United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ____
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.) |
| | |
|---|
| 6363 Main Street | 14221 |
| Williamsville, New York | (Zip Code) |
(Address of principal executive offices)
(716) 857-7000
(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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X NO
Indicate the number 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, 2005: 84,144,571 shares.
1
Company or Group of Companies for which Report is Filed:
NATIONAL FUEL GAS COMPANY (Company or Registrant)
DIRECT SUBSIDIARIES: National Fuel Gas Distribution Corporation
National Fuel Gas Supply Corporation
Seneca Resources Corporation
Highland Forest Resources, Inc.
Leidy Hub, Inc.
Data-Track Account Services, Inc.
National Fuel Resources, Inc.
Horizon Energy Development, Inc.
Horizon LFG, Inc.
Horizon Power, Inc.
GLOSSARY OF TERMS
Frequently used abbreviations or acronyms used in this report:
National Fuel Gas Companies
Data-Track Data-Track Account Services, Inc.
Distribution Corporation National Fuel Gas Distribution Corporation
Empire Empire State Pipeline
ESNE Energy Systems North East, LLC
Highland Highland Forest Resources, Inc.
Horizon Horizon Energy Development, Inc.
Horizon LFG Horizon LFG, Inc.
Horizon Power Horizon Power, Inc.
Leidy Hub Leidy Hub, Inc.
Model City Model City Energy, LLC
National Fuel, the Company,
or the Registrant National Fuel Gas Company and its subsidiaries
NFR National Fuel Resources, Inc.
Seneca Seneca Resources Corporation
Seneca Energy Seneca Energy II, LLC
Supply Corporation National Fuel Gas Supply Corporation
U.E. United Energy, a.s.
Regulatory Agencies
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
NYPSC State of New York Public Service Commission
PaPUC Pennsylvania Public Utility Commission
2
GLOSSARY OF TERMS (Cont'd)
SEC Securities and Exchange Commission
Other
2004 Form 10-K The Company's Annual Report on Form 10-K for the year ended
September 30, 2004
APB 20 Accounting Principles Board Opinion No. 20, Accounting Changes
APB 25 Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees
Bbl Barrel
CZK Czech korunas (the currency denomination in the Czech Republic)
Energy Policy Act Energy Policy Act of 2005
Exchange Act Securities Exchange Act of 1934, as amended
FIN 47 FASB Interpretation No. 47, Accounting for Conditional Asset Retirement
Obligations - an interpretation of SFAS 143
GAAP Accounting principles generally accepted in the United States of America
Holding Company Act Public Utility Holding Company Act of 1935, as amended
LIFO Last-in, first-out
Mbbl Thousand barrels
Mcf Thousand cubic feet
MD&A Management's Discussion and Analysis of Financial Condition and
Results of Operations
MMcf Million cubic feet
SFAS Statement of Financial Accounting Standards
SFAS 3 Reporting Accounting Changes in Interim Financial Statements
SFAS 123 Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation
SFAS 123R Statement of Financial Accounting Standards No. 123R,
Share-Based Payment
SFAS 133 Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging
Activities
SFAS 143 Statement of Financial Accounting Standards No. 143, Accounting for
Asset Retirement Obligations
SAFS 154 Statement of Financial Accounting Standards No. 154, Accounting
Changes and Error Corrections
WNC Weather normalization clause
3
INDEX
Part I. Financial InformationItem 1. Financial Statements (Unaudited)Consolidated Statements of Income and Earnings Reinvested in the Business - Three and Nine Months Ended June 30, 2005 and 2004 - Pages 5-6Consolidated Balance Sheets - June 30, 2005 and September 30, 2004 - Pages 7-8Consolidated Statement of Cash Flows - Nine Months Ended June 30, 2005 and 2004 - Page 9Consolidated Statements of Comprehensive Income - Three and Nine Months Ended June 30, 2005 and 2004 - Page 10Notes to Consolidated Financial Statements - Pages 11-20Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Pages 21-39Item 3. Quantitative and Qualitative Disclosures About Market Risk - Page 39Item 4. Controls and Procedures - Pages 39-40 Part II. Other InformationItem 1. Legal Proceedings - Pages 40-41Item 2. Unregistered Sales of Equity Securities and Use of Proceeds- Page 41Item 3. Defaults Upon Senior Securities - The Company has nothing to report under this item.Item 4. Submission of Matters to a Vote of Security Holders - The Company has nothing to report under this item.Item 5. Other Information - The Company has nothing to report under this item.Item 6. Exhibits - Page 42Signatures - Page 43. The Company has nothing to report under this item.
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 - 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 an asterisk (“*”) 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.
4
Part I. Financial Information
Back to Table of ContentsBack to Table of ContentsNational Fuel Gas Company
Consolidated Statements of Income and Earnings
Reinvested in the Business
(Unaudited)
Three Months Ended
June 30,
(Thousands of Dollars, Except Per Common Share Amounts) 2005 2004
------------------ -----------------
INCOME
Operating Revenues $400,359 $396,884
- ------------------------------------------------------------------------------- ------------------ -----------------
Operating Expenses
Purchased Gas 181,100 174,907
Operation and Maintenance 94,534 86,362
Property, Franchise and Other Taxes 16,598 17,080
Depreciation, Depletion and Amortization 45,099 43,601
- ------------------------------------------------------------------------------- ------------------ -----------------
337,331 321,950
Adjustment of Gain on Sale of Timber Properties (1,252)
-
- ------------------------------------------------------------------------------- ------------------ -----------------
Operating Income 63,028 73,682
Other Income (Expense):
Income from Unconsolidated Subsidiaries 675 306
Other Income 1,094 799
Interest Expense on Long-Term Debt (18,294) (20,190)
Other Interest Expense (4,557) (1,095)
- ------------------------------------------------------------------------------- ------------------ -----------------
Income from Continuing Operations Before
Income Taxes 41,946 53,502
Income Tax Expense 15,553 20,681
- ------------------------------------------------------------------------------- ------------------ -----------------
Income from Continuing Operations 26,393 32,821
- ------------------------------------------------------------------------------- ------------------ -----------------
Loss from Discontinued Operations, Net of Tax (7,237) (258)
- ------------------------------------------------------------------------------- ------------------ -----------------
Net Income Available for Common Stock 19,156 32,563
- ------------------------------------------------------------------------------- ------------------ -----------------
EARNINGS REINVESTED IN THE BUSINESS
Balance at April 1 793,409 724,855
- ------------------------------------------------------------------------------- ------------------ -----------------
812,565 757,418
Dividends on Common Stock
(2005 - $0.29 per share; 2004 - $0.28 per share) 24,312 23,036
- ------------------------------------------------------------------------------- ------------------ -----------------
Balance at June 30 $788,253 $734,382
=============================================================================== ================== =================
Earnings Per Common Share:
Basic:
Income from Continuing Operations $0.32 $0.40
Loss from Discontinued Operations (0.09) -
- ------------------------------------------------------------------------------- ------------------ -----------------
Net Income Available for Common Stock $0.23 $0.40
=============================================================================== ================== =================
Diluted:
Income from Continuing Operations $0.31 $0.39
Loss from Discontinued Operations (0.08) -
- ------------------------------------------------------------------------------- ------------------ -----------------
Net Income Available for Common Stock $0.23 $0.39
=============================================================================== ================== =================
Weighted Average Common Shares Outstanding:
Used in Basic Calculation 83,568,251 82,178,424
=============================================================================== ================== =================
Used in Diluted Calculation 84,897,466 83,119,373
=============================================================================== ================== =================
See Notes to Condensed Consolidated Financial Statements
5
Item 1. Financial Statements (Cont.)
National Fuel Gas Company
Consolidated Statements of Income and Earnings
Reinvested in the Business
(Unaudited)
Nine Months Ended
June 30,
(Thousands of Dollars, Except Per Common Share Amounts) 2005 2004
----------------- -----------------
INCOME
Operating Revenues $1,636,484 $1,640,474
- -------------------------------------------------------------------------------- ----------------- -----------------
Operating Expenses
Purchased Gas 877,510 871,593
Operation and Maintenance 297,549 293,370
Property, Franchise and Other Taxes 53,551 53,795
Depreciation, Depletion and Amortization 132,438 130,350
- -------------------------------------------------------------------------------- ----------------- -----------------
1,361,048 1,349,108
Adjustment of Gain on Sale of Timber Properties - (1,252)
Adjustment of Loss on Sale of Oil and Gas Producing Properties - 4,645
- -------------------------------------------------------------------------------- ----------------- -----------------
Operating Income 275,436 294,759
Other Income (Expense):
Income from Unconsolidated Subsidiaries 1,914 403
Other Income 7,762 3,422
Interest Expense on Long-Term Debt (54,989) (63,990)
Other Interest Expense (8,911) (4,830)
- -------------------------------------------------------------------------------- ----------------- -----------------
Income from Continuing Operations Before
Income Taxes 221,212 229,764
Income Tax Expense 86,009 89,331
- -------------------------------------------------------------------------------- ----------------- -----------------
Income from Continuing Operations 135,203 140,433
- -------------------------------------------------------------------------------- ----------------- -----------------
Income from Discontinued Operations, Net of Tax 5,073 18,399
- -------------------------------------------------------------------------------- ----------------- -----------------
Net Income Available for Common Stock 140,276 158,832
- -------------------------------------------------------------------------------- ----------------- -----------------
EARNINGS REINVESTED IN THE BUSINESS
Balance at October 1 718,926 642,690
- -------------------------------------------------------------------------------- ----------------- -----------------
859,202 801,522
Dividends on Common Stock
(2005 - $0.85; 2004 - $0.82) 70,949 67,140
- -------------------------------------------------------------------------------- ----------------- -----------------
Balance at June 30 $788,253 $734,382
================================================================================ ================= =================
Earnings Per Common Share:
Basic:
Income from Continuing Operations $1.62 $1.72
Income from Discontinued Operations 0.06 0.22
- -------------------------------------------------------------------------------- ----------------- -----------------
Net Income Available for Common Stock $1.68 $1.94
================================================================================ ================= =================
Diluted:
Income from Continuing Operations $1.59 $1.70
Income from Discontinued Operations 0.06 0.22
- -------------------------------------------------------------------------------- ----------------- -----------------
Net Income Available for Common Stock $1.65 $1.92
================================================================================ ================= =================
Weighted Average Common Shares Outstanding:
Used in Basic Calculation 83,343,711 81,848,043
================================================================================ ================= =================
Used in Diluted Calculation 84,771,403 82,717,332
================================================================================ ================= =================
See Notes to Condensed Consolidated Financial Statements
6
Item 1. Financial Statements (Cont.)
Back to Table of ContentsNational Fuel Gas Company
Consolidated Balance Sheets
(Unaudited)
June 30, September 30,
2005 2004
-------------------- -------------------
(Thousands of Dollars)
ASSETS
Property, Plant and Equipment $4,351,718 $4,602,779
Less - Accumulated Depreciation, Depletion
and Amortization 1,533,840 1,596,015
Net Property, Plant, and Equipment of Discontinued
Operations Held for Sale 223,707 -
- ---------------------------------------------------------------------------- -------------------- -------------------
3,041,585 3,006,764
- ---------------------------------------------------------------------------- -------------------- -------------------
Current Assets
Cash and Temporary Cash Investments 62,072 66,153
Receivables - Net of Allowance for Uncollectible Accounts of
$20,181 and $17,440, Respectively 221,408 129,825
Unbilled Utility Revenue 14,562 18,574
Gas Stored Underground 28,641 68,511
Materials and Supplies - at average cost 48,885 43,922
Unrecovered Purchased Gas Costs - 7,532
Prepayments 51,230 38,760
Fair Value of Derivative Financial Instruments - 23
Current Assets of Discontinued Operations Held for Sale 14,530 -
- ---------------------------------------------------------------------------- -------------------- -------------------
441,328 373,300
- ---------------------------------------------------------------------------- -------------------- -------------------
Other Assets
Recoverable Future Taxes 83,847 83,847
Unamortized Debt Expense 18,074 19,573
Other Regulatory Assets 71,175 66,862
Deferred Charges 4,481 3,411
Other Investments 78,142 72,556
Investments in Unconsolidated Subsidiaries 15,818 16,444
Goodwill 5,476 5,476
Intangible Assets 43,997 45,994
Other 15,966 17,571
Other Assets of Discontinued Operations Held for Sale 309 -
- ---------------------------------------------------------------------------- -------------------- -------------------
337,285 331,734
- ---------------------------------------------------------------------------- -------------------- -------------------
Total Assets $3,820,198 $3,711,798
============================================================================ ==================== ===================
See Notes to Condensed Consolidated Financial Statements
7
Item 1. Financial Statements (Cont.)
