ended June 30, 2000 73,839 76,997
Net Income Available for Common Stock:
Three Months Ended June 30, 2000 9,070 14,468
Nine Months Ended June 30, 2000 124,989 130,387
Basic Earnings Per Common Share:
Three Months Ended June 30, 2000 0.23 0.37
Nine Months Ended June 30, 2000 3.20 3.34
Diluted Earnings Per Common Share:
Three Months Ended June 30, 2000 0.23 0.36
Nine Months Ended June 30, 2000 3.17 3.30
Deferred Charges 11,341 21,955
Earnings Reinvested in the Business 542,474 547,872
Other Accruals and Current Liabilities 138,609 140,667
Accumulated Deferred Income Taxes 305,777 308,935
Total Assets 3,209,168 3,219,782
Total Capitalization and Liabilities 3,209,168 3,219,782
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
RESULTS OF OPERATIONS
Earnings. The Company's earnings were $9.1 million, or $0.23 per common share
(basic and diluted), for the quarter ended June 30, 2000. This compares with
earnings of $11.8 million, or $0.31 per common share ($0.30 per common share on
a diluted basis), for the quarter ended June 30, 1999. The decrease in earnings
of approximately $2.7 million is the result of a loss in the Energy Marketing
segment this year compared with the earnings reported in the prior year's
quarter. This was offset in part by higher earnings in the Exploration and
Production, Utility, Timber, and Pipeline and Storage segments and a lower loss
in the current quarter for the International segment. .
The Company's earnings were $125.0 million, or $3.20 per common share
($3.17 per common share on a diluted basis), for the nine months ended June 30,
2000. This compares with earnings of $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. The increase in earnings of $14.4 million is the result of higher earnings
in the Exploration and Production, Utility and Timber segments. These increases
were offset in part by lower earnings in the Pipeline and Storage and
International segments and a loss in the Energy Marketing segment.
Due to the precipitous rise in natural gas prices this quarter, the
Company took a $21.3 million pretax, or $13.7 million after tax charge to
earnings for the quarter ended June 30, 2000. This charge recognizes the
estimated net value related to derivative financial instruments that do not
qualify for hedge accounting. Generally Accepted Accounting Principles require
the Company to mark these derivative financial instruments to market at the end
of each quarter. The contracts relate to price risk management activities in the
Exploration and Production and Energy Marketing segments. This mark-to-market
adjustment does not reflect the actual gain or loss that will be realized upon
settlement of the option contracts.
Additional discussion of earnings in each of the business segments
can be found in the business segment information that follows.
<TABLE>
<CAPTION>
Earnings (Loss) by Segment
------------------------------------------------ ---------------------------------- ----------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------------------------ ---------------------------------- ----------------------------------
(Thousands) 2000 2000
(Restated) 1999 (Restated) 1999
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Utility $ 5,565 $ 3,439 $ 68,843 $ 62,438
Pipeline and Storage 7,324 6,995 26,762 30,094
Exploration and Production 6,026 2,576 21,910 2,982
International (1,394) (2,495) 7,606 7,996
Energy Marketing (9,390) 847 (7,942) 1,730
Timber 1,155 586 6,175 4,445
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
Total Reportable Segments 9,286 11,948 123,354 109,685
All Other (315) (43) 212 162
Corporate 99 (65) 1,423 757
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
Total Consolidated $9,070 $11,840 $124,989 $110,604
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
Utility
<TABLE>
<CAPTION>
Utility Operating Revenues
------------------------------------------------ ---------------------------------- ----------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------------------------ ---------------------------------- ----------------------------------
(Thousands) 2000 1999 2000 1999
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Retail Sales Revenues:
Residential $107,883 $100,924 $515,703 $521,457
Commercial 15,856 15,214 84,418 93,444
Industrial 3,742 2,618 13,217 11,988
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
127,481 118,756 613,338 626,889
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
Off-System Sales 9,417 5,401 38,605 22,897
Transportation 24,861 19,331 90,167 65,996
Other 2,691 (292) 1,930 (4,932)
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
$164,450 $143,196 $744,040 $710,850
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
Utility Throughput
------------------------------------------------ ---------------------------------- ----------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------------------------ ---------------------------------- ----------------------------------
(MMcf) 2000 1999 2000 1999
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
Retail Sales:
Residential 11,305 11,222 62,766 66,199
Commercial 1,907 1,926 11,425 13,055
Industrial 851 747 2,929 2,978
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
14,063 13,895 77,120 82,232
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
Off-System Sales 2,295 2,223 10,916 10,195
Transportation 17,085 15,608 60,763 53,638
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
33,443 31,726 148,799 146,065
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
</TABLE>
2000 Compared with 1999
Operating revenues for the Utility segment increased $21.3 million and $33.2
million, respectively, for the quarter and nine months ended June 30, 2000 as
compared with the same periods a year ago. For the quarter, this increase
resulted from higher retail, transportation, off-system sales and other revenue.
For the nine months ended, this increase resulted from higher transportation,
off-system sales and other revenue, offset in part by lower retail gas sales
revenues.
The increase in retail gas sales revenue for the quarter was primarily
the result of the recovery of higher gas costs and slightly higher volumes sold.
The recovery of higher gas costs resulted from a much higher cost of purchased
gas (the average cost of purchased gas was $5.21 per Mcf and $3.87 per Mcf for
the three months ended June 30, 2000 and 1999, respectively). The slight
increase in sales volumes was the result of colder weather, offset by the impact
of the migration of residential and small commercial retail customers to
transportation service in both the New York and Pennsylvania jurisdictions. This
migration to transportation service was also the primary cause of the increase
in volumes transported and transportation revenue.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
The decrease in retail gas sales revenue for the nine months was the
result of lower volumes of retail gas sales because of the migration of
residential and small commercial retail customers to transportation service.
This was offset in part by a higher average cost of purchased gas (the average
cost of purchased gas was $4.55 per Mcf and $3.64 per Mcf, for the nine months
ended June 30, 2000 and 1999, respectively). This migration to transportation
service was also the primary cause of the increase in volumes transported and
transportation revenue. Restructuring in the Utility segment's service territory
is further discussed in the "Rate Matters" section that follows.
Off-system gas sales revenue increased $4.0 million and $15.7 million,
respectively, for the quarter and nine months ended June 30, 2000, as compared
with the same periods a year ago, largely due to increased gas prices in
combination with higher volumes. However, due to profit sharing with retail
customers, the margins resulting from off-system sales are minimal.
Other operating revenues increased $3.0 million and $6.9 million,
respectively, for the quarter and nine months ended June 30, 2000, as compared
with the same periods a year ago. Other operating revenues in the quarter and
nine months ended June 30, 1999 were reduced by $1.6 million and $6.5 million,
respectively, for the recording of a special gas restructuring reserve to be
applied against incremental costs that could result from the New York Public
Service Commission's (NYPSC) gas restructuring effort. No such reserve is
required in 2000 by the terms of the New York rate settlement of 1998. Other
operating revenues for the quarter and nine months ended June 30, 2000, include
revenue of $2.0 million accrued to offset additional state income taxes which
resulted from the enactment of tax changes in New York State. The revenue and
related regulatory asset were recorded as the NYPSC has provided for the
opportunity of rate recovery by New York State utilities of such additional
taxes. Partly offsetting these increases to other operating revenues,
Distribution Corporation accrued an estimated refund provision for a 50% sharing
with customers of earnings over a predetermined amount in accordance with the
New York rate settlement of 1998. The estimated refund provision was $1.1
million for the quarter ended June 30, 2000 and $3.3 million for the nine months
ended June 30, 2000.