National Fuel Gas Company
Consolidated Balance Sheets
(Unaudited)
June 30, September 30,
2005 2004
-------------------- -------------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
Capitalization:
Comprehensive Shareholders' Equity
Common Stock, $1 Par Value
Authorized - 200,000,000 Shares; Issued
and Outstanding - 83,898,311 Shares and
82,990,340 Shares, Respectively $ 83,898 $ 82,990
Paid in Capital 518,621 506,560
Earnings Reinvested in the Business 788,253 718,926
- ---------------------------------------------------------------------------- -------------------- -------------------
Total Common Shareholder Equity Before
Items of Other Comprehensive Loss 1,390,772 1,308,476
Accumulated Other Comprehensive Loss (65,013) (54,775)
- ---------------------------------------------------------------------------- -------------------- -------------------
Total Comprehensive Shareholders' Equity 1,325,759 1,253,701
Long-Term Debt, Net of Current Portion 1,121,354 1,133,317
Long-Term Debt of Discontinued Operations
Held for Sale, Net of Current Portion 1,258 -
- ---------------------------------------------------------------------------- -------------------- -------------------
Total Capitalization 2,448,371 2,387,018
- ---------------------------------------------------------------------------- -------------------- -------------------
Minority Interest in Discontinued Operations
Held for Sale 27,923 37,048
- ---------------------------------------------------------------------------- -------------------- -------------------
Current and Accrued Liabilities
Notes Payable to Banks and
Commercial Paper 12,700 156,800
Current Portion of Long-Term Debt 9,400 14,260
Accounts Payable 130,856 115,979
Amounts Payable to Customers 40,646 3,154
Other Accruals and Current Liabilities 160,861 91,164
Fair Value of Derivative Financial Instruments 126,331 95,099
Current Liabilities of Discontinued Operations Held for Sale 56,143 -
- ---------------------------------------------------------------------------- -------------------- -------------------
536,937 476,456
- ---------------------------------------------------------------------------- -------------------- -------------------
Deferred Credits
Accumulated Deferred Income Taxes 425,882 458,095
Taxes Refundable to Customers 11,065 11,065
Unamortized Investment Tax Credit 6,972 7,498
Cost of Removal Regulatory Liability 85,925 82,020
Other Regulatory Liabilities 72,388 67,669
Pension Liability 91,706 91,587
Asset Retirement Obligation 33,965 32,292
Other Deferred Credits 54,736 61,050
Deferred Credits of Discontinued Operations Held for Sale 24,328 -
- ---------------------------------------------------------------------------- -------------------- -------------------
806,967 811,276
- ---------------------------------------------------------------------------- -------------------- -------------------
Commitments and Contingencies - -
- ---------------------------------------------------------------------------- -------------------- -------------------
Total Capitalization and Liabilities $3,820,198 $3,711,798
============================================================================ ==================== ===================
See Notes to Condensed Consolidated Financial Statements
8
Item 1. Financial Statements (Cont.)
Back to Table of ContentsNational Fuel Gas Company
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
June 30,
(Thousands of Dollars) 2005 2004
------------------- ---------------------
OPERATING ACTIVITIES
Net Income Available for Common Stock $140,276 $158,832
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Adjustment of Gain on Sale of Timber Properties - 1,252
Adjustment of Loss on Sale of Oil and Gas Producing
Properties - (4,645)
Depreciation, Depletion and Amortization 145,814 141,768
Deferred Income Taxes 1,994 (8,993)
(Income) Loss from Unconsolidated Subsidiaries, Net of
Cash Distributions (374) 361
Minority Interest in Foreign Subsidiaries 2,899 3,378
Other (9,342) (148)
Change in:
Receivables and Unbilled Utility Revenue (91,223) (73,998)
Gas Stored Underground and Materials and
Supplies 30,687 55,917
Unrecovered Purchased Gas Costs 7,532 27,616
Prepayments (12,503) 13,619
Accounts Payable 23,886 (3,094)
Amounts Payable to Customers 37,492 21,561
Other Accruals and Current Liabilities 72,972 122,000
Other Assets (9,066) (21,194)
Other Liabilities 1,867 (25,997)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Net Cash Provided by Operating Activities 342,911 408,235
- ---------------------------------------------------------------------------- ------------------- ---------------------
INVESTING ACTIVITIES
Capital Expenditures (157,401) (122,295)
Net Proceeds from Sale of Oil and Gas Producing Properties 90 5,062
Other 4,001 2,073
- ---------------------------------------------------------------------------- ------------------- ---------------------
Net Cash Used in Investing Activities (153,310) (115,160)
- ---------------------------------------------------------------------------- ------------------- ---------------------
FINANCING ACTIVITIES
Change in Notes Payable to Banks and Commercial Paper (107,243) (78,300)
Reduction of Long-Term Debt (10,740) (139,441)
Dividends Paid on Common Stock (69,847) (66,056)
Dividends Paid to Minority Interest (12,676) -
Proceeds from Issuance of Common Stock 12,499 14,597
- ---------------------------------------------------------------------------- ------------------- ---------------------
Net Cash Used in Financing Activities (188,007) (269,200)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Effect of Exchange Rates on Cash (40) 1,616
- ---------------------------------------------------------------------------- ------------------- ---------------------
Net Increase in Cash and Temporary Cash Investments 1,554 25,491
Cash and Temporary Cash Investments at October 1 66,153 51,421
- ---------------------------------------------------------------------------- ------------------- ---------------------
Cash and Temporary Cash Investments at June 30 $67,707(1) $76,912
============================================================================ =================== =====================
| | (1) | Includes $5,635 of cash and temporary cash investments included in Current Assets of Discontinued Operations Held for Sale on the Consolidated Balance Sheet at June 30, 2005. |
See Notes to Condensed Consolidated Financial Statements
9
Item 1. Financial Statements (Cont.)
Back to Table of ContentsNational Fuel Gas Company
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended
June 30,
(Thousands of Dollars) 2005 2004
--------------- -- --------------
Net Income Available for Common Stock $19,156 $32,563
- ---------------------------------------------------------------------------- --------------- -- --------------
Other Comprehensive Income (Loss), Before Tax:
Foreign Currency Translation Adjustment (15,717) 1,665
Unrealized Gain on Securities Available for Sale
Arising During the Period 134 767
Unrealized Loss on Derivative Financial Instruments
Arising During the Period (4,153) (26,111)
Reclassification Adjustment for Realized Losses on
Derivative Financial Instruments in Net Income 19,220 15,088
- ---------------------------------------------------------------------------- --------------- -- --------------
Other Comprehensive Loss Before Tax (516) (8,591)
- ---------------------------------------------------------------------------- --------------- -- --------------
Income Tax Benefit Related to Cumulative Translation
Adjustment (251) -
Income Tax Expense (Benefit) Related to Unrealized Gain on
Securities Available for Sale Arising During the Period (35) 268
Income Tax Benefit Related to Unrealized Loss on
Derivative Financial Instruments Arising During the Period (1,665) (9,912)
Reclassification Adjustment for Income Tax Benefit on
Realized Losses on Derivative Financial Instruments
In Net Income 7,263 5,085
- ---------------------------------------------------------------------------- --------------- -- --------------
Income Taxes - Net 5,312 (4,559)
- ---------------------------------------------------------------------------- --------------- -- --------------
Other Comprehensive Loss (5,828) (4,032)
- ---------------------------------------------------------------------------- --------------- -- --------------
Comprehensive Income $13,328 $28,531
============================================================================ =============== == ==============
Nine Months Ended
June 30,
(Thousands of Dollars) 2005 2004
--------------- -- --------------
Net Income Available for Common Stock $140,276 $158,832
- ---------------------------------------------------------------------------- --------------- -- --------------
Other Comprehensive Income (Loss), Before Tax:
Foreign Currency Translation Adjustment 7,183 10,464
Unrealized Gain on Securities Available for Sale
Arising During the Period 1,484 3,160
Unrealized Loss on Derivative Financial Instruments
Arising During the Period (84,385) (68,423)
Reclassification Adjustment for Realized Gains on
Securities Available for Sale in Net Income (652) -
Reclassification Adjustment for Realized Losses on
Derivative Financial Instruments in Net Income 55,062 31,883
- ---------------------------------------------------------------------------- --------------- -- --------------
Other Comprehensive Loss Before Tax (21,308) (22,916)
- ---------------------------------------------------------------------------- --------------- -- --------------
Income Tax Expense Related to Cumulative Translation
Adjustment 112 -
Income Tax Expense Related to Unrealized Gain on
Securities Available for Sale Arising During the Period 519 1,106
Income Tax Benefit Related to Unrealized Loss on
Derivative Financial Instruments Arising During the Period (32,318) (25,799)
Reclassification Adjustment for Income Tax Expense on
Realized Gains from Securities Available for Sale in Net Income (228) -
Reclassification Adjustment for Income Tax Benefit on
Realized Losses on Derivative Financial Instruments
In Net Income 20,845 11,585
- ---------------------------------------------------------------------------- --------------- -- --------------
Income Taxes - Net (11,070) (13,108)
- ---------------------------------------------------------------------------- --------------- -- --------------
Other Comprehensive Loss (10,238) (9,808)
- ---------------------------------------------------------------------------- --------------- -- --------------
Comprehensive Income $130,038 $149,024
============================================================================ =============== == ==============
See Notes to Condensed Consolidated Financial Statements
10
Item 1. Financial Statements (Cont.)
Back to Table of ContentsNational Fuel Gas Company
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 — Summary of Significant Accounting Policies
Principles of Consolidation. The Company consolidates its majority owned entities. The equity method is used to account for minority owned entities. All significant intercompany balances and transactions are eliminated.
The preparation of the consolidated financial statements in conformity with GAAP 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.
Earnings for Interim Periods. 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, 2004, 2003 and 2002 that are included in the 2004 Form 10-K. The 2005 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, 2005 should not be taken as a prediction of earnings for the entire fiscal year ending September 30, 2005. Most of the business of the Utility and Energy Marketing segments is seasonal in nature and is influenced by weather conditions. Due to the seasonal nature of the heating business in the Utility and Energy Marketing segments, earnings during the winter months normally represent a substantial part of the earnings in those segments for the entire fiscal year.
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.
Gas Stored Underground — Current. In the Utility segment, gas stored underground – current is carried at lower of cost or market, on a LIFO method. Gas stored underground – current normally declines during the first and second quarters of the year and is replenished during the third and fourth quarters. In the Utility segment, 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 under the caption “Other Accruals and Current Liabilities.” Such reserve, which amounted to $44.5 million at June 30, 2005, is reduced to zero by September 30 as the inventory is replenished.
Accumulated Other Comprehensive Income (Loss). The components of Accumulated Other Comprehensive Income (Loss), net of related tax effect, are as follows (in thousands):
At June 30, 2005 At September 30, 2004
---------------- ---------------------
Minimum Pension Liability Adjustment $(53,648) $(53,648)
Cumulative Foreign Currency
Translation Adjustment 58,587 51,516
Net Unrealized Loss on Derivative
Financial Instruments (74,583) (56,733)
Net Unrealized Gain on Securities
Available for Sale 4,631 4,090
------- -------
Accumulated Other Comprehensive Loss $(65,013) $(54,775)
======= =======
11
Item 1. Financial Statements (Cont.)
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. For purposes of determining earnings per common share, the only potentially dilutive securities the Company has outstanding are stock options. The diluted weighted average shares outstanding shown on the Consolidated Statements of Income reflects the potential dilution as a result of these stock options as determined using the Treasury Stock Method. Stock options that are antidilutive are excluded from the calculation of diluted earnings per common share. For the quarters ended June 30, 2005 and 2004, 657,769 and 2,690,547 stock options, respectively, were excluded as being antidilutive. For the nine months ended June 30, 2005 and 2004, 226,322 and 4,417,138 stock options, respectively, were excluded as being antidilutive.
Stock-Based Compensation.The Company accounts for stock-based compensation for options granted using the intrinsic value method specified by APB 25 and related interpretations. Under that method, no compensation expense was recognized for options granted under the plans for the quarter and nine months ended June 30, 2005 and 2004. However, in accordance with APB 25, the Company records compensation expense for the market value of restricted stock on the date of award over the periods during which the vesting restrictions exist. Had compensation expense associated with stock options been determined based on fair value at the grant dates, which is the accounting treatment specified by SFAS 123, the Company’s net income and earnings per share would have been reduced to the pro forma amounts below:
Three Months Ended Nine Months Ended
(Thousands of Dollars, Except Per June 30, June 30,
Common Share Amounts) 2005 2004 2005 2004
---- ---- ---- ----
Net Income Available for
Common Stock as Reported $19,156 $32,563 $140,276 $158,832
Add:
Stock-Based Compensation Expense
Included in Reported Net Income,
Net of Tax 66 109 270 435
Deduct:
Stock-Based Compensation Expense
Determined Based on Fair Value
At the Grant Dates, Net of Tax (2,073) (431) (2,752) (1,789)
------ ------ ------- -------
Pro Forma Net Income Available
For Common Stock $17,149 $32,241 $137,794 $157,478
====== ====== ======= =======
Earnings Per Common Share:
Basic - As Reported $0.23 $0.40 $1.68 $1.94
Basic - Pro Forma $0.21 $0.39 $1.65 $1.92
Diluted - As Reported $0.23 $0.39 $1.65 $1.92
Diluted - Pro Forma $0.20 $0.39 $1.63 $1.90
12
Item 1. Financial Statements (Cont.)
New Accounting Pronouncements. In December 2004, the FASB issued SFAS 123R. SFAS 123R replaces SFAS 123 and supercedes APB 25. The Company currently follows APB 25 in accounting for stock-based compensation, as disclosed above. SFAS 123R addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This standard focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. Under this standard, companies are required to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award at the date of grant. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. The Company will adopt this standard during the first quarter of fiscal 2006. In accordance with SFAS 123R, the Company will use the modified version of prospective application. Under modified prospective application, SFAS 123R applies to new awards and to awards modified, repurchased, or cancelled after the required effective date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered that are outstanding as of the required effective date shall be recognized as the requisite service is rendered on or after the required effective date. The compensation cost for that portion of awards shall be based on the grant-date fair value of those awards as calculated for the Company’s disclosure under SFAS 123. The Company will not restate any prior periods as a result of adopting SFAS 123R. The Company does not believe that adoption of SFAS 123R will have a material impact on its financial condition and results of operations because substantially all of the Company’s options will be vested by September 30, 2005.
In March 2005, the FASB issued FIN 47, an interpretation of SFAS 143. FIN 47 provides clarification of the term “conditional asset retirement obligation” as used in SFAS 143, defined as a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the Company. Under this standard, a company must record a liability for a conditional asset retirement obligation if the fair value of the obligation can be reasonably estimated. FIN 47 also serves to clarify when a company would have sufficient information to reasonably estimate the fair value of a conditional asset retirement obligation. FIN 47 becomes effective no later than the end of fiscal 2006. The Company is currently evaluating the impact of FIN 47, if any, on its consolidated financial statements.
In May 2005, the FASB issued SFAS 154. SFAS 154 replaces APB 20 and SFAS 3 and changes the requirements for the accounting for and reporting of a change in accounting principle. The Company is required to adopt SFAS 154 for accounting changes and corrections of errors that occur in fiscal 2007. Early adoption is permitted. The Company’s financial condition and results of operations will only be impacted by SFAS 154 if there are any accounting changes or corrections of errors in the future.
Note 2 – Adjustment of Loss on Sale of Oil and Gas Producing Properties
During the quarter ended March 31, 2004, the Company recorded a $4.6 million earnings benefit related to the Company’s 2003 sale of Canadian oil properties. When the Company completed that transaction in September 2003, the initial proceeds it received were subject to adjustment based on actual working capital and the resolution of certain income tax matters. During the quarter ended March 31, 2004, the Company resolved those items with the buyer and, as a result, received an additional $4.6 million (U. S. dollars) of sales proceeds, which it recorded in the Adjustment of Loss on Sale of Oil and Gas Producing Properties line on the income statement.
Note 3 – Adjustment of Gain on Sale of Timber Properties
During the quarter ended June 30, 2004, the Company received final timber cruise information (inventory) on the 70,000 acres of timber properties sold in 2003. Based on that information, the Company determined that property records pertaining to $1.3 million ($0.8 million after tax) of timber property were not properly shown as having been transferred to the purchaser. As a result, the Company removed those assets from its property records and adjusted the previously recognized gain downward by recognizing a pre-tax loss of $1.3 million. The Company recorded this adjustment in the Adjustment of Gain on Sale of Timber Properties line on the income statement.
13
Item 1. Financial Statements (Cont.)
Note 4 — Income Taxes
The components of federal, state and foreign income taxes included in the Consolidated Statements of Income are as follows (in thousands):
Nine Months Ended
June 30,
2005 2004
------------------- --------------------
Operating Expenses:
Current Income Taxes
Federal $71,088 $72,472
State 19,872 22,285
Foreign 1,568 131
Deferred Income Taxes
Federal (7,937) (5,468)
State (2,718) (3,948)
Foreign 4,136 3,859
------------------- --------------------
86,009 89,331
Other Income:
Deferred Investment Tax Credit (523) (523)
Taxes on Discontinued Operations Held for Sale 15,383 1,039
------------------- --------------------
Total Income Taxes $100,869 $89,847
=================== ====================
The U.S. and foreign components of income before income taxes are as follows (in thousands):
Nine Months Ended
June 30,
2005 2004
------------------- --------------------
U.S. $206,737 $214,330
Foreign 34,408 34,349
------------------- --------------------
$241,145 $248,679
=================== ====================
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,
2005 2004
------------------- --------------------
Income Tax Expense, Computed at
Statutory Rate of 35% $84,401 $87,038
Increase (Reduction) in Taxes Resulting From:
State Income Taxes 11,150 11,919
Dividend from Foreign Subsidiary 3,708 -
Foreign Tax Differential (1,122) (1,806)
Foreign Tax Rate Reduction (1) - (5,174)
Tax on Unremitted Earnings 6,000 -
Miscellaneous (3,268) (2,130)
------------------- --------------------
Total Income Taxes $100,869 $89,847
=================== ====================
| | (1) | During the quarter ended December 31, 2003, legislation was enacted in the Czech Republic which reduces the corporate statutory income tax rate from 31% to 24% over a three-year period. |
14
Item 1. Financial Statements (Cont.)
Significant components of the Company’s deferred tax liabilities (assets) were as follows (in thousands):
At June 30, 2005 At September 30, 2004
--------------------------------- ----------------------------
Deferred Tax Liabilities:
Property, Plant and Equipment $581,750 $568,114
Other 36,587 37,051
- ------------------------------------------------------ --------------------------------- ----------------------------
Total Deferred Tax Liabilities 618,337 605,165
- ------------------------------------------------------ --------------------------------- ----------------------------
Deferred Tax Assets:
Minimum Pension Liability Adjustment (28,887) (28,887)
Capital Loss Carryover (10,030) (12,546)
Unrealized Hedging Losses (45,072) (33,890)
Other (87,666) (74,624)
- ------------------------------------------------------ --------------------------------- ----------------------------
(171,655) (149,947)
Valuation Allowance 2,746 2,877
- ------------------------------------------------------ --------------------------------- ----------------------------
Total Deferred Tax Assets (168,909) (147,070)
Less Deferred Income Taxes Included in Deferred
Credits of Discontinued Operations Held for Sale (23,546) -
- ------------------------------------------------------ --------------------------------- ----------------------------
Total Net Deferred Income Taxes $425,882 $458,095
====================================================== ================================= ============================
The Company has undistributed earnings of foreign subsidiaries that relate to its operations in the Czech Republic. Due to the pending sale of the Czech assets as of June 30, 2005, these earnings are no longer considered to be permanently reinvested outside the United States and, accordingly, U.S. income taxes of $6 million have been provided thereon. The $6 million deferred tax, which is included in Income from Discontinued Operations, will be reversed in the fourth quarter as a result of the sale of the Czech assets occurring in such quarter.
The Company recorded a tax liability of $3.8 million relating to a dividend of $72.8 million received from a foreign subsidiary. The tax was recorded at a rate of 5.25% in accordance with the applicable provisions of the American Jobs Creation Act of 2004. A portion of this tax amounting to $0.1 million is included in Other Comprehensive Loss. The remainder of this tax is included in Income from Discontinued Operations.
A capital loss carryover of $28.7 million existed at June 30, 2005, which expires if not utilized by September 30, 2008. Although realization is not assured, management estimates that a portion of the deferred tax asset associated with this carryover will be realized during the carryover period, and a valuation allowance is recorded for the remaining portion. Adjustments to the valuation allowance may be necessary in the future if estimates of capital gain income are revised.
Note 5 – Capitalization
Common Stock.During the nine months ended June 30, 2005, the Company issued 907,971 shares of common stock under the Company’s stock option and director compensation plans.
On March 29, 2005, 643,000 stock options were granted at an exercise price of $28.155 per share.
On June 3, 2005, 57,000 stock options were granted at an exercise price of $28.565 per share.
15
Item 1. Financial Statements (Cont.)
Note 6 – Commitments and Contingencies
Environmental Matters.The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. The Company has established procedures for the ongoing evaluation of its operations to identify potential environmental exposures and comply with regulatory policies and procedures. It is the Company’s policy to accrue estimated environmental clean-up costs (investigation and remediation) when such amounts can reasonably be estimated and it is probable that the Company will be required to incur such costs. At June 30, 2005, the Company has estimated its remaining clean-up costs related to former manufactured gas plant sites and third party waste disposal sites will be $8.1 million. This liability has been recorded on the Consolidated Balance Sheet at June 30, 2005.
During the quarter ended June 30, 2005, the Company entered into a transfer agreement for environmental obligations related to a former manufactured gas plant site in New York. Under the terms of the agreement, the Company paid $12.7 million during the quarter ended June 30, 2005 to settle its remaining environmental obligations related to this site. As a result, the environmental liability for this site has been reduced to zero at June 30, 2005.
During the quarter ended June 30, 2005, the Company reached a settlement agreement for environmental obligations related to another former manufactured gas plant site. The Company paid $4.4 million in August 2005 under the terms of the settlement agreement, and the Company will continue to be responsible for future ongoing maintenance of the site. The $4.4 million that was paid in August 2005 and the estimated obligation for ongoing maintenance of the site are included in the $8.1 million liability at June 30, 2005.
Other than as discussed in Note G of the 2004 Form 10-K, the Company is currently not aware of any material additional exposure to environmental liabilities. However, changes in environmental regulations or other factors could adversely impact the Company. With regard to the payments made to settle environmental obligations for the two former manufactured gas plant sites discussed above, the Company expects to recover these clean-up costs from a combination of insurance proceeds and rate recovery.
For further discussion refer to Note G – Commitments and Contingencies under the heading “Environmental Matters” in Item 8 of the 2004 Form 10-K.
Other. The Company is involved in litigation arising in the normal course of business. Also in the normal course of business, the Company is involved in tax, regulatory and other governmental audits, inspections, investigations and other proceedings that involve state and federal taxes, safety, compliance with regulations, 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 quarterly and annual period 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.
Note 7 – Discontinued Operations
On July 18, 2005, the Company completed the sale of its majority interest in U.E., a district heating and electric generation business in the Bohemia region of the Czech Republic, to Czech Energy Holdings, a.s. for sales proceeds of approximately $116.3 million. The sale will result in a gain of approximately $25.0 million. The gain will be recorded in the fourth quarter of 2005. Current market conditions, including the increasing value of the Czech currency as compared to the U.S. dollar, caused the value of the assets of U.E. to increase, providing an opportunity to sell the U.E. operations at a profit for the Company. As a result of the decision to sell its majority interest in U.E. in June 2005, the Company has presented the Czech Republic operations, which are primarily comprised of U.E., as discontinued operations at June 30, 2005. U.E. was the major component of the Company’s International segment. With this change in presentation, the Company has discontinued all reporting for an International segment, as explained further in Note 8 – Business Segment Information. The assets and liabilities of U.E. are identified on the consolidated balance sheet as assets or liabilities from discontinued operations held for sale.
16
Item 1. Financial Statements (Cont.)
The following is selected financial information of the discontinued operations for U.E.:
- ------------------------------------------------- ------------------------------ ------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
- ------------------------------------------------- -------------- --------------- -------------- ---------------
(Thousands) 2005 2004 2005 2004
- ------------------------------------------------- -------------- --------------- -------------- ---------------
Operating Revenues $22,626 $22,122 $122,088 $112,723
Operating Expenses 25,626 23,480 99,276 90,787
- ------------------------------------------------- -------------- --------------- -------------- ---------------
Operating Income (Loss) (3,000) (1,358) 22,812 21,936
- ------------------------------------------------- -------------- --------------- -------------- ---------------
Other Income 918 1,279 2,059 1,674
Interest Expense (186) (189) (507) (661)
- ------------------------------------------------- -------------- --------------- -------------- ---------------
Income (Loss) before Income Taxes
and Minority Interest (2,268) (268) 24,364 22,949
- ------------------------------------------------- -------------- --------------- -------------- ---------------
Income Tax Expense 5,412 282 16,392 1,172
Minority Interest, Net of Taxes (443) (292) 2,899 3,378
- ------------------------------------------------- -------------- --------------- -------------- ---------------
Income (Loss) from
Discontinued Operations $(7,237) $(258) $5,073 $18,399
- ------------------------------------------------- -------------- --------------- -------------- ---------------
Note 8 – Business Segment Information
The Company has five reportable segments: Utility, Pipeline and Storage, Exploration and Production, Energy Marketing, and Timber. The division of the Company’s operations into the 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. As disclosed in Note 7 — Discontinued Operations, the Company completed the sale of its majority interest in U.E., a district heating and electric generation business in the Czech Republic, on July 18, 2005. As a result of the decision to sell its majority interest in U.E. in June 2005, the Company has discontinued all reporting for an International segment and previous period segment information has been restated to reflect this change. All Czech Republic operations, which are primarily comprised of U.E., have been reported as discontinued operations. Any remaining international activity has been included in corporate operations. As stated in the 2004 Form 10-K, the Company evaluates segment performance based on income before discontinued operations, extraordinary items and cumulative effects of changes in accounting (when applicable). When these items are not applicable, the Company evaluates performance based on net income. There have been no material changes in the amount of assets for any operating segment from the amounts disclosed in the 2004 Form 10-K. The assets of U.E., which reflected substantially all of the former International segment assets, have been disclosed on the face of the balance sheet at June 30, 2005 as assets of discontinued operations held for sale. With the completion of the sale of U.E. in July 2005, these assets were removed from the Company’s balance sheet.