The Utility segment's third quarter 2000 earnings were $5.6 million, an
increase of $2.1 million when compared with third quarter 1999 earnings. The
most significant reasons for the increase were that last year's quarter included
a portion (approximately $1.0 million reduction to earnings) of the 1999 special
gas restructuring reserve, as discussed above, and the current quarter had lower
operation and maintenance (O&M) expense of approximately $1.3 million (after
tax). This lower O&M expense is due in part to a charge for an early retirement
offer in 1999. Partially offsetting these increases, the third quarter 2000
earnings included an estimated refund provision (approximately $0.7 million
reduction to earnings), which is also discussed above.
The Utility segment's earnings for the nine months ended June 30, 2000
were $68.8 million, an increase of $6.4 million when compared with the earnings
for the nine months ended June 30, 1999. This increase can be attributed
primarily to expenses related to early retirement offers in 1999 (approximately
$3.7 million reduction to earnings in 1999) as well as the 1999 special gas
restructuring reserve (approximately $4.2 million reduction to earnings in
1999), which was discussed above. Both the early retirement offers and the gas
restructuring reserve did not recur in 2000. Partly offsetting these increases,
the nine months ended June 30, 2000 earnings included an estimated refund
provision (approximately $2.1 million reduction to earnings), as previously
discussed.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
<TABLE>
<CAPTION>
Degree Days
---------------------------------- -------------- -------------- -------------------- --------------------------------
Percent (Warmer)
Three Months Ended Colder Than
--------------------------------
June 30 Normal 2000 1999 Normal Prior Year
---------------------------------- -------------- -------------- -------------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
Buffalo 976 936 817 (4.1%) 14.6%
Erie 874 835 755 (4.5%) 10.6%
---------------------------------- -------------- -------------- -------------------- ----------------- --------------
Nine Months Ended
June 30
---------------------------------- -------------- -------------- -------------------- ----------------- --------------
Buffalo 6,733 6,090 6,066 (9.5%) 0.4%
Erie 6,130 5,478 5,513 (10.6%) (0.6%)
---------------------------------- -------------- -------------- -------------------- ----------------- --------------
</TABLE>
Pipeline and Storage
<TABLE>
<CAPTION>
Pipeline and Storage Operating Revenues
------------------------------------------------ ---------------------------------- ----------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------------------------ ---------------------------------- ----------------------------------
(Thousands) 2000 1999 2000 1999
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Firm Transportation $22,663 $21,810 $69,078 $68,951
Interruptible Transportation 826 243 1,800 995
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
23,489 22,053 70,878 69,946
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
Firm Storage Service 15,594 15,654 47,706 47,117
Interruptible Storage Service 38 9 211 172
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
15,632 15,663 47,917 47,289
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
Other 2,719 2,753 9,405 9,441
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
$41,840 $40,469 $128,200 $126,676
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
</TABLE>
<TABLE>
<CAPTION>
Pipeline and Storage Throughput
------------------------------------------------ ---------------------------------- ----------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------------------------ ---------------------------------- ----------------------------------
(MMcf) 2000 1999 2000 1999
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Firm Transportation 52,834 53,970 237,575 240,395
Interruptible Transportation 4,752 418 7,199 4,099
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
57,586 54,388 244,774 244,494
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
</TABLE>
2000 Compared with 1999
Operating revenues for the Pipeline and Storage segment increased $1.4 million
and $1.5 million for the quarter and nine months ended June 30, 2000,
respectively, as compared with the same period a year ago. Approximately, $1.3
million of these increases relates to a "pass through" type item (which did not
recur in 2000) that reduced revenues in the prior year and correspondingly
reduced O&M expense in the prior year, thus having no bottom line earnings
impact.
The Pipeline and Storage segment's third quarter 2000 earnings were
$7.3 million, an increase of $0.3 million when compared with the third quarter
of 1999's earnings. Lower O&M expense, due in part to a charge in the prior year
for an early retirement, increased earnings for the quarter. The impact of the
recently enacted New York State tax changes, as discussed in the Utility segment
above, mostly offset the O&M savings. The Federal Energy Regulatory Commission
(FERC), which regulates this segment, has not provided for the recovery of
additional taxes as has the NYPSC.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
The Pipeline and Storage segment's earnings for the nine months ended
June 30, 2000 were $26.8 million, a decrease of $3.3 million when compared with
the earnings for the nine months ended June 30, 1999. The most significant
reason for this decrease is that the prior year's earnings included interest
income and a reduction in income taxes related to the final settlement of
Internal Revenue Service audits of years 1977-1994. This, coupled with the
negative impact of New York State tax changes, discussed above, resulted in
decreased earnings.
Exploration and Production
<TABLE>
<CAPTION>
Exploration and Production Operating Revenues
------------------------------------------------ ---------------------------------- ----------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------------------------ ---------------------------------- ----------------------------------
(Thousands) 2000 1999 2000 1999
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Gas (after Hedging) $28,321 $23,823 $83,532 $61,502
Oil (after Hedging) 28,624 14,271 66,059 35,585
Gas Processing Plant 4,170 2,734 12,541 8,326
Other (7,668) (666) (8,317) 37
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
$53,447 $40,162 $153,815 $105,450
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
</TABLE>
2000 Compared with 1999
Operating revenues for the Exploration and Production segment increased $13.3
million and $48.4 million, respectively, for the quarter and nine months ended
June 30, 2000, as compared with the same periods a year ago. For the quarter
ended June 30, 2000, gas production revenue (after hedging) increased $4.5
million and oil production revenue (after hedging) increased $14.4 million due
to increased production and prices. For the nine months ended June 30, 2000, gas
production revenue (after hedging) and oil production revenue (after hedging)
increased $22.0 million and $30.5 million, respectively, due to increased
production and prices. Refer to the tables below for production volumes and
average price information. Revenue from Seneca's gas processing plant was up
$1.4 million and $4.2 million, respectively, for the quarter and nine months
ended June 30, 2000 as compared with the same periods a year ago due to
increased prices for gas liquids and residue. Other revenue decreased $7.0
million and $8.4 million, respectively, for the quarter and nine months ended
June 30, 2000, as compared with the same periods a year ago. The decreases to
other revenues resulted primarily from mark-to-market and other revenue
adjustments related to written options. Refer to further discussion of written
options in the "Market Risk Sensitive Instruments" section that follows and in
Item 1, Note 5 - Derivative Financial Instruments.
The Exploration and Production segment's third quarter 2000 earnings
were $6.0 million, an increase of $3.4 million when compared with third quarter
1999 earnings. As discussed above, significant improvement in oil and gas
pricing combined with an increase in production were the main reasons for higher
earnings. A 20% increase in oil production was attributable largely to
production from the Canadian wells acquired by National Fuel Exploration
Corporation (NFEC) (a 100% wholly-owned subsidiary of Seneca) as part of the Tri
Link Resources, Ltd. (Tri Link) stock acquisition in mid-June. Partly offsetting
these increases in revenues were increases in depletion expense (due to higher
production volumes and higher depletable base), lease operating costs (due to
increased production), a negative mark-to-market revenue adjustment related to
written options, and increased interest expense due to higher borrowings and
higher weighted average interest rates.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
The Exploration and Production segment's earnings for the nine months
ended June 30, 2000 were $21.9 million, an increase of $18.9 million when
compared with the earnings for the nine months ended June 30, 1999. As discussed
above, significant improvement in oil and gas pricing combined with an increase
in production were the main reasons for higher earnings. Partly offsetting these
increases were higher depletion expense and lease operating costs. Earnings were
also reduced due to revenue adjustments related to written options discussed
above. Also, there was a decrease in interest income as 1999 included
nonrecurring interest received from the final settlement of the IRS audits in
December 1998. In addition, there was an increase in interest expense as a
result of increased borrowings and higher weighted average interest rates.