17
Item 1. Financial Statements (Cont.)
Quarter Ended June 30, 2005 (Thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Exploration Total Corporate and
Pipeline and Energy Reportable Intersegment Total
Utility and Storage Production Marketing Timber Segments All Other Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
Revenue from
External Customers $189,175 $29,642 $77,370 $88,048 $15,028 $399,263 $1,096 $ - $400,359
Intersegment $ 2,734 $20,956 $ - $ - $ - $23,690 $1,782 $ (25,472) $ -
Revenues
Segment Profit:
Income (Loss) from
Continuing Operations $ (1,684) $10,843 $13,830 $ 1,548 $ 555 $25,092 $ 270 $ 1,031 $26,393
Nine Months Ended June 30, 2005 (Thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Exploration Total Corporate and
Pipeline and Energy Reportable Intersegment Total
Utility and Storage Production Marketing Timber Segments All Other Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
Revenue from
External Customers $991,651 $98,117 $219,527 $276,106 $46,994 $1,632,395 $4,089 $ - $1,636,484
Intersegment $ 12,732 $63,071 $ - $ - $ 1 $ 75,804 $ 6,125 $ (81,929) $ -
Revenues
Segment Profit:
Income (Loss) from
Continuing Operations $ 45,269 $41,577 $38,984 $ 4,909 $4,201 $ 134,940 $1,522 $ (1,259) $ 135,203
Quarter Ended June 30, 2004 (Thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Exploration Total Corporate and
Pipeline and Energy Reportable Intersegment Total
Utility and Storage Production Marketing Timber Segments All Other Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
Revenue from
External Customers $206,492 $29,553 $76,992 $67,376 $13,071 $393,484 $3,400 $ - $396,884
Intersegment $ 3,059 $20,895 $ - $ - $ - $23,954 $ - $ (23,954) $ -
Revenues
Segment Profit:
Income (Loss) from
Continuing Operations $4,167 $12,063 $14,822 $ 1,241 $ 652 $32,945 $ 394 $ (518) $32,821
Nine Months Ended June 30, 2004 (Thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Exploration Total Corporate and
Pipeline and Energy Reportable Intersegment Total
Utility and Storage Production Marketing Timber Segments All Other Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
Revenue from
External Customers $1,029,638 $92,420 $225,594 $240,732 $41,622 $1,630,006 $10,468 $ - $1,640,474
Intersegment $ 13,487 $65,625 $ - $ - $ 2 $ 79,114 $ - $ (79,114) $ -
Revenues
Segment Profit:
Income (Loss) from
Continuing Operations $ 53,772 $36,233 $44,065 $ 5,588 $3,871 $ 143,529 $1,350 $ (4,446) $ 140,433
18
Item 1. Financial Statements (Cont.)
Note 9 — Intangible Assets
The components of the Company’s intangible assets were as follows (in thousands):
At September 30,
At June 30, 2005 2004
----------------------------------------- ---------------------
Gross Net Net
Carrying Accumulated Carrying Carrying
Amount Amortization Amount Amount
----------- ----------------- ----------- ---------------------
Intangible Assets Subject to Amortization
Long-Term Transportation Contracts $8,580 $(2,584) $5,996 $ 6,798
Long-Term Gas Purchase Contracts 31,864 (3,034) 28,830 30,025
Intangible Assets Not Subject to Amortization
Retirement Plan Intangible Asset 9,171 - 9,171 9,171
----------- ----------------- ----------- ---------------------
$49,615 $ (5,618) $43,997 $45,994
----------- ----------------- ----------- ---------------------
Aggregate Amortization Expense (Thousands)
Three Months Ended June 30, 2005 $666
Three Months Ended June 30, 2004 $666
Nine Months Ended June 30, 2005 $1,997
Nine Months Ended June 30, 2004 $1,902
Amortization expense for the long-term transportation contracts is estimated to be $0.3 million for the remainder of 2005 and $1.1 million annually for 2006, 2007, and 2008. Amortization in 2009 is estimated to be $0.5 million.
Amortization expense for the long-term gas purchase contracts is estimated to be $0.4 million for the remainder of 2005 and $1.6 million annually for 2006, 2007, 2008 and 2009.
Note 10 – Retirement Plan and Other Post-Retirement Benefits
Components of Net Periodic Benefit Cost (in thousands):
Three months ended June 30,
Retirement Plan Other Post-Retirement Benefits
--------------- ------------------------------
2005 2004 2005 2004
---- ---- ---- ----
Service Cost $3,429 $3,649 $1,538 $1,649
Interest Cost 10,520 10,141 6,446 6,885
Expected Return on Plan Assets (12,386) (12,070) (4,715) (3,453)
Amortization of Prior Service Cost 257 276 1 1
Amortization of Transition Amount - - 1,782 1,782
Amortization of Losses 2,618 2,360 3,116 5,381
Net Amortization and Deferral
For Regulatory Purposes (Including
Volumetric Adjustments) (1) 1,500 435 (963) (4,706)
------------- ------------- ------------------- -------------------
Net Periodic Benefit Cost $5,938 $4,791 $7,205 $7,539
============= ============= =================== ===================
19
Item 1. Financial Statements (Cont.)
Nine months ended June 30,
Retirement Plan Other Post-Retirement Benefits
---------------- ------------------------------
2005 2004 2005 2004
---- ---- ---- ----
Service Cost $10,285 $10,948 $4,614 $4,948
Interest Cost 31,559 30,424 19,338 20,656
Expected Return on Plan Assets (37,159) (36,211) (14,145) (10,360)
Amortization of Prior Service Cost 772 827 3 3
Amortization of Transition Amount - - 5,346 5,345
Amortization of Losses 7,855 7,078 9,348 16,144
Net Amortization and Deferral
For Regulatory Purposes (Including
Volumetric Adjustments) (1) 5,060 1,049 4,272 (7,179)
------------- ------------- ------------------ ------------------
Net Periodic Benefit Cost $18,372 $14,115 $28,776 $29,557
============= ============= ================== ==================
(1) The Company’s policy is to record retirement plan and other post-retirement benefit costs in the Utility segment on a volumetric basis to reflect the fact that the Utility segment experiences higher throughput of natural gas in the winter months and lower throughput of natural gas in the summer months.
Employer Contributions.During the nine months ended June 30, 2005, the Company contributed $36.3 million to its post-retirement benefit plan and $26.1 million to its retirement plan. In the remainder of 2005, the Company expects to contribute an additional $3.0 million to $4.0 million to its post-retirement benefit plan. The Company does not expect to make any additional contributions to its retirement plan during the remainder of 2005.
20
Back to Table of ContentsCRITICAL ACCOUNTING POLICIES
For a complete discussion of critical accounting policies, refer to “Critical Accounting Policies” in Item 7 of the 2004 Form 10-K. There have been no subsequent changes to that disclosure.
RESULTS OF OPERATIONS
Earnings
The Company’s earnings were $19.2 million for the quarter ended June 30, 2005 compared to earnings of $32.6 million for the quarter ended June 30, 2004. The Company’s earnings were $140.3 million for the nine months ended June 30, 2005 compared to earnings of $158.8 million for the nine months ended June 30, 2004. The following paragraphs will discuss these fluctuations in terms of earnings from continuing operations and earnings from discontinued operations. The quarter ended June 30, 2005 is the first quarter in which the Company is reporting earnings from discontinued operations. The decision to report discontinued operations stems from the fact that the Company decided to sell its majority interest in U.E., a district heating and electric generation business in the Czech Republic in June 2005. The Company subsequently completed the sale on July 18, 2005. Current market conditions, including the increasing value of the Czech currency as compared to the U.S. dollar, caused the value of the assets of U.E. to increase, providing an opportunity to sell the U.E. operations at a profit for the Company. As a result of the decision to sell its majority interest in U.E., the Company determined it appropriate to present the Czech Republic operations, which are primarily comprised of U.E., as discontinued operations at June 30, 2005. The Company also determined it appropriate to discontinue all reporting for an International segment since the Czech Republic operations represented substantially all of the activity in that segment. Any remaining international activity has been included in corporate operations for all periods presented below.
Quarter Ended June 30, 2005 Compared with Quarter Ended June 30, 2004
The Company’s earnings from continuing operations were $26.4 million for the quarter ended June 30, 2005 compared to earnings from continuing operations of $32.8 million for the quarter ended June 30, 2004. The decrease is primarily the result of lower earnings in the Utility, Pipeline and Storage, and Exploration and Production segments, partially offset by slightly higher earnings in the Energy Marketing segment, as shown in the table below. Earnings in the Timber segment did not change significantly from the prior year. However, it should be noted that the Timber segment earnings for the quarter ended June 30, 2004 were reduced by a $0.8 million adjustment to the Company’s August 2003 sale of timber properties.
The Company recognized a loss from discontinued operations of $7.2 million for the quarter ended June 30, 2005, $7.0 million higher than the $0.2 million loss from discontinued operations for the quarter ended June 30, 2004. For the quarter ended June 30, 2005, the loss from discontinued operations includes $6.0 million of previously unrecorded deferred income tax expense related to U.E.
Nine Months Ended June 30, 2005 Compared with Nine Months Ended June 30, 2004
The Company’s earnings from continuing operations were $135.2 million for the nine months ended June 30, 2005 compared to earnings from continuing operations of $140.4 million for the nine months ended June 30, 2004. The decrease of $5.2 million is primarily the result of lower earnings in the Utility, Exploration and Production, and Energy Marketing segments, partially offset by higher earnings in the Pipeline and Storage and Timber segments, as shown in the table below. As mentioned above, Timber segment earnings for the nine months ended June 30, 2004 were reduced by $0.8 million related to an adjustment to the Company’s August 2003 sale of timber properties. In addition, the Pipeline & Storage segment’s earnings for the nine months ended June 30, 2005 include a $2.6 million gain on the FERC approved sale of base gas by Supply Corporation’s jointly-owned Ellisburg Storage Pool. Earnings for the nine months ended June 30, 2004 include the earnings impact of $6.4 million of expense, allocated among all segments, associated with the settlement of a pension obligation. Also, the Exploration and Production segment’s earnings for the nine months ended June 30, 2004 include a $4.6 million benefit related to the Company’s September 2003 sale of Canadian oil properties.
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.) The Company’s earnings from discontinued operations were $5.1 million for the nine months ended June 30, 2005, a decrease of $13.3 million as compared to earnings from discontinued operations of $18.4 million for the nine months ended June 30, 2004. As mentioned above, the earnings from discontinued operations for the nine months ended June 30, 2005 include $6.0 million of previously unrecorded deferred income tax expense related to U.E. In addition, the earnings from discontinued operations for the nine months ended June 30, 2005 include a $3.7 million charge for U.S. taxes on the $72.8 million dividend repatriated from the Company’s operations in the Czech Republic. Earnings from discontinued operations for the nine months ended June 30, 2004 include a $5.2 million reduction to deferred income tax expense resulting from a change in the statutory income tax rate in the Czech Republic, which also contributed to the decline in earnings from discontinued operations for the nine months ended June 30, 2005.
Additional discussion of earnings in each of the business segments can be found in the business segment information that follows. Note that all amounts used in the earnings discussions are after tax amounts.
Earnings (Loss) by Segment
- ------------------------------------ ------------------------------------------- -------------------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
- ------------------------------------ ------------------------------------------- -------------------------------------------
Increase/ Increase/
(Thousands) 2005 2004 (Decrease) 2005 2004 (Decrease)
- ------------------------------------ ------------- ------------- --------------- ------------- ------------- ---------------
Utility $(1,684) $4,167 $(5,851) $45,269 $53,772 $(8,503)
Pipeline and Storage 10,843 12,063 (1,220) 41,577 36,233 5,344
Exploration and Production 13,830 14,822 (992) 38,984 44,065 (5,081)
Energy Marketing 1,548 1,241 307 4,909 5,588 (679)
Timber 555 652 (97) 4,201 3,871 330
- ------------------------------------ ------------- ------------- --------------- ------------- ------------- ---------------
Total Reportable Segments 25,092 32,945 (7,853) 134,940 143,529 (8,589)
All Other 270 394 (124) 1,522 1,350 172
Corporate (1) 1,031 (518) 1,549 (1,259) (4,446) 3,187
- ------------------------------------ ------------- ------------- --------------- ------------- ------------- ---------------
Total Earnings from
Continuing Operations $26,393 $32,821 $(6,428) $135,203 $140,433 $(5,230)
- ------------------------------------ ------------- ------------- --------------- ------------- ------------- ---------------
Earnings from Discontinued
Operations (7,237) (258) (6,979) 5,073 18,399 (13,326)
- ------------------------------------ ------------- ------------- --------------- ------------- ------------- ---------------
Total Consolidated $19,156 $32,563 $(13,407) $140,276 $158,832 $(18,556)
- ------------------------------------ ------------- ------------- --------------- ------------- ------------- ---------------
| | (1) | Includes earnings from the remaining International segment's activity other than the activity from the Czech Republic operations included in Earnings from Discontinued Operations. |
Utility
Utility Operating Revenues
- ------------------------------- ------------------------------------------ ---------------------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
- ------------------------------- ------------------------------------------ ---------------------------------------------
Increase/ Increase/
(Thousands) 2005 2004 (Decrease) 2005 2004 (Decrease)
- ------------------------------- ------------- ------------- -------------- --------------- -------------- --------------
Retail Sales Revenues:
Residential $152,581 $136,324 $16,257 $794,269 $739,797 $54,472
Commercial 23,676 20,846 2,830 134,826 127,130 7,696
Industrial 1,510 5,701 (4,191) 8,220 15,701 (7,481)
- ------------------------------- ------------- ------------- -------------- --------------- -------------- --------------
177,767 162,871 14,896 937,315 882,628 54,687
- ------------------------------- ------------- ------------- -------------- --------------- -------------- --------------
Off-System Sales - 28,034 (28,034) - 91,236 (91,236)
Transportation 17,986 17,605 381 69,545 68,084 1,461
Other (3,844) 1,041 (4,885) (2,477) 1,177 (3,654)
- ------------------------------- ------------- ------------- -------------- --------------- -------------- --------------
$191,909 $209,551 $(17,642) $1,004,383 $1,043,125 $(38,742)
- ------------------------------- ------------- ------------- -------------- --------------- -------------- --------------
22
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)
Utility Throughput
- ------------------------------- ------------------------------------------- --------------------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
- ------------------------------- ------------------------------------------- --------------------------------------------
Increase/ Increase/
(MMcf) 2005 2004 (Decrease) 2005 2004 (Decrease)
- ------------------------------- ------------- -------------- -------------- -------------- -------------- --------------
Retail Sales:
Residential 10,698 10,899 (201) 63,125 65,791 (2,666)
Commercial 1,814 1,812 2 11,340 12,019 (679)
Industrial 120 797 (677) 721 2,050 (1,329)
- ------------------------------- ------------- -------------- -------------- -------------- -------------- --------------
12,632 13,508 (876) 75,186 79,860 (4,674)
- ------------------------------- ------------- -------------- -------------- -------------- -------------- --------------
Off-System Sales - 4,151 (4,151) - 14,254 (14,254)
Transportation 13,776 13,923 (147) 50,345 51,597 (1,252)
- ------------------------------- ------------- -------------- -------------- -------------- -------------- --------------
26,408 31,582 (5,174) 125,531 145,711 (20,180)
- ------------------------------- ------------- -------------- -------------- -------------- -------------- --------------
Degree Days
- ---------------------------------- -------------- -------------- -------------------- --------------------------------
Percent Colder
Three Months Ended (Warmer) Than
--------------------------------
June 30 Normal 2005 2004 Normal Prior Year
- ---------------------------------- -------------- -------------- -------------------- ----------------- --------------
Buffalo 927 911 884 (1.7) 3.1
Erie 885 952 786 7.6 21.1
- ---------------------------------- -------------- -------------- -------------------- ----------------- --------------
Nine Months Ended
June 30
- ---------------------------------- -------------- -------------- -------------------- ----------------- --------------
Buffalo 6,514 6,551 6,474 0.6 1.2
Erie 6,108 6,215 5,991 1.8 3.7
- ---------------------------------- -------------- -------------- -------------------- ----------------- --------------
2005 Compared with 2004
Operating revenues for the Utility segment decreased $17.6 million for the quarter ended June 30, 2005 as compared with the quarter ended June 30, 2004. The decrease for the quarter was primarily the result of the absence of any off-system sales revenues in 2005 and lower other operating revenues, offset partially by higher retail gas sales revenues. Off-system sales decreased $28.0 million for the quarter ended June 30, 2005 as compared with the quarter ended June 30, 2004. Effective September 22, 2004, Distribution Corporation stopped making off-system sales as a result of the FERC’s Order 2004, “Standards of Conduct for Transmission Providers,” as discussed more fully in the Rate Matters section below. As a result of this decision, Distribution Corporation most likely will not have any off-system sales in 2005.* However, due to profit sharing with retail customers, the margins that had resulted from off-system sales were minimal and, accordingly, the Company does not expect any material impact to margins in 2005.* Other operating revenues decreased $4.9 million due primarily to two out-of-period regulatory adjustments recorded during the quarter ended June 30, 2005. The first adjustment related to the final settlement with the Staff of the NYPSC of the earnings sharing liability for the fiscal 2001 to 2003 time period. As a result of that settlement, the New York rate jurisdiction recorded additional earnings sharing expense (as an offset to other operating revenues) of $0.9 million. The second adjustment related to a regulatory liability recorded for previous over-collections of New York State gross receipts tax. In preparing for the implementation of the recent settlement agreement in New York, the Company determined that it needed to adjust that regulatory liability by $2.7 million related to fiscal years 2004 and prior. These out-of-period adjustments are considered immaterial to the quarter ended June 30, 2005 and inconsequential to all applicable prior periods. Retail gas revenues increased $14.9 million largely due to the recovery of higher gas costs (gas costs are recovered dollar for dollar in revenues). This increase was partially offset by a decrease in retail industrial sales revenue, due to production declines of certain large volume industrial customers. Also contributing to the increase, in the Pennsylvania rate jurisdiction, were the impacts of colder than normal weather and a base rate increase. On April 15, 2005, Distribution Corporation implemented the March 23, 2005 Settlement Agreement with the Staff of the PaPUC and other parties, which among other things, provided for a $12.0 million annual base rate increase in revenues. For the quarter ended June 30, 2005, the base rate adjustment contributed $1.6 million to revenues.
23
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.) Operating revenues for the Utility segment decreased $38.7 million for the nine months ended June 30, 2005 as compared with the nine months ended June 30, 2004. The decrease for the nine months was primarily the result of the absence of any off-system sales revenues in 2005 and lower other operating revenues, offset partially by higher retail sales revenues. Off-system sales decreased $91.2 million for the nine months ended June 30, 2005 as compared with the nine months ended June 30, 2004 as a result of the FERC’s Order 2004, as noted above. Other operating revenues decreased $3.7 million due primarily to two out-of-period regulatory adjustments recorded during the quarter ended June 30, 2005, as noted above. Partially offsetting these decreases, the increase in retail gas sales revenues was largely a function of the recovery of higher gas costs, which more than offset lower retail sales volumes, as shown above.
The Utility segment experienced a loss of $1.7 million for the quarter ended June 30, 2005, a decrease of $5.9 million when compared with the quarter ended June 30, 2004. In the New York jurisdiction, earnings decreased by $7.2 million principally due to two out-of-period regulatory adjustments recorded during the quarter ended June 30, 2005. The first adjustment related to the final settlement with the Staff of the NYPSC of the earnings sharing liability for the fiscal 2001 to 2003 time period. As a result of that settlement, the New York rate jurisdiction recorded additional earnings sharing expense of $0.6 million. The second adjustment related to a regulatory liability recorded for previous over-collections of New York State gross receipts tax. In preparing for the implementation of the recent settlement agreement in New York, the Company determined that it needed to adjust that regulatory liability, including accrued interest, by $3.5 million (after tax), ($0.6 million of that adjustment related to the first six months of fiscal 2005 and $2.9 million related to fiscal years 2004 and prior). The earnings decrease in New York also was caused by higher pension expense ($0.1 million), higher post-retirement expenses ($0.2 million) and higher bad debt expense ($0.3 million). In the Pennsylvania rate jurisdiction, earnings increased $1.3 million primarily due to increased margin associated with the impact of a base rate increase ($1.0 million), as noted above.
The Utility segment’s earnings for the nine months ended June 30, 2005 were $45.3 million, a decrease of $8.5 million when compared with the earnings of $53.8 million for the nine months ended June 30, 2004. In the New York rate jurisdiction, earnings decreased by $6.3 million principally due to a $4.9million decrease in margin on retail sales and transportation services, resulting from lower average usage per customer. The two out-of-period regulatory adjustments noted above ($4.1 million) also contributed to the decrease. These decreases were partially offset by a $1.2 million charge associated with the settlement of a pension obligation recorded in the quarter ended March 31, 2004, which did not recur in 2005. For the Pennsylvania rate jurisdiction, earnings decreased by $2.2 million principally due to a $3.0 million increase in operation and maintenance expense. The increase in operation and maintenance expense was due to an increase in pension and other post-retirement expenses ($2.7 million) and higher bad debt expense ($0.7 million). The increase in pension and other post-retirement expenses is largely related to the 2003 Settlement Agreement with the PaPUC, which provided for a one-time credit to pension expense recorded by the Company during the quarter ended December 31, 2003. Partially offsetting these decreases was $1.0 million of expense associated with the settlement of a pension obligation recognized in the quarter ended March 31, 2004. That expense did not recur in 2005. Margin in the Pennsylvania rate jurisdiction remained flat as decreased usage per customer ($2.2 million) was offset by the impact of colder than normal weather ($1.1 million) and a base rate increase ($1.0 million), effective April 15, 2005, in conjunction with the March 23, 2005 Settlement Agreement with the PaPUC, as noted above.
24
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)
Pipeline and Storage
Pipeline and Storage Operating Revenues
- ------------------------------------ ---------------------------------------- -------------------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
- ------------------------------------ ---------------------------------------- -------------------------------------------
Increase/ Increase/
(Thousands) 2005 2004 (Decrease) 2005 2004 (Decrease)
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
Firm Transportation $28,349 $28,929 $(580) $89,966 $92,194 $(2,228)
Interruptible Transportation 1,121 785 336 2,969 2,323 646
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
29,470 29,714 (244) 92,935 94,517 (1,582)
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
Firm Storage Service 16,297 15,961 336 48,767 47,774 993
Other 4,831 4,773 58 19,486 15,754 3,732
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
$50,598 $50,448 $150 $161,188 $158,045 $3,143
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
Pipeline and Storage Throughput
- ------------------------------------ ---------------------------------------- -------------------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
- ------------------------------------ ---------------------------------------- -------------------------------------------
Increase/ Increase/
(MMcf) 2005 2004 (Decrease) 2005 2004 (Decrease)
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
Firm Transportation 70,944 66,140 4,804 284,537 284,351 186
Interruptible Transportation 7,162 6,995 167 10,004 10,891 (887)
------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
78,106 73,135 4,971 294,541 295,242 (701)
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
2005 Compared with 2004
Operating revenues for the Pipeline and Storage segment were relatively unchanged for the quarter ended June 30, 2005 as compared with the quarter ended June 30, 2004. For the nine months ended June 30, 2005, operating revenues for the Pipeline and Storage segment increased $3.1 million as compared with the nine months ended June 30, 2004. This increase was primarily due to higher revenues from unbundled pipeline sales of $2.7 million, reported as part of other revenues in the table above. Higher cashout revenues of $0.7 million, also reported as part of other revenues in the table above, also contributed to the increase. Cashout revenues represent a cash resolution of a gas imbalance whereby a customer pays Supply Corporation for gas the customer receives in excess of amounts delivered into Supply Corporation’s system by the customer’s shipper. Cashout revenues are completely offset by purchased gas expense. In addition, increased firm storage revenues of $1.0 million also contributed to the increase in revenues. Offsetting these increases, the decrease in transportation revenues of $1.6 million largely reflects the Utility segment’s cancellation of a portion of its firm transportation capacity in April 2004. The Utility segment’s decision to cancel a portion of its firm transportation capacity was based on lower usage in its service territory. Supply Corporation has only been able to remarket approximately twenty percent of this capacity to date.
Earnings in the Pipeline and Storage segment for the quarter ended June 30, 2005 decreased $1.2 million as compared with the quarter ended June 30, 2004. The decrease can be attributed to higher operation and maintenance expenses ($0.9 million) and a reserve for preliminary project costs incurred during the quarter ended June 30, 2005 associated with the Empire State Pipeline Connector project ($0.3 million). Lower interest expense ($0.5 million) partially offset these increases.