<TABLE>
<CAPTION>
Production Volumes
----------------------------------------------- ---------------------------------- ----------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------------------------------- ---------------------------------- ----------------------------------
2000 1999 2000 1999
----------------------------------------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Gas Production (MMcf)
Gulf Coast 8,860 8,532 24,948 21,473
West Coast 1,058 1,050 3,301 2,839
Appalachia 1,100 1,069 3,252 3,381
Canada 17 - 17 -
----------------------------------------------- ---------------- ----------------- ---------------- -----------------
11,035 10,651 31,518 27,693
----------------------------------------------- ---------------- ----------------- ---------------- -----------------
Oil Production (thousands of barrels)
Gulf Coast 372 352 1,025 1,022
West Coast 714 664 2,106 1,957
Appalachia 3 2 7 7
Canada 128 - 128 -
----------------------------------------------- ---------------- ----------------- ---------------- -----------------
1,217 1,018 3,266 2,986
----------------------------------------------- ---------------- ----------------- ---------------- -----------------
</TABLE>
<TABLE>
<CAPTION>
Average Prices
----------------------------------------------- ---------------------------------- ----------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------------------------------- ---------------------------------- ----------------------------------
2000 1999 2000 1999
----------------------------------------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Average Gas Price/Mcf
Gulf Coast $3.57 $2.19 $2.93 $1.99
West Coast $3.58 $2.30 $3.02 $2.17
Appalachia $3.03 $2.31 $2.94 $2.42
Canada $2.68 - $2.68 -
Weighted Average $3.52 $2.22 $2.94 $2.06
Weighted Average After Hedging $2.57 $2.24 $2.65 $2.22
Average Oil Price/bbl
Gulf Coast $28.83 $16.54 $27.06 $13.41
West Coast $24.15 $12.60 $22.70 $10.19
Appalachia $27.16 $14.95 $24.23 $13.19
Canada $28.58 - $28.58 -
Weighted Average $26.06 $13.97 $24.30 $11.30
Weighted Average After Hedging $23.52 $14.02 $20.22 $11.92
----------------------------------------------- ---------------- ----------------- ---------------- -----------------
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
International
<TABLE>
<CAPTION>
International Operating Revenues
----------------------------------------------- ---------------------------------- ----------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------------------------------- ---------------------------------- ----------------------------------
(Thousands) 2000 1999 2000 1999
----------------------------------------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Heating $7,601 $8,221 $64,291 $68,020
Electricity 7,141 7,853 25,466 27,224
Other 561 15 3,228 1,922
----------------------------------------------- ---------------- ----------------- ---------------- -----------------
$15,303 $16,089 $92,985 $97,166
----------------------------------------------- ---------------- ----------------- ---------------- -----------------
</TABLE>
<TABLE>
<CAPTION>
International Heating and Electric Volumes
----------------------------------------------- ---------------------------------- ----------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------------------------------- ---------------------------------- ----------------------------------
2000 1999 2000 1999
----------------------------------------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Heating Sales (Gigajoules) (1) 1,199,835 1,266,929 9,464,307 9,502,415
Electricity Sales (megawatt hours) 271,823 279,987 911,520 897,829
----------------------------------------------- ---------------- ----------------- ---------------- -----------------
</TABLE>
(1) Gigajoules = one billion joules. A joule is a unit of energy.
2000 Compared with 1999
Operating revenues for the International segment decreased $0.8 million and $4.2
million, respectively, for the quarter and nine months ended June 30, 2000 as
compared to the same periods a year ago. The decrease reflects a decrease in the
value of the Czech koruna as well as the impact of warm weather and conservation
efforts by customers.
The International segment experienced a loss of $1.4 million for the
third quarter 2000, $1.1 million lower than the loss of $2.5 million for the
third quarter of 1999. This lower loss was primarily due to lower O&M expenses
and additional consideration received on the sale of a previous project.
The International segment's earnings for the nine months ended June 30,
2000 were $7.6 million, a decrease of $0.4 million when compared with the
earnings for the nine months ended June 30, 1999. This decrease can be
attributed primarily to lower margins stemming from warm weather and
conservation efforts by customers combined with the decline in the value of the
Czech koruna. These factors were offset, in part, by lower O&M expenses.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
Energy Marketing
<TABLE>
<CAPTION>
Energy Marketing Operating Revenues
------------------------------------------------ ---------------------------------- ----------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------------------------ ---------------------------------- ----------------------------------
(Thousands) 2000 2000
(Restated) 1999 (Restated) 1999
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Natural Gas (after Hedging) $38,631 $25,407 $120,193 $81,693
Electricity 536 471 1,290 1,179
Other (13,514) 101 (12,922) (619)
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
$25,653 $25,979 $108,561 $82,253
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
</TABLE>
<TABLE>
<CAPTION>
Energy Marketing Volumes
------------------------------------------------ ---------------------------------- ----------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------------------------ ---------------------------------- ----------------------------------
2000 1999 2000 1999
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Natural Gas - (MMcf) 9,233 8,892 31,496 29,231
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
</TABLE>
2000 Compared with 1999
Operating revenues for the Energy Marketing segment decreased $0.3 million for
the quarter ended June 30, 2000, as compared with the same period a year ago.
For the nine months ended June 30, 2000, operating revenues increased $26.3
million over last year's nine months ended June 30, 1999. Operating revenues for
both the quarter and the nine month period reflect higher marketing volumes and
revenues as NFR's customer base continues to increase. However, NFR recognized a
negative $13.8 million mark-to-market adjustment related to derivative financial
instruments for the quarter and nine months ended June 30, 2000 (included in
"Other" on the table above). See further discussion of NFR's exchange-traded
futures and exchange-traded options in the "Market Risk Sensitive Instruments"
section that follows and in Item 1, Note 5 - Derivative Financial Instruments.
The Energy Marketing segment incurred losses for both the quarter and
nine months ended June 30, 2000. When compared to the same periods a year ago,
earnings decreased $10.2 million for the quarter and $9.7 million for the nine
month period. The most significant reason for these decreases were the
mark-to-market adjustments related to derivative financial instruments, noted
above.