The Pipeline and Storage segment’s earnings for the nine months ended June 30, 2005 were $41.6 million, an increase of $5.3 million when compared with the nine months ended June 30, 2004. The main factors contributing to this increase were higher revenues from unbundled pipeline sales ($1.8 million), lower interest expense ($2.1 million), $2.0 million of expense that did not recur in 2005 associated with the settlement of a pension obligation recognized in the quarter ended March 31, 2004,
25
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)as well as the $2.6 million gain on the FERC approved sale of base gas during the quarter ended March 31, 2005. A reserve for preliminary project costs incurred for the nine months ended June 30, 2005 associated with the Empire State Pipeline Connector project ($1.9 million) partially offset these increases.
The sale of Ellisburg base gas, which amounted to 660 MMcf, will open up 660 MMcf of space for ongoing storage service. At current rates between $1.49 and $1.70 per Mcf, it is expected that future storage service revenues may increase by approximately $1.0 million per year with almost no increase in operating expenses associated with the higher revenues.* The additional storage space has already been contracted for, effective April 1, 2005, resulting in approximately $0.3 million of additional storage revenues for the quarter ended June 30, 2005 over the prior period.
Exploration and Production
Exploration and Production Operating Revenues
- ----------------------------------- ---------------------------------------- -----------------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
- ----------------------------------- ---------------------------------------- -----------------------------------------
Increase/ Increase/
(Thousands) 2005 2004 (Decrease) 2005 2004 (Decrease)
- ----------------------------------- ------------ ------------ -------------- ------------- ------------ --------------
Gas (after Hedging) $47,117 $43,947 $3,170 $132,381 $130,240 $2,141
Oil (after Hedging) 27,666 31,354 (3,688) 80,185 90,009 (9,824)
Gas Processing Plant 8,894 6,980 1,914 25,943 20,609 5,334
Other 760 842 (82) 1,947 1,607 340
Intrasegment Elimination (1) (7,067) (6,131) (936) (20,929) (16,871) (4,058)
- ----------------------------------- ------------ ------------ -------------- ------------- ------------ --------------
$77,370 $76,992 $378 $219,527 $225,594 $(6,067)
- ----------------------------------- ------------ ------------ -------------- ------------- ------------ --------------
(1) Represents the elimination of certain West Coast gas production revenue included in "Gas (after Hedging)"
in the table above that was sold to the gas processing plant shown in the table above. An elimination for the
same dollar amount was made to reduce the gas processing plant's Purchased Gas expense.
- ---------------------------------------------- ------------------------------------ --------------------------------------
Production Volumes Three Months Ended Nine Months Ended
June 30, June 30,
- ---------------------------------------------- ------------------------------------ --------------------------------------
Increase/ Increase/
2005 2004 (Decrease) 2005 2004 (Decrease)
- ---------------------------------------------- ---------- ---------- -------------- ------------ ---------- --------------
Gas Production (MMcf)
Gulf Coast 3,365 4,563 (1,198) 9,433 14,050 (4,617)
West Coast 975 1,018 (43) 3,000 3,018 (18)
Appalachia 1,156 1,208 (52) 3,499 3,894 (395)
Canada 2,134 1,578 556 5,959 4,874 1,085
- ---------------------------------------------- ---------- ---------- -------------- ------------ ---------- --------------
7,630 8,367 (737) 21,891 25,836 (3,945)
- ---------------------------------------------- ---------- ---------- -------------- ------------ ---------- --------------
Oil Production
(Mbbl)
Gulf Coast 251 395 (144) 801 1,184 (383)
West Coast 630 651 (21) 1,916 2,012 (96)
Appalachia 11 4 7 23 15 8
Canada 75 89 (14) 229 253 (24)
- ---------------------------------------------- ---------- ---------- -------------- ------------ ---------- --------------
967 1,139 (172) 2,969 3,464 (495)
- ---------------------------------------------- ---------- ---------- -------------- ------------ ---------- --------------
26
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)
Average Prices
- ----------------------------------------- --------------------------------------- ----------------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
- ----------------------------------------- --------------------------------------- ----------------------------------------
Increase/ Increase/
2005 2004 (Decrease) 2005 2004 (Decrease)
- ----------------------------------------- ----------- ----------- --------------- ------------ ------------ --------------
Average Gas Price/Mcf
Gulf Coast $6.92 $6.06 $0.86 $6.72 $5.52 $1.20
West Coast $6.87 $5.87 $1.00 $6.54 $5.44 $1.10
Appalachia $6.97 $6.23 $0.74 $7.16 $5.88 $1.28
Canada $6.08 $5.02 $1.06 $5.70 $4.86 $0.84
Weighted Average $6.69 $5.87 $0.82 $6.49 $5.44 $1.05
Weighted Average After
Hedging $6.18 $5.25 $0.93 $6.05 $5.04 $1.01
Average Oil Price/bbl
Gulf Coast $49.83 $36.80 $13.03 $47.73 $33.43 $14.30
West Coast $42.57 $33.56 $9.01 $39.10 $30.26 $8.84
Appalachia $50.95 $32.55 $18.40 $46.71 $29.50 $17.21
Canada $41.66 $32.25 $9.41 $40.39 $29.50 $10.89
Weighted Average $44.48 $34.58 $9.90 $41.59 $31.28 $10.31
Weighted Average After
Hedging $28.62 $27.53 $1.09 $27.00 $25.98 $1.02
- ----------------------------------------- ----------- ----------- --------------- ------------ ------------ --------------
2005 Compared with 2004
Operating revenues for the Exploration and Production segment increased $0.4 million for the quarter ended June 30, 2005 as compared with the quarter ended June 30, 2004. Oil production revenue after hedging decreased $3.7 million due primarily to a 172,000 barrel decline in production, particularly in the Gulf Coast of Mexico region where production decreased by approximately 144,000 barrels, offset partly by higher weighted average prices after hedging ($1.09 per barrel). Gas production revenue after hedging increased $3.2 million due to higher weighted average prices after hedging ($0.93 per Mcf), offset partly by a 737 MMcf decrease in production. Most of the decrease in gas production occurred in the Gulf Coast region (a 1,198 MMcf decline), which is consistent with the expected decline rates for the Company’s production in this region. This decline was partially offset by an increase in Canadian gas production, primarily due to production from the Sukunka 60-E well, in which the Company has a 20% working interest.
Operating revenues for the Exploration and Production segment decreased $6.1 million for the nine months ended June 30, 2005 as compared with the nine months ended June 30, 2004. Oil production revenue after hedging decreased $9.8 million due to a 495,000 barrel decline in production offset partly by higher weighted average prices after hedging ($1.02 per barrel). The majority of the decrease can be attributed to the Gulf Coast region oil production decline of approximately 383,000 barrels. Gas production revenue after hedging increased $2.1 million. Increases in the weighted average price of gas after hedging ($1.01 per Mcf) more than offset an overall decrease in gas production of 3,945 MMcf. The decrease in gas production occurred primarily in the Gulf Cost region (a 4,617 MMcf decline), which is consistent with the expected decline rates for the Company’s production in this region. This decline was partially offset by an increase in Canadian gas production, primarily due to production from the Sukunka 60-E well, in which the Company has a 20% working interest.
As shown above, this segment’s weighted average oil prices after hedging were $28.62 and $27.00, respectively, during the quarter and nine months ended June 30, 2005. While these prices reflect the impact of hedging, they also reflect the lesser value of the West Coast’s heavy sour crude oil, which represents the bulk of the Company’s oil production as compared to the more widely publicized West Texas Intermediate (WTI) price of light sweet crude, which is in the $50 — $60 range. While prices of light sweet crude oil increased significantly during the nine months ended June 30, 2005, prices for West Coast heavy sour crude oil did not increase as dramatically due to oversupply and refinery constraint issues. Historically, the prices of light sweet crude oil and heavy sour crude oil have largely
27
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)moved in tandem, meaning that the price differential between light sweet crude oil and heavy sour crude oil has historically not changed significantly. The Company’s hedge effectiveness tests for the derivative financial instruments used in the Exploration and Production segment, as required by SFAS 133, have assumed that the differential between these two types of oil will return to their historical norms. During the quarter ended June 30, 2005 the price differential between these two types of oil did decrease. However, if the current price differential does not continue to decline to its historical norm, it is possible that these assumptions would change and that some of the derivative financial instruments used to hedge West Coast oil production may become ineffective.* To the extent that derivative financial instruments would ever be deemed to be ineffective, gains or losses from the derivative financial instruments from that point forward would be marked-to-market on the income statement without regard to an underlying physical transaction (i.e., there would be timing differences between when gains or losses from the derivative financial instruments are recorded and when the revenues from the anticipated production is recorded).
The Exploration and Production segment’s earnings for the quarter ended June 30, 2005 were $13.8 million, a decrease of $1.0 million when compared with a earnings of $14.8 million for the quarter ended June 30, 2004. The decrease for the quarter is due primarily to higher lease operating expenses ($0.8 million) and general and administrative expenses ($0.8 million). The increase in lease operating expenses is principally attributable to the Sukunka wells in Canada (which are generally more expensive to operate than the Company’s other properties) and higher fuel costs in the West division.
The Exploration and Production segment’s earnings for the nine months ended June 30, 2005 were $39.0 million, a decrease of $5.1 million when compared with earnings of $44.1 million for the nine months ended June 30, 2004. As noted above, the decrease is a result of the decrease in oil and gas revenues caused by an overall decline in production ($5.0 million) as well as an increase in lease operating expense ($1.1 million). Also contributing to the decrease is the non-recurrence of a $4.6 million earnings benefit recognized in the quarter ended March 31, 2004 related to the Company’s September 2003 sale of Canadian oil properties located in Southeast Saskatchewan. When the Southeast Saskatchewan transaction closed, the initial proceeds received were subject to an adjustment based on actual working capital and the resolution of certain income tax matters. During the quarter ended March 31, 2004, those items were resolved with the buyer and, as a result, the Company received an additional $4.6 million (U.S. dollars) of sales proceeds, which is recorded in the Adjustment of Loss on Sale of Oil and Gas Producing Properties line on the income statement. Partially offsetting these decreases was the non-recurrence of the expense associated with the settlement of a pension obligation in the quarter ended March 31, 2004 ($0.9 million), lower depreciation and depletion expense ($0.8 million), lower interest expense ($1.1 million), and higher interest income ($1.4 million).
Energy Marketing
Energy Marketing Operating Revenues
- ----------------------------------- -------------------------------------------- ----------------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
- ----------------------------------- -------------------------------------------- ----------------------------------------
Increase/ Increase/
(Thousands) 2005 2004 (Decrease) 2005 2004 (Decrease)
- ----------------------------------- ------------- -------------- --------------- ------------ ------------ --------------
Natural Gas (after Hedging) $87,983 $67,374 $20,609 $276,032 $240,701 $35,331
Other 65 2 63 74 31 43
- ----------------------------------- ------------- -------------- --------------- ------------ ------------ --------------
$88,048 $67,376 $20,672 $276,106 $240,732 $35,374
- ----------------------------------- ------------- -------------- --------------- ------------ ------------ --------------
Energy Marketing Volumes
- ----------------------------------- -------------------------------------------- ----------------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
- ----------------------------------- -------------------------------------------- ----------------------------------------
Increase/ Increase/
2005 2004 (Decrease) 2005 2004 (Decrease)
- ----------------------------------- ------------- -------------- --------------- ----------- ------------- --------------
Natural Gas - (MMcf) 10,925 9,918 1,007 34,115 35,908 (1,793)
- ----------------------------------- ------------- -------------- --------------- ----------- ------------- --------------
28
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)2005 Compared with 2004
Operating revenues for the Energy Marketing segment increased $20.7 million and $35.4 million, respectively, for the quarter and nine months ended June 30, 2005, as compared with the quarter and nine months ended June 30, 2004. These increases primarily reflect an increase in the price of natural gas over the prior year periods. For the quarter ended June 30, 2005, volumes are up over the prior year’s quarter due to the addition of customers in the lower margin wholesale and industrial customer classes. For the nine months ended June 30, 2005, volumes are down over the prior year period due to the loss of customers in the lower margin wholesale customer class during the six months ended March 31, 2005.
The Energy Marketing segment’s earnings for the quarter ended June 30, 2005 were $1.5 million, an increase of $0.3 million when compared with earnings of $1.2 million for the quarter ended June 30, 2004. Despite higher operating revenues and volumes, margins did not increase significantly due to low margins in the wholesale and industrial customer classes.
The Energy Marketing segment’s earnings for the nine months ended June 30, 2005 were $4.9 million, a decrease of $0.7 million when compared with earnings of $5.6 million for the nine months ended June 30, 2004. The decrease primarily reflects lower margins caused by a reduction in the benefit of storage gas and, to a lesser extent, lower throughput.
Timber
Timber Operating Revenues
- ------------------------------- ------------------------------------------- ---------------------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
- ------------------------------- ------------------------------------------- ---------------------------------------------
Increase/ Increase/
(Thousands) 2005 2004 (Decrease) 2005 2004 (Decrease)
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
Log Sales $4,370 $4,434 $(64) $18,014 $16,833 $1,181
Green Lumber Sales 2,424 1,345 1,079 5,734 4,464 1,270
Kiln Dry Lumber Sales 7,919 7,115 804 22,015 19,647 2,368
Other 315 177 138 1,232 680 552
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
Operating Revenues $15,028 $13,071 $1,957 $46,995 $41,624 $5,371
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
Timber Board Feet
- ------------------------------- ------------------------------------------- ---------------------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
- ------------------------------- ------------------------------------------- ---------------------------------------------
Increase/ Increase/
(Thousands) 2005 2004 (Decrease) 2005 2004 (Decrease)
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
Log Sales 1,619 1,392 227 5,934 5,208 726
Green Lumber Sales 3,475 1,956 1,519 8,179 7,154 1,025
Kiln Dry Lumber Sales 4,110 3,824 286 11,373 10,909 464
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
9,204 7,172 2,032 25,486 23,271 2,215
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
2005 Compared with 2004
Operating revenues for the Timber segment increased $2.0 million for the quarter ended June 30, 2005 as compared with the quarter ended June 30, 2004. The increase for the quarter can largely be attributed to higher green lumber sales of $1.1 million as well as higher kiln dry lumber sales of $0.8 million.
Operating revenues for the Timber segment increased $5.4 million for the nine months ended June 30, 2005 as compared with the nine months ended June 30, 2004. This increase can be attributed to an increase in kiln dry lumber sales of $2.4 million due to an increase in processing cherry lumber volumes as well as higher log sales of $1.2 million (the majority being cherry veneer due to favorable
29
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)weather conditions). Green lumber sales also increased by $1.3 million largely due to increased sales in maple green lumber.
The Timber segment’s earnings for the quarter ended June 30, 2005 were $0.6 million, a decrease of $0.1 million when compared with earnings of $0.7 million for the quarter ended June 30, 2004. The decrease is partially due to increases in cost of good sold as a result of the higher cost basis of trees harvested. Offsetting this decrease is a $0.8 million adjustment to the Company’s August 2003 sale of timber properties during the quarter ended June 30, 2004 discussed above. The Company received final timber cruise information of the properties it sold and, based on that information, determined that property records pertaining to $1.3 million ($0.8 million after tax) of timber property were not properly shown as having been transferred to the purchaser. As a result, the Company removed those assets from its property records and adjusted the previously recognized gain downward by recognizing a pre tax loss of $1.3 million in the quarter ended June 30, 2004. No such expense was incurred in 2005.
The Timber segment’s earnings for the nine months ended June 30, 2005 were $4.2 million, an increase of $0.3 million when compared with earnings of $3.9 million for the nine months ended June 30, 2004. Increases in cost of good sold during 2005 due to a larger amount of timber being harvested on purchased stumpage that has a higher cost basis than other raw material sources, were more than offset by the favorable earnings impact associated with the non-recurrence of the $0.8 million after tax loss recorded in 2004 related to the Company’s fiscal 2003 sale of timber properties, as discussed above.
Interest Charges
Interest on long-term debt decreased $1.9 million and $9.0 million, respectively, for the quarter and nine-months ended June 30, 2005 as compared with the quarter and nine months ended June 30, 2004. For both the quarter and nine month periods, the decrease can be attributed primarily to lower average amounts of long-term debt outstanding.
Other interest charges increased $3.5 million and $4.1 million, respectively, for the quarter and nine months ended June 30, 2005 as compared with the quarter and nine months ended June 30, 2004. These increases resulted primarily from a regulatory true-up adjustment in the Utility segment’s New York rate jurisdiction related to a regulatory liability recorded for previous over-collections of New York State gross receipts tax.
CAPITAL RESOURCES AND LIQUIDITY
The Company’s primary source of cash during the nine-month period ended June 30, 2005 was cash provided by operating activities. This source of cash was supplemented by issuances of common stock under the Company’s stock option plans. During the nine months ended June 30, 2005, issuances of common stock under the Company’s 401(k) plans and Direct Stock Purchase and Dividend Reinvestment Plan were made via open market purchases.
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, income or loss from unconsolidated subsidiaries net of cash distributions, adjustment of loss on sale of oil and gas producing properties, adjustment of gain on sale of timber properties, 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 may 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.
30
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.) Because of the seasonal nature of the heating business in the Utility and Energy Marketing segments, revenues in these segments are relatively high during the heating season, primarily the first and second quarters of the fiscal year, and receivable balances historically increase during these periods from the balances receivable at September 30.
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 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 under the caption “Other Accruals and Current Liabilities.” Such reserve is reduced as the inventory is replenished.
Cash provided by operating activities in the Exploration and Production segment may vary from period to period as a result of changes in the commodity prices of natural gas and crude oil. The Company uses various derivative financial instruments, including price swap agreements and no cost collars in an attempt to manage this energy commodity price risk.
Net cash provided by operating activities totaled $342.9 million for the nine months ended June 30, 2005, a decrease of $65.3 million compared with $408.2 million provided by operating activities for the nine months ended June 30, 2004. Most of this decrease occurred in the Utility, Exploration and Production, and Energy Marketing segments. In the Utility segment, the decrease was largely attributable to gas cost recovery timing differences. In the Exploration and Production segment, lower oil and gas sales and higher lease operating expenses contributed to a decrease in cash from operations. Higher working capital requirements was the main reason for the decrease in the Energy Marketing segment. Partially offsetting this decrease, the Corporate operation experienced a significant cash outflow in January 2004 due to a $23.0 million lump sum payment to a participant of the Company’s nonqualified defined benefit plan under a provision of an agreement previously entered into between the Company and the participant. No such cash outflow occurred during the nine months ended June 30, 2005.
Investing Cash Flow
Expenditures for Long-Lived Assets
Expenditures for long-lived assets include additions to property, plant and equipment.
The Company’s expenditures for long-lived assets totaled $153.2 million during the nine months ended June 30, 2005. The table below presents these expenditures:
- ----------------------------------------------------------- ----- -------------------------
Nine Months Ended June 30, 2005
(in millions of dollars)
- ----------------------------------------------------------- ----- -------------------------
Total
Expenditures for
Long-Lived Assets
- ----------------------------------------------------------- ----- -------------------------
Utility $35.0
Pipeline and Storage 13.1
Exploration and Production 86.1
Timber 18.7
All Other and Corporate 0.3
- ----------------------------------------------------------- ----- -------------------------
Total Expenditures from Continuing Operations $153.2
- ----------------------------------------------------------- ----- -------------------------
Utility
The majority of the Utility capital expenditures for the nine months ended June 30, 2005 were made for replacement of mains and main extensions, as well as for the replacement of service lines.
31
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)Pipeline and Storage
The majority of the Pipeline and Storage capital expenditures for the nine months ended June 30, 2005 were made for additions, improvements, and replacements to this segment’s transmission and storage systems.
The Company is pursuing a project to expand its natural gas pipeline operations to serve new markets in New York and elsewhere in the Northeast by extending the Empire State Pipeline.* This proposed extension project would provide an upstream supply link for Phase I of the Millennium Pipeline and will transport Canadian and other natural gas supplies to downstream customers, including Key Span Gas East Corporation, which has entered into a precedent agreement to be a major shipper, subject to the satisfaction of various conditions.* The pipeline extension will be designed to move at least 250 MMcf of natural gas per day.* The preliminary estimate of the cost for developing the Empire extension project is $145 million and the targeted in-service date is in calendar 2007.* As of June 30, 2005, the Company had incurred approximately $3.6 million in costs (all of which have been reserved) related to this project. Of this amount, $0.5 million and $3.0 million, respectively, were incurred during the quarter and nine months ended June 30, 2005.
The Company completed a FERC approved sale of base gas from Supply Corporation’s jointly-owned Ellisburg Storage Pool in March 2005 for $4.6 million in sales proceeds. As a result of the sale, property, plant, and equipment was reduced by $0.7 million for the cost basis of the gas and a $3.9 million gain on the sale ($2.6 million after tax) was recognized by the Company in the quarter-ended March 31, 2005. The proceeds of this sale are included in Other Investing Activities on the Consolidated Statement of Cash Flows for the nine months ended June 30, 2005. The gain is included in Other Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities.
Exploration and Production
The Exploration and Production segment capital expenditures for the nine months ended June 30, 2005 included approximately $26.9 million (U.S. Dollar equivalent) for Canada, $31.7 million for the Gulf Coast region ($30.7 million for the off-shore program in the Gulf of Mexico), $21.3 million for the West Coast region and $6.2 million for the Appalachian region. These amounts included approximately $11.7 million spent to develop proved undeveloped reserves.
Estimated capital expenditures in 2005 for the Exploration and Production segment have been increased from $112.0 million to $139.0 million.* Estimated capital expenditures for Canada remains unchanged at $41.0 million.* Estimated capital expenditures for the Gulf Coast region have been increased from $35.0 million to $56.0 million.* Estimated capital expenditures for the West Coast region have been increased from $24.0 million to $27.0 million and estimated capital expenditures for the Appalachian region have been increased from $12.0 million to $15.0 million.* Drilling success in the Gulf Coast region is the main reason for this increase.
Timber
The majority of the Timber segment capital expenditures for the nine months ended June 30, 2005 were made for the purchase of land and timber rights in Elk County, Pennsylvania in January 2005. The land and timber, consisting of approximately 12,324 acres, was purchased for approximately $17.6 million. The remaining $1.1 million of capital expenditures for the nine months ended June 30, 2005 was made for purchases of equipment for Highland’s sawmill and kiln operations.
The Company continuously evaluates capital expenditures and investments in corporations and other entities. 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.*
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)Financing Cash Flow
Consolidated short-term debt decreased $107.2 million during the nine months ended June 30, 2005. The Company continues to consider short-term debt (consisting of short-term notes payable to banks and commercial paper) 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. At June 30, 2005, the Company had outstanding short-term notes payable to banks of $49.6 million. There was no outstanding commercial paper at June 30, 2005. The Company has SEC authorization under the Holding Company Act, to borrow and have outstanding as much as $750.0 million of short-term debt at any time through December 31, 2005. On June 23, 2005, the Company filed with the SEC an application under the Holding Company Act for authority, among other things, to issue short-term debt securities, long-term debt securities and equity securities during the period commencing January 1, 2006 and ending December 31, 2008.* The Company has not yet determined whether it will continue to pursue that application, as the recently enacted Energy Policy Act of 2005 (Energy Policy Act) (discussed below under Other Matters, Rate and Regulatory Matters) would permit the Company to continue to rely on its current authorization. In particular, the Energy Policy Act provides that nothing in that act or in the Holding Company Act prohibits a person from engaging in or continuing to engage in activities or transactions in which it is legally engaged or authorized to engage on the date of enactment of the Energy Policy Act, if that person continues to comply with the terms (other than an expiration date or termination date) of an such authorization. As for bank loans, the Company maintains a number of individual (bi-lateral) uncommitted or discretionary lines of credit with certain financial institutions for general corporate purposes. Borrowings under these lines of credit are made at competitive market rates. Each of these credit lines, which aggregate to $380.0 million, are revocable at the option of the financial institution and are reviewed on an annual basis. The Company anticipates that these lines of credit will continue to be renewed.* The total amount available to be issued under the Company’s commercial paper program is $200.0 million. The commercial paper program is backed by a syndicated committed credit facility totaling $220.0 million. Of that amount, $110.0 million is committed to the Company through September 25, 2005 and another $110.0 million is committed to the Company through September 30, 2005. The Company anticipates that it will be able to replace this facility at or before its maturity.*
Under the Company’s committed credit facility, the Company has agreed that its debt to capitalization ratio will not, at the last day of any fiscal quarter, exceed .60 from October 1, 2004 through September 30, 2005. The Company is currently in the process of negotiating a new committed credit facility and expects this to be finalized before the end of the current fiscal year.* At June 30, 2005, the Company’s debt to capitalization ratio (as calculated under the facility) was .47. The constraints specified in the committed credit facility would permit an additional $802.0 million in short-term and/or long-term debt to be outstanding before the Company’s debt to capitalization ratio would exceed .60. If a downgrade in any of the Company’s credit ratings were to occur, access to the commercial paper markets might not be possible.* However, the Company expects that it could borrow under its uncommitted bank lines of credit or rely upon other liquidity sources, including cash provided by operations.*
Under the Company’s existing indenture covenants, at June 30, 2005, the Company would have been permitted to issue up to a maximum of $832.0 million in additional long-term unsecured indebtedness at then-current market interest rates (further limited by the debt to capitalization ratio constraints noted in the previous paragraph) in addition to being able to issue new indebtedness to replace maturing debt. The Company’s present liquidity position is believed to be adequate to satisfy known demands.*
The Company’s 1974 indenture pursuant to which $399.0 million (or 35%) of the Company’s long-term debt (as of June 30, 2005) was issued contains a cross-default provision whereby the failure by the Company to perform certain obligations under other borrowing arrangements could trigger an obligation to repay the debt outstanding under the indenture. In particular, a repayment obligation could be triggered if the Company fails (i) to pay any scheduled principal or interest on any debt under any other indenture or agreement or (ii) to perform any other term in any other such indenture or agreement, and
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)the effect of the failure causes, or would permit the holders of the debt to cause, the debt to become due prior to its stated maturity, unless cured or waived.