Timber
<TABLE>
<CAPTION>
Timber Operating Revenues
------------------------------------------------ ---------------------------------- ----------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------------------------ ---------------------------------- ----------------------------------
(Thousands) 2000 1999 2000 1999
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Log Sales $6,334 $2,757 $19,688 $14,610
Green Lumber Sales 1,272 1,045 3,401 3,142
Kiln Dry Lumber Sales 2,950 2,518 7,414 5,840
Other 106 13 430 518
---------------- ----------------- ---------------- -----------------
$10,662 $6,333 $30,933 $24,110
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
<TABLE>
<CAPTION>
------------------------------------------------ ---------------------------------- ----------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------------------------ ---------------------------------- ----------------------------------
Board Feet (Thousands) 2000 1999 2000 1999
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Log Sales 2,331 1,111 7,439 5,000
Green Lumber Sales 2,251 2,135 6,405 6,767
Kiln Dry Lumber Sales 2,046 1,818 5,343 4,122
---------------- ----------------- ---------------- -----------------
6,628 5,064 19,187 15,889
------------------------------------------------ ---------------- ----------------- ---------------- -----------------
</TABLE>
2000 Compared with 1999
Operating revenues for the Timber segment increased $4.3 million and $6.8
million, respectively, for the quarter and nine months ended June 30, 2000, as
compared with the same periods a year ago. The increase for the quarter and nine
month period resulted primarily from higher veneer log sales and kiln dry lumber
sales. The increase in kiln dry lumber sales is due to the operation of
additional kilns purchased late in the quarter ended December 31, 1998.
Earnings in the Timber segment increased $0.6 million and $1.7 million,
respectively, for the quarter and nine months ended June 30, 2000, as compared
with the same periods a year ago. The increase for the quarter and nine months
is the result of higher log and lumber sales, partly offset by higher interest
expense resulting from higher debt related to the PennzEnergy Company
acquisition in July 1999. For the nine month period a pretax gain of $2.3
million ($1.5 million after tax) on the sale of land and standing timber
increased earnings of this segment.
Other Income and Interest Charges
Although variances in Other Income items and Interest Charges are discussed in
the earnings discussion by segment above, following is a recap on a consolidated
basis:
Other Income
Other income increased $0.6 million for the quarter ended June 30, 2000 compared
with the quarter ended June 30, 1999. This increase resulted primarily from the
$0.5 million of additional consideration received on the sale of a previous
project in the International segment.
Other income decreased $0.2 million for the nine months ended June 30,
2000 compared with the nine months ended June 30, 1999. This decrease resulted
mainly from approximately $3.2 million of interest income related to the final
settlement of IRS audits for years 1977 - 1994 which was recorded during 1999
and did not recur this year. Partially offsetting this decrease was the gain on
the sale of land and standing timber in the second quarter of 2000, as well as
the additional consideration received on the sale of a previous project, both
noted above.
Interest Charges
Interest on long-term debt increased $1.4 million and $0.8 million for the
quarter and nine months ended June 30, 2000, respectively, as compared with the
quarter and nine months ended June 30, 1999. This increase can be attributed
primarily to a higher average amount of long-term debt outstanding combined with
higher weighted average interest rates.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
Other interest charges increased $0.8 million for the quarter ended
June 30, 2000. This increase resulted mainly from higher weighted average
interest rates in the current quarter, offset partially by a decrease in the
average amount of short-term debt outstanding. For the nine months ended June
30, 2000, other interest charges increased $4.5 million. Higher weighted average
interest rates for the nine-month period together with an increase in the
average amount of short-term debt outstanding contributed to this increase.
Also, a reduction in interest charges was recorded in 1999 related to the final
settlement of IRS audits of years 1977 - 1994.
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary sources of cash during the nine-month period ended June
30, 2000, 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 and minority
interest in foreign subsidiaries.
Cash provided by operating activities in the Utility and the Pipeline
and Storage segments may vary from period to period because of the impact of
rate cases. In the Utility segment, supplier refunds, over- or under-recovered
purchased gas costs and weather also significantly impact cash flow. The impact
of weather on cash flow is tempered in the Utility segment's New York rate
jurisdiction by its WNC and in the Pipeline and Storage segment by Supply
Corporation's straight fixed-variable rate design.
Because of the seasonal nature of the Company's heating business,
revenues are relatively high during the nine months ended June 30 and
receivables historically increase from September to June because of winter
weather.
The storage gas inventory normally declines during the first and second
quarters of the 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 Statements of Income and a reserve for gas replacement is
recorded in the Consolidated Balance Sheets 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 $261.1 million for
the nine months ended June 30, 2000, an increase of $13.0 million compared with
$248.0 million provided by operating activities for the nine months ended June
30, 1999. The increase can be attributed primarily to higher cash receipts from
the sale of oil and gas and lower interest payments in the Exploration and
Production segment. Higher cash receipts for oil and gas production resulted
from increased oil and gas production and significantly higher prices. Interest
payments are down in this segment due to the retirement of the HarCor Energy,
Inc. 14.875% Senior Secured Notes in March 1999 and July 1999.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
Investing Cash Flow.
Expenditures for Long-Lived Assets
----------------------------------
Expenditures for long-lived assets include additions to property, plant and
equipment (capital expenditures) and investments in corporations (stock
acquisitions) or partnerships, net of any cash acquired.
The Company's expenditures for long-lived assets totaled $314.2 million
during the nine months ended June 30, 2000. The table below presents these
expenditures:
<TABLE>
<CAPTION>
--------------------------------------------- ----------------------- ----------------------- -----------------------
Nine Months Ended June 30, 2000
(in millions of dollars)
--------------------------------------------- ----------------------- ----------------------- -----------------------
Investments in Total
Capital Corporations Expenditures for
Expenditures and Partnerships Long-Lived Assets
--------------------------------------------- ----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Utility $ 43.1 $ - $43.1
Pipeline and Storage 27.8(1) 1.8 29.6
Exploration and Production 96.4 123.8 220.2
International 6.3 - 6.3
Timber 11.4 - 11.4
Energy Marketing - - -
All Other 1.0 2.6 3.6
--------------------------------------------- ----------------------- ----------------------- -----------------------
$186.0(1) $128.2 $314.2
--------------------------------------------- ----------------------- ----------------------- -----------------------
</TABLE>
(1)Includes non-cash acquisition of $1.2 million in a stock-for-asset swap.
Utility
-------
The majority of the Utility capital expenditures were made for replacement of
mains and main extensions, as well as for the replacement of service lines.
Pipeline and Storage
--------------------
The majority of the Pipeline and Storage capital expenditures were made for
additions, improvements, and replacements to this segment's transmission and
storage systems. Of the total capital expenditures, $9.2 million was related to
Supply Corporation's acquisition of another company's interest in the Niagara
Spur Loop Line and the Ellisburg-Leidy pipeline in January 2000. This
acquisition was financed with short-term borrowings. The capital expenditures
also include approximately $1.2 million of natural gas wells and related
pipelines as well as some undeveloped timber property acquired from Cunningham
Natural Gas Corporation (Cunningham) in November 1999. These assets were
acquired through the issuance of 54,674 shares of Company common stock. In
addition to the assets identified above, the Company received Cunningham's
temporary cash investments in exchange for the shares of Company common stock.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
During the nine months ended June 30, 2000, SIP made a $1.8 million
investment in Independence Pipeline Company, a Delaware general partnership
(Independence), and had an aggregate investment balance of $12.9 million at June
30, 2000. This investment represents a one-third partnership interest. The
investment has been financed with short-term borrowings. Independence intends to
build a 370 mile natural gas pipeline (the Independence Pipeline) from Defiance,
Ohio to Leidy, Pennsylvania at an estimated cost of $680 million.* If
construction never begins on the Independence Pipeline project, SIP's share of
the development costs (including SIP's investment in Independence) is estimated
not to exceed $15.0 million.*
On July 12, 2000, the FERC issued a certificate of public convenience
and necessity (the Certificate) authorizing, among other things, the
construction and operation of the Independence Pipeline, subject to satisfaction
of various conditions spelled out in the Certificate and in previous FERC
orders. Among those conditions is the requirement that, before construction may
commence, Independence must file at FERC executed, firm transportation
agreements with "no out" clauses for at least 68.2% of its capacity.
(Independence already filed, on June 26 and July 6, 2000, precedent agreements
for firm transportation amounting to about 38% of the capacity of the
Independence Pipeline, thereby satisfying a FERC requirement previously imposed
as a precondition to FERC's issuance of the Certificate.) The Independence
Pipeline sponsors are working on obtaining the required customer commitments.
The Certificate also requires that the Independence Pipeline be constructed and
placed in service by July 12, 2003. Assuming contracts are in place in
quantities satisfactory to the partners, the Independence Pipeline's planned in
service date is November 1, 2002.*
Exploration and Production
--------------------------
The Exploration and Production segment capital expenditures for the nine months
ended June 30, 2000 included approximately $76.4 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. The remaining $20.0 million of capital expenditures included
onshore drilling, construction and recompletion costs for wells located in
Louisiana, Texas and California as well as onshore geological and geophysical
costs, including the purchase of certain 3-D seismic data and fixed asset
purchases.
In June 2000, NFEC acquired the outstanding shares of Tri Link, a
Calgary-Alberta based oil and gas exploration and production company. This
acquisition builds Seneca's total reserve base to approximately one trillion
cubic feet equivalent.* The cost of acquiring the outstanding shares of Tri Link
was approximately $123.8 million. The acquisition was financed with short-term
borrowings. Refer to "Financing Cash Flow" for a discussion of the redemption of
the debt that was assumed as part of the Tri Link acquisition.
International
-------------
The majority of the International segment capital expenditures were concentrated
in the areas of improvements and replacements within the district heating and
power generation plants in the Czech Republic.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
Timber
------
The majority of the Timber segment capital expenditures were made for the
purchase of land and timber in Pennsylvania, and the construction and/or
purchase of new facilities and equipment for this segment's sawmill and kiln
operations. As discussed under the Timber segment's results of operations, in
January 2000, this segment sold land and timber with a book value of $3.0
million for $5.3 million. The resulting gain on this sale of $2.3 million is
included in earnings for the nine months ending June 30, 2000.
All Other
---------
Expenditures for Long-Lived Assets for all other subsidiaries consisted of
Upstate's purchase of a 50% interest in a gas processing facility and NFR
Power's purchase of a 50% partnership interest in Seneca Energy II, LLC (Seneca
Energy). Seneca Energy generates and sells electricity to a public utility.
Seneca Energy generates the electricity by using methane gas obtained from a
landfill in Seneca Falls, New York, which is owned by an outside party.
The Company continuously evaluates capital expenditures and investments
in corporations and partnerships. The amounts are subject to modification for
opportunities such as the acquisition of attractive oil and gas properties,
timber or storage facilities and the expansion of transmission line capacities.
While the majority of capital expenditures in the Utility segment are
necessitated by the continued need for replacement and upgrading of mains and
service lines, the magnitude of future capital expenditures or other investments
in the Company's other business segments depends, to a large degree, upon market
conditions.*
Financing Cash Flow.
Consolidated short-term debt increased $125.3 million during the first nine
months of 2000. The Company continues to consider short-term debt an important
source 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. Fluctuations in these items can have a significant impact on the
amount and timing of short-term debt.
In June 2000, NFEC paid approximately $96.2 million to redeem the bank
loans and convertible debentures of the former Tri Link. These redemptions were
financed with short-term debt.
In February 2000, the Company issued $150.0 million of 7.30%
medium-term notes due in February 2003. After deducting underwriting discounts
and commissions, the net proceeds to the Company amounted to $149.3 million. The
proceeds of this debt issuance were used to redeem $50.0 million of 6.60%
medium-term notes which matured in February 2000 and to reduce short-term debt.
In March 1998, the Company obtained authorization from the Securities
and Exchange Commission (SEC), under the Public Utility Holding Company Act of
1935, to issue long-term debt securities and equity securities in amounts not
exceeding $2.0 billion at any one time outstanding during the order's
authorization period, which extends to December 31, 2002. In August 1999, the
Company registered $625.0 million of debt and equity securities under the
Securities Act of 1933. After the February 2000 medium-term note issuance
discussed above, the Company currently has $475.0 million of debt and equity
securities registered under the Securities Act of 1933.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
The Company's present liquidity position is believed to be adequate to
satisfy known demands.* Under the Company's existing indenture covenants, at
June 30, 2000, the Company would have been permitted to issue up to a maximum of
$521.0 million in additional long-term unsecured indebtedness at projected
market interest rates. In addition, at June 30, 2000, the Company had regulatory
authorizations and unused short-term credit lines that would have permitted it
to borrow an additional $231.2 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.
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.*
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 1999 Form 10-K. The
following discussion is an update to that disclosure.
Energy Commodity Price Risk
Certain of the Company's subsidiaries (primarily Seneca and NFR) utilize various
derivative financial instruments (derivatives), including price swap agreements,
options, no cost collars, exchange-traded futures and exchange-traded options,
as part of the Company's overall energy commodity price risk management
strategy. Under this strategy, the Company manages a portion of the market risk
associated with fluctuations in the price of natural gas and crude oil, thereby
providing more stability to operating results. The derivatives entered into by
these subsidiaries are not held for trading purposes.
The following tables disclose natural gas and crude oil price swap
information by expected maturity dates for agreements in which Seneca receives a
fixed price in exchange for paying a variable price as quoted in "Inside FERC"
or on the New York Mercantile Exchange. Notional amounts (quantities) are used
to calculate the contractual payments to be exchanged under the contract. The
tables do not reflect the earnings impact of the physical transactions that are
expected to offset any financial gains and losses arising from the use of the
price swap agreements. The weighted average variable prices represent the prices
as of June 30, 2000. At June 30, 2000, Seneca had not entered into any natural
gas or crude oil price swap agreements with maturity dates extending beyond
2003.
<TABLE>
<CAPTION>
Natural Gas Price Swap Agreements
-------------------------------------------------- -----------------------------------------------------------------
Expected Maturity Dates
-----------------------------------------------------------------
2000 2001 2002 2003 Total
-------------------------------------------------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Notional Quantities (Equivalent Bcf) 6.6 17.9 10.8 1.1 36.4
Weighted Average Fixed Rate (per Mcf) $2.63 $2.79 $3.08 $2.78 $2.85
Weighted Average Variable Rate (per Mcf) $4.58 $4.56 $4.56 $4.55 $4.56
-------------------------------------------------- ------------ ------------ ------------- ------------ ------------
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
Crude Oil Price Swap Agreements
-------------------------------
<TABLE>
<CAPTION>
-------------------------------------------------- ----------------------------------------------------------------------
Expected Maturity Dates
2000 2001 2002 2003 Total
-------------------------------------------------- ------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Notional Quantities (Equivalent bbls) 574,000 3,717,915 2,608,980 1,803,000 8,703,895
Weighted Average Fixed Rate (per bbl) $18.88 $21.04 $19.93 $19.93 $20.34
Weighted Average Variable Rate (per bbl) $31.53 $31.53 $31.53 $31.53 $31.53
-------------------------------------------------- ------------- -------------- ------------- ------------- -------------
</TABLE>
At June 30, 2000, Seneca would have had to pay the respective
counterparties to its natural gas price swap agreements an aggregate of
approximately $40.7 million to terminate the natural gas price swap agreements
outstanding at that date. Seneca would have had to pay an aggregate of
approximately $33.9 million to the counterparties to its crude oil price swap
agreements to terminate the crude oil price swap agreements outstanding at June
30, 2000.
The following table discloses the notional quantities, the weighted
average ceiling price and the weighted average floor price for the no cost
collars utilized by Seneca to manage natural gas and crude oil price risk. The
table does not reflect the earnings impact of the physical transactions that are
expected to offset any financial gains and losses arising from the use of the no
cost collars. At June 30, 2000, Seneca had not entered into any no cost collars
with maturity dates extending beyond 2002.
No Cost Collars
---------------
<TABLE>
<CAPTION>
---------------------------------------------------------------------- ---------------------------------------------
Expected Maturity Dates
2001 2002 Total
---------------------------------------------------------------------- -------------- -------------- ---------------
<S> <C> <C> <C>
Crude Oil
Notional Quantities (Equivalent bbls) 1,245,000 255,000 1,500,000
Weighted Average Ceiling Price (per bbl) $29.13 $28.58 $29.03
Weighted Average Floor Price (per bbl) $22.10 $21.53 $22.00
---------------------------------------------------------------------- -------------- -------------- ---------------
Natural Gas
Notional Quantities (Equivalent Bcf) 3.1 - 3.1
Weighted Average Ceiling Price (per Mcf) $6.00 - $6.00
Weighted Average Floor Price (per Mcf) $3.69 - $3.69
---------------------------------------------------------------------- -------------- -------------- ---------------
</TABLE>
The following tables disclose the notional quantities and weighted
average strike prices for options utilized by Seneca to manage natural gas and
crude oil price risk. The tables do not reflect the earnings impact of the
physical transactions that are expected to offset any financial gains or losses
that might arise if an option were to be exercised. At June 30, 2000, Seneca
held no options with maturity dates extending beyond December 2000.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
Written Call Options(1)
--------------------
<TABLE>
<CAPTION>
---------------------------------------------------------------------- ---------------------------------------------
Expected Maturity Dates
---------------------------------------------
2000 2001 Total
---------------------------------------------------------------------- -------------- -------------- ---------------
<S> <C> <C> <C>
Crude Oil
Notional Quantities (Equivalent bbls) 184,000 184,000 368,000
Weighted Average Strike Price (per bbl) $18.00 $18.00 $18.00
Natural Gas
Notional Quantities (Equivalent Bcf) 3.5 3.5 7.0
Weighted Average Strike Price (per Mcf) $2.42 $2.74 $2.58
---------------------------------------------------------------------- -------------- -------------- ---------------
</TABLE>
(1) The counterparty has a choice between a natural gas call option and a crude
oil call option, depending on whichever option has greater value to the
counterparty.
Written Put Options
-------------------
<TABLE>
<CAPTION>
---------------------------------------------------------------------- ---------------------------------------------
Expected Maturity Dates
---------------------------------------------
2000 2001 Total
---------------------------------------------------------------------- -------------- -------------- ---------------
<S> <C> <C> <C>
Crude Oil
Notional Quantities (Equivalent bbls) 184,000 184,000 368,000
Weighted Average Strike Price (per bbl) $12.50 $12.50 $12.50
---------------------------------------------------------------------- -------------- -------------- ---------------
</TABLE>
Purchased Call Option
---------------------
-------------------------------------------------------------------------
Expected Maturity Date - 2000
-------------------------------------------------------------------------
Crude Oil
Notional Quantities (Equivalent bbls) 368,000
Weighted Average Strike Price (per bbl) $20.00
-------------------------------------------------------------------------
At June 30, 2000, Seneca would have had to pay the counterparty to its
call options $11.1 million on a net basis to terminate its call options. Seneca
would have paid the counterparty $15.0 million related to the exercise of the
written call and put options but would have received $3.9 million related to
Seneca's exercise of its purchased call option.
The Company is exposed to credit risk on the price swap agreements and
no cost collars 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 counterparties pursuant to the
terms of their contractual obligations. To mitigate such credit risk, management
performs a credit check and then on an ongoing basis monitors counterparty
credit exposure. 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.*
The following table discloses the net notional quantities, weighted
average contract prices and weighted average settlement prices by expected
maturity date for exchange-traded futures contracts utilized by NFR to manage
natural gas price risk. These instruments qualify for hedge accounting. The
table does not reflect the earnings impact of the physical transactions that are
expected to offset any financial gains or losses arising from the use of the
futures contracts. At June 30, 2000, NFR held no futures contracts with maturity
dates extending beyond 2002.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
<TABLE>
<CAPTION>
Exchange-Traded Futures Contracts
------------------------------------------------------------ ------------- ---------------- ---------------------------
Expected Maturity Dates
----------------------------------------------------------
2000 2001 2002 Total
(Restated) (Restated) (Restated) (Restated)
------------------------------------------------------------ ------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Contract Volumes Purchased (Sold) (Equivalent Bcf) 1.5 (1.2) -* 0.3
Weighted Average Contract Price (per Mcf) $3.99 $3.82 $3.57 $3.87
Weighted Average Settlement Price (per Mcf) $4.69 $4.41 $3.66 $4.46
------------------------------------------------------------ ------------- ---------------- ------------- -------------
</TABLE>
*Volumes purchased amount to approximately 38,000 Mcf.
At June 30, 2000, NFR would have received approximately $0.1 million to
settle these exchange-traded futures.
The following table discloses the net notional quantities, weighted
average contract prices and weighted average settlement prices by expected
maturity date for exchange-traded futures contracts utilized by NFR to manage
natural gas price risk. These instruments do not qualify for hedge accounting.
At June 30, 2000, NFR held no futures contracts with maturity dates extending
beyond 2001.
<TABLE>
<CAPTION>
Exchange-Traded Futures Contracts
------------------------------------------------------------ ------------- ---------------- ---------------------------
Expected Maturity Dates
------------- --------------------------------------------
2000 2001 Total
(Restated) (Restated) (Restated)
------------------------------------------------------------ ------------- ---------------- ------------- -------------
<S> <C> <C> <C>
Contract Volumes Purchased (Sold) (Equivalent Bcf) (2.0) 0.8 (1.2)
Weighted Average Contract Price (per Mcf) $3.92 $3.83 $3.91
Weighted Average Settlement Price (per Mcf) $4.69 $4.45 $4.68
------------------------------------------------------------ ------------- ---------------- ------------- -------------
</TABLE>
At June 30, 2000, NFR would have paid approximately $3.9 million to
settle these exchange-traded futures.
The following table discloses the notional quantities and weighted
average strike prices by expected maturity dates for exchange-traded options
utilized by NFR to manage natural gas price risk. These instruments qualify for
hedge accounting. The table does not reflect the earnings impact of the physical
transactions that would offset any financial gains or losses that might arise if
an option were to be exercised. At June 30, 2000, NFR held no options with
maturity dates extending beyond 2001.
Exchange-Traded Options Purchased
----------------------------------------------------------------------------
Expected Maturity Date
----------------------------------
2001
(Restated)
----------------------------------------------------------------------------
Notional Quantities (Equivalent Bcf) 2.6
Weighted Average Strike Price (per Mcf) $3.41
----------------------------------------------------------------------------
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
Exchange-Traded Options Sold
----------------------------
--------------------------------------------------------------------------------
Expected Maturity Date
------------------------------
2001
(Restated)
--------------------------------------------------------------------------------
Notional Quantities (Equivalent Bcf) 2.6
Weighted Average Strike Price (per Mcf) $4.27
--------------------------------------------------------------------------------
NFR would have paid approximately $2.0 million to settle these
exchange-traded options outstanding at June 30, 2000.
The following table discloses the notional quantities and weighted
average strike prices by expected maturity dates for exchange-traded options
utilized by NFR to manage natural gas price risk. These instruments do not
qualify for hedge accounting. At June 30, 2000, NFR held no such options with
maturity dates extending beyond 2002.
Exchange-Traded Options Purchased
---------------------------------
<TABLE>
<CAPTION>
--------------------------------------------------------------- -----------------------------------------------------
Expected Maturity Dates
-----------------------------------------------------
2000 2001 Total
(Restated) (Restated) (Restated)
--------------------------------------------------------------- ------------------ ---------------- -----------------
<S> <C> <C> <C>
Notional Quantities (Equivalent Bcf) 59.9 7.8 67.7
Weighted Average Strike Price (per Mcf) $4.27 $3.99 $4.24
--------------------------------------------------------------- ------------------ ---------------- -----------------
</TABLE>
Exchange-Traded Options Sold
----------------------------
<TABLE>
<CAPTION>
-------------------------------------------------- ----------------------------------------------------
Expected Maturity Dates
----------------------------------------------------
2000 2001 Total
(Restated) (Restated) (Restated)
-------------------------------------------------- ------------------ ---------------- ----------------
<S> <C> <C> <C>
Notional Quantities (Equivalent Bcf) 74.8 15.2 90.0
Weighted Average Strike Price (per Mcf) $4.55 $4.33 $4.51
-------------------------------------------------- ------------------ ---------------- ----------------
</TABLE>
NFR would have paid approximately $5.2 million to settle these
exchange-traded options outstanding at June 30, 2000.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
Exchange Rate Risk
Seneca's investment in NFEC is valued in Canadian dollars, and, as such, this
investment is subject to currency exchange risk when the Canadian dollars are
translated into U.S. dollars. Subsequent to the completion of the acquisition of
Tri Link on June 15, 2000, the Canadian dollar decreased in value in relation to
the U.S. dollar resulting in a $0.8 million negative adjustment to the
Cumulative Foreign Currency Translation Adjustment (a component of Accumulated
Other Comprehensive Loss). Further valuation charges to the Canadian dollar
would result in corresponding positive or negative adjustments to the Cumulative
Foreign Currency Translation Adjustment. Management cannot predict whether the
Canadian dollar will increase or decrease in value against the U.S. dollar.*
RATE MATTERS
Utility Operation
New York Jurisdiction
On October 21, 1998, the NYPSC approved a rate plan for Distribution Corporation
for the period beginning October 1, 1998 and ending September 30, 2000. The plan
was the result of a settlement agreement entered into by Distribution
Corporation, Staff for the NYPSC (Staff), Multiple Intervenors (an advocate for
large industrial customers) and the State Consumer Protection Board. Under the
plan, Distribution Corporation's rates decreased by $7.2 million, or 1.1%. In
addition, the plan provided customers with 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 additional earnings are to be shared equally with the
customers, was maintained from a 1996 settlement. Finally, as provided by the
rate plan, $7.2 million of 1999 revenues were set aside in a special reserve to
be applied against Distribution Corporation's incremental costs resulting from
the NYPSC's gas restructuring effort further described below.
On July 28, 2000, Distribution Corporation distributed a plan to extend
the above-described rate plan for a period beyond the expiration date of
September 30, 2000. The proposal was served on the rate plan parties identified
above and interested marketers. In addition to extending the term of the current
rate plan, Distribution Corporation's proposal includes service and rate
modifications designed to further the NYPSC's gas restructuring initiative.
Discussions are currently under way to determine if the parties might reach an
agreement on the Distribution Corporation's proposal.
On November 3, 1998, the NYPSC 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
--------------------
NYPSC'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 NYPSC indicated in its order that it hopes to accomplish that
objective over a three-to-seven year transition period from the date the Policy
Statement was issued, taking into account "statutory requirements" and the
individual needs of each local distribution company (LDC).* The Policy Statement
directs Staff to schedule "discussions" with each LDC on an "individualized plan
that would effectuate our vision." In preparation for negotiations, LDCs will be
required to address issues such as a strategy to hold new capacity contracts to
a minimum, a long-term rate plan with a goal of reducing or freezing rates, and
a plan for further unbundling. In addition, Staff was instructed to hold
collaborative sessions with multiple parties to discuss generic issues including
reliability and market power regulation. Distribution Corporation has
participated in the collaborative sessions. These collaborative sessions have
not yet produced a consensus document on all issues before the NYPSC.
Distribution Corporation will continue to participate in all future
collaborative sessions.*
On March 22, 2000, the NYPSC issued an order directing electric and gas
utilities to file tariff amendments "to accommodate the wishes of retail access
customers who prefer to receive combined, single bills from either their utility
company or their [marketer]" (the Billing Order). The tariff amendments will
provide for marketer single-bill or utility single-bill services, thereby
allowing a customer to choose a billing preference through the customer's choice
of suppliers - utility or marketer. Distribution Corporation has permitted
marketer single billing since 1996. The Billing Order will permit Distribution
Corporation to provide a single retail bill service for marketers.
Included in the Billing Order is a requirement that utilities design a
"back-out" credit equal to the long run costs avoided by each utility when
billing is provided by another party. On April 24, 2000 Distribution Corporation
submitted draft tariff sheets setting forth a proposed back-out credit
methodology for review and comment by NYPSC Staff and other interested parties.
Although a methodology is described, no back-out credit was calculated.
Distribution Corporation's filing included provisions for a billing service to
be provided by Distribution Corporation, together with additional rules and
regulations governing marketer-provided retail billing.
Several utilities filed requests for rehearing of the Billing Order.
The requests include, among other things, arguments challenging the NYPSC's
authority to impose a back-out credit based on long run avoided costs.
Distribution Corporation chose against joining the other utilities on rehearing
and may, if necessary, pursue other avenues of relief.* At this time,
Distribution Corporation is unable to ascertain the outcome of matters relating
to the Billing Order.
In conversations with NYPSC Staff prior to the release of the Billing
Order, Distribution Corporation requested approval for a temporary, interim
billing service to be provided in response to marketer inquiries. As a result of
Distribution Corporation's efforts, the Billing Order included a provision for a
billing service as requested. Accordingly, beginning on May 1, 2000,
Distribution Corporation commenced a retail billing service for two marketers
serving approximately 2000 retail customers. The billing service is being
offered to the marketer community for a per-bill fee of $0.50, subject to
modification pursuant to the Billing Order. The temporary billing service will
remain available for interested marketers until it is replaced by a permanent
billing service under the Billing Order.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
On March 30, 2000, a collaborative was convened to address the NYPSC's
Order Instituting Proceeding in the so-called "Provider of Last Resort" (POLR)
case. The collaborative was charged with the task of helping the NYPSC to
"refine our concept of the mature competitive retail energy markets (especially
the future role of the regulated utilities) and to identify and remove obstacles
to its achievement." This case is expected to address, among other things,
issues arising from utilities exiting the merchant function. The proceeding is
also focusing on utilities' responsibility to provide low-income assistance
programs. Currently the parties are meeting on a periodic basis to establish a
procedure for identifying the issues and managing the proceeding. At this time,
Distribution Corporation is unable to ascertain the outcome of the POLR
proceeding.*
On April 12, 2000, the NYPSC issued an order setting forth procedures
for implementation of electronic data interchange (EDI) for electronic exchange
of retail access data in New York (EDI Order). As described by the NYPSC, EDI is
the computer-to-computer exchange of routine business information in a standard
form. The NYPSC believes that EDI is necessary to develop uniform data exchange
protocol for the state's customer choice initiatives. The EDI Order adopts
provisions of a report prepared after an EDI collaborative involving utilities,
marketers and other interests. Distribution Corporation submitted its EDI
implementation plans on May 31, 2000. At this time, Distribution Corporation is
unable to ascertain the outcome of the EDI proceeding.
The NYPSC continues to address, through various proceedings and
"collaboratives," upstream pipeline capacity issues arising from the
restructuring. At this point, Distribution Corporation remains authorized to
release upstream intermediate capacity to marketers serving former sales
customers. Costs relating to retained upstream transmission capacity are
recovered through a transition cost surcharge. At this time, Distribution
Corporation does not foresee any material changes to upstream capacity
requirements in the near term.*
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.
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 submitted its
compliance filing on October 1, 1999 for an effective date on or about July 1,
2000. The filing largely mirrored the company's System Wide Energy Select
program previously in effect, which substantially complied with the Act's
requirements. After negotiations with PaPUC Staff and intervenors, a settlement
was reached with all parties except for the Pennsylvania Office of Consumer
Advocate (OCA). The settlement parties generally agreed that Distribution
Corporation's proposal needed only modest changes to meet the requirements of
the Act. Hearings were held and briefs filed on OCA's open issues. In a
Recommended Decision issued on March 31, 2000, the Administrative Law Judge
rejected the OCA's arguments and recommended approval of the settlement
agreement. On June 29, 2000, the PaPUC entered an Opinion and Order adopting the
settlement, with immaterial changes. Distribution Corporation's restructured
rates and services became effective on July 1, 2000.
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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
Pipeline and Storage
Supply Corporation currently does not have a rate case on file with the FERC.
Management will continue to monitor Supply Corporation's financial position to
determine the necessity of filing a rate case in the future.
Other Matters
Environmental Matters
It is the Company's policy to accrue estimated environmental clean-up costs
(investigation and remediation) when such amounts can reasonably be estimated
and it is probable that the Company will be required to incur such costs.
Distribution Corporation and Supply Corporation have estimated their clean-up
costs related to former manufactured gas plant and former gasoline plant sites
and third party waste disposal sites will be in the range of $8.1 million to
$9.1 million.* The minimum liability of $8.1 million has been recorded on the
Consolidated Balance Sheet at June 30, 2000. Other than discussed in Note H of
the 1999 Form 10-K (referred to below), 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.*
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 comply with regulatory policies and
procedures.
For further discussion refer to Note H - Commitments and Contingencies
under the heading "Environmental Matters" in Item 8 of the Company's 1999 Form
10-K.
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 Section 21E of the Securities
Exchange Act of 1934 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 "*", 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
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Concl.)
----------------------
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 acquisitions, 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 or changes in
project costs
8. The nature and projected profitability of pending and potential
projects and other investments
9. Occurrences affecting the Company's ability to obtain funds from
operations, debt or equity to finance needed capital expenditures and
other investments
10. Uncertainty of oil and gas reserve estimates
11. Ability to successfully identify and finance oil and gas property
acquisitions and ability to operate existing and any subsequently
acquired businesses and/or properties
12. Ability to successfully identify, drill for and produce economically
viable natural gas and oil reserves
13. Changes in the availability and/or price of derivative financial
instruments
14. Changes in the price of natural gas or oil and the related effect given
the accounting treatment or valuation of these financial instruments.
15. Inability of the various counterparties to meet their obligations with
respect to the Company's financial instruments
16. 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
17. Significant changes in tax rates or policies or in rates of inflation
or interest
18. Significant changes in the Company's relationship with its employees
and the potential adverse effects if labor disputes or grievances were
to occur
19. Changes in accounting principles and/or the application of such
principles to the Company
The Company disclaims any obligation to update any forward-looking
statements to reflect events or circumstances after the date hereof.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Refer to the "Market Risk Sensitive Instruments" section in Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Part II. Other Information
---------------------------
Item 1. Legal Proceedings
-----------------
For a discussion of various environmental matters, refer to Part I, Item 1 at
Note 6 and to Part I, Item 2 - MD&A of this report under the heading "Other
Matters."
Item 2. Changes in Securities
---------------------
On April 3, 2000, the Company issued 600 unregistered shares of Company common
stock to the non-employee directors of the Company. The shares were issued as
partial consideration for the directors' service during the quarter ended June
30, 2000, 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 a public
offering.
Item 5. Other Information
-----------------
In June, John F. Riordan was elected to the Board of Directors for a term that
will expire in February 2001. Mr. Riordan's election filled a vacancy created in
February when George H. Schofield retired from the Board.
Also in June, Highland Land & Minerals, Inc. changed its name to Highland Forest
Resources, Inc.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
3 (ii) By-Laws:
3.1* National Fuel Gas Company By-Laws as amended
on February 17, 2000.
(10) Material Contracts
10.1* Amended and Restated Split Dollar Insurance
Agreement, effective June 15, 2000 among
National Fuel Gas Company, Bernard J.
Kennedy, and Joseph B. Kennedy, as Trustee
of the Trust under the Agreement dated
January 9, 1998.
10.2* Contingent Benefit Agreement effective June
15, 2000 between National Fuel Gas Company
and Bernard J. Kennedy.
*Previously filed.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K (Concl.)
-----------------------------------------
(a) Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
(12) Statements regarding Computation of Ratios:
Restated Ratio of Earnings to Fixed Charges
for the Twelve Months Ended June 30, 2000
and the Fiscal Years Ended September 30,
1995 through 1999.
(27) Financial Data Schedules
27.1 Restated Financial Data Schedule for the
Nine Months Ended June 30, 2000.
27.2* Restated Financial Data Schedule for the
Nine Months Ended June 30, 1999.
(99) Restated National Fuel Gas Company
Consolidated Statement of Income for the
Twelve Months Ended June 30, 2000 and 1999.
*Previously filed.
(b) Reports on Form 8-K
On April 24, 2000, the Company filed a Form
8-K regarding an agreement whereby Seneca
Resources Corporation agreed to offer to
acquire all of the outstanding common shares
of Tri Link Resources, Ltd., a Calgary,
Alberta based exploration and production
company. This report did not include any
financial statements.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this amended 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: November 14, 2000
-----------------
EXHIBIT INDEX
(Form 10Q)
Exhibit 12 Statements regarding Computation of Ratios:
Ratio of Earnings to Fixed Charges for the Twelve Months
Ended June 30, 2000 and the Years Ended September 30,
1995 through 1999.
Exhibit 27.1 Financial Data Schedule for the Nine Months Ended
June 30, 2000.
Exhibit 99 National Fuel Gas Company Consolidated Statement of
Income for the Twelve Months Ended June 30, 2000 and
1999.