The Company’s $220.0 million committed credit facility also contains a cross-default provision whereby the failure by the Company or its significant subsidiaries to make payments under other borrowing arrangements, or the occurrence of certain events affecting those other borrowing arrangements, could trigger an obligation to repay any amounts outstanding under the committed credit facility. In particular, a repayment obligation could be triggered if (i) the Company or its significant subsidiaries fail to make a payment when due of any principal or interest on any other indebtedness aggregating $20.0 million or more or (ii) an event occurs that causes, or would permit the holders of any other indebtedness aggregating $20.0 million or more to cause, such indebtedness to become due prior to its stated maturity. As of June 30, 2005, the Company had no debt outstanding under the committed credit facility.
The Company also has authorization from the SEC, under the Holding Company Act, to issue long-term debt securities and equity securities in an aggregate amount of up to $1.5 billion during the order’s authorization period, which commenced in November 2002 and extends to December 31, 2005. The Energy Policy Act (discussed below under Rate and Regulatory Matters) provides that nothing in that act or in the Holding Company Act prohibits a person from engaging in or continuing to engage in activities or transactions in which it is legally engaged or authorized to engage on the date of enactment of the Energy Policy Act, it that person continues to comply with the terms (other than an expiration date or termination date) of any such authorization. The Company has an effective registration statement on file with the SEC under which it has available capacity to issue an additional $550.0 million of debt and equity securities under the Securities Act of 1933, and within the authorization granted by the SEC under the Holding Company Act. The Company may sell all or a portion of the remaining registered securities if warranted by market conditions and the Company’s capital requirements. Any offer and sale of the above mentioned $550.0 million of debt and equity securities will be made only by means of a prospectus meeting the requirements of the Securities Act of 1933 and the rules and regulations thereunder.
The amounts and timing of the issuance and sale of debt or equity securities will depend on market conditions, indenture requirements, regulatory authorizations and the capital requirements of the Company.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has entered into certain off-balance sheet financing arrangements. These financing arrangements are primarily operating and capital leases. The Company’s consolidated subsidiaries have operating leases having a remaining lease commitment of approximately $51.9 million. These leases have been entered into for the use of buildings, vehicles, construction tools, meters, computer equipment and other items and are accounted for as operating leases. The Company’s unconsolidated subsidiaries, which are accounted for under the equity method, have capital leases of electric generating equipment having a remaining lease commitment of approximately $9.6 million. The Company has guaranteed 50% or $4.8 million of these capital lease commitments.
OTHER MATTERS
The Company is involved in litigation arising in the normal course of business. Also in the normal course of business, the Company is involved in tax, regulatory and other governmental audits, inspections, investigations and other proceedings that involve state and federal taxes, safety, compliance with regulations, 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 quarterly and annual period 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.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)Market Risk Sensitive Instruments
For a complete discussion of market risk sensitive instruments, refer to “Market Risk Sensitive Instruments” in Item 7 of the 2004 Form 10-K. There have been no subsequent material changes to the Company’s exposure to market risk sensitive instruments.
Rate and Regulatory Matters
Energy Policy Act
On August 8, 2005, President Bush signed into law the Energy Policy Act, which, among other things, repeals the Holding Company Act effective February 8, 2006. With repeal of the Holding Company Act, the Company will no longer be subject to that act's broad regulatory provisions, including provisions relating to issuance of securities, sales and acquisitions of securities and utility assets, intra-company transactions and limitations on diversification. However, the Energy Policy Act gives the FERC and state public utility regulatory commissions greater access to the books and records of companies in holding company systems. In addition, it is possible that some state legislatures will enact new laws designed to give state public utilities commissions certain regulatory powers over holding companies similar to those now exercised by the SEC. The Company is unable to predict at this time what the ultimate outcome of these or future legislative or regulatory changes will be.
Utility Operation
Base rate adjustments in both the New York and Pennsylvania rate 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.
New York Jurisdiction
In April 2004, Distribution Corporation commenced confidential settlement negotiations with the NYPSC and other parties concerning, among other things, its revenue requirement for the year ending September 30, 2005. Those settlement discussions failed to produce an agreement prior to the expiration of Distribution Corporation’s then-current rate plan. For a complete discussion of this prior rate plan, refer to “Rate Matters” in Item 7 of the 2004 Form 10-K. On August 27, 2004, Distribution Corporation filed proposed tariff amendments and supporting testimony designed to increase its annual revenues by $41.3 million beginning October 1, 2004. Parties filed responsive testimony recommending a base rate decrease, among other things. Thereafter the Parties and other interests commenced settlement negotiations. On April 15, 2005, Distribution Corporation, the Parties and others executed an agreement settling all outstanding issues. The settlement agreement provides for a rate increase of $21 million by means of the elimination of bill credits ($5.8 million) and an increase in base rates ($15.2 million). For the two-year term of the plan and thereafter, the return on equity level above which earnings must be shared with rate payers will be increased from 11.0% to 11.5%. In an order issued on July 22, 2005, the NYPSC, approved the April 15, 2005 rate plan, substantially as filed, for an effective date of August 1, 2005. In response to the NYPSC’s decision, Distribution Corporation agreed to withdraw its petition for rehearing of a prior NYPSC order rejecting the Company’s request for the removal of a $5 million annual bill credit, effectively closing the proceeding.
In another order issued on September 28, 2004, the NYPSC directed the continuation, with modification, of four programs under the July 25, 2003 Settlement that were scheduled to expire on September 30, 2004. The effect of the NYPSC’s order was to unilaterally extend the terms of the Settlement without Distribution Corporation’s consent. Although the NYPSC’s order stated that it provided for funding of the programs, Distribution Corporation petitioned Supreme Court, Albany County for an injunction to allow the programs to expire on their own terms. Distribution Corporation’s petition and the actions before Supreme Court, Albany County were partially successful. A Notice of Appeal was filed by Distribution Corporation seeking review of certain procedural arguments that were rejected by the trial court. That action remains pending at this time.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)Pennsylvania Jurisdiction
On September 15, 2004, Distribution Corporation filed proposed tariff amendments with the PaPUC to increase annual revenues by $22.8 million to cover increases in the cost of service to be effective November 14, 2004. The rate request was filed to address throughput reductions and increased operating costs such as uncollectibles and personnel expenses. Applying standard procedure, the PaPUC suspended Distribution Corporation’s tariff filing to perform an investigation and hold hearings. On February 16, 2005, the parties reached a settlement of all issues. The settlement was submitted to the Administrative Law Judge, who, on March 2, 2005 issued a decision recommending adoption of the settlement. The settlement provides for a base rate increase of $12.0 million and terminates the tracking of pension expenses versus the rate allowance. The settlement was approved by the PaPUC on March 23, 2005, and the new rates went into effect on April 15, 2005.
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.
On November 25, 2003, the FERC issued Order 2004 “Standards of Conduct for Transmission Providers”. Order 2004 was clarified in Order 2004-A on April 16, 2004 and Order 2004-B on August 2, 2004. Order 2004, which went into effect September 22, 2004, regulates the conduct of transmission providers (such as Supply Corporation) with their “energy affiliates”. The FERC broadened the definition of “energy affiliates” to include any affiliate of a transmission provider if that affiliate engages in or is involved in transmission (gas or electric) transactions, or manages or controls transmission capacity, or buys, sells, trades or administers natural gas or electric energy or engages in financial transactions relating to the sale or transmission of natural gas or electricity. Supply Corporation’s principal energy affiliates are Seneca, NFR, and, possibly, Distribution Corporation.* Order 2004 provides that companies may request waivers, which the Company has done with respect to Distribution Corporation and is awaiting rulings. Order 2004 also provides an exemption for local distribution companies that are affiliated with interstate pipelines (such as Distribution Corporation), but the exemption is limited, with very minor exceptions, to local distribution corporations that do not make any off-system sales. Distribution Corporation stopped making such off-system sales effective September 22, 2004, although it continues to make certain sales permitted by a prior FERC order; FERC has required Supply Corporation to provide arguments justifying the continued effectiveness of that order. Supply Corporation and Distribution Corporation would like to continue operating as they do, whether by waiver, amendment or further clarification of the new rules, or by complying with the requirements applicable if Distribution Corporation were an energy affiliate. Treating Distribution Corporation as an energy affiliate, without any waivers, would require changes in the way Supply Corporation and Distribution Corporation operate which would decrease efficiency, but probably would not increase capital or operating expenses to an extent that would be material to the financial condition of the Company.* Until there is further clarification from the FERC on the scope of these exemptions and rulings on the Company’s waiver requests, the Company is unable to predict the impact Order 2004 will have on the Company. As previously mentioned, Distribution Corporation stopped making off-system sales, effective September 22, 2004. The Company does not expect that change to have a material effect on the Company’s results of operations, as margins resulting from off-system sales are minimal as a result of profit sharing with retail customers.*
Empire currently does not have a rate case on file with the NYPSC. Management will continue to monitor Empire’s financial position in the New York rate jurisdiction to determine the necessity of filing a rate case in the future.
Environmental Matters
The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. The Company has established procedures for the ongoing evaluation of its operations to identify potential environmental exposures and comply with regulatory policies and
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)procedures. It is the Company’s policy to accrue estimated environmental clean-up costs (investigation and remediation) when such amounts can reasonably be estimated and it is probable thatthe Company will be required to incur such costs. At June 30, 2005, the Company has estimated its remaining clean-up costs related to former manufactured gas plant sites and third party waste disposal sites will be $8.1 million. This liability has been recorded on the Consolidated Balance Sheet at June 30, 2005. In April 2005, the Company entered into a transfer agreement for environmental obligations related to a former manufactured gas plant site in New York. Under the terms of the agreement, the Company paid $12.7 million during the quarter ended June 30, 2005 to settle its remaining environmental obligations related to this site. As a result, the environmental liability for this site has been reduced to zero at June 30, 2005. During the quarter ended June 30, 2005, the Company also reached a settlement agreement for environmental obligations related to another former manufactured gas plant site. The Company paid $4.4 million in August 2005 under the terms of the settlement agreement, and the Company will continue to be responsible for future ongoing maintenance of the site. The $4.4 million that was paid in August 2005 and the estimated obligation for ongoing maintenance of the site are included in the $8.1 million liability at June 30, 2005. The Company expects to recover its environmental clean-up costs from a combination of insurance proceeds and rate recovery.* Other than as discussed in Note G of the 2004 Form 10-K, the Company is currently not aware of any material additional exposure to environmental liabilities. However, changes in environmental regulations or other factors could adversely impact the Company.*
For further discussion refer to Note G — Commitments and Contingencies under the heading “Environmental Matters” in Item 8 of the 2004 Form 10-K, and to Part II, Item 1, “Legal Proceedings.”
New Accounting Pronouncements
In December 2004, the FASB issued SFAS 123R. SFAS 123R replaces SFAS 123 and supercedes APB 25. The Company currently follows APB 25 in accounting for stock-based compensation, as disclosed above. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The Company does not believe that adoption of SFAS 123R will have a material impact on its financial condition and results of operations.* For further discussion of SFAS 123R and its impact on the Company, refer to Item 1 at Note 1 — Summary of Significant Accounting Policies.
In March 2005, the FASB issued FIN 47, an interpretation of SFAS 143. FIN 47 provides additional guidance on the term “conditional asset retirement obligation” as used in SFAS 143, and in particular the standard clarifies when a Company must record a liability for a conditional asset retirement obligation. The Company is currently evaluating the impact of FIN 47, if any, on its consolidated financial statements. For further discussion of FIN 47 and its impact on the Company, refer to Item 1 at Note 1 – Summary of Significant Accounting Policies.
In May 2005, the FASB issued SFAS 154. SFAS 154 replaces APB 20 and SFAS 3 and changes the requirements for the accounting for and reporting of a change in accounting principle. The Company’s financial condition and results of operations will only be impacted by SFAS 154 if there are any accounting changes or corrections of errors in the future. For further discussion of SFAS 154 and its impact on the Company, refer to Item 1 at Note 1 – Summary of Significant Accounting Policies.
Safe Harbor for Forward-Looking Statements
The Company is including the following cautionary statement in this Form 10-Q to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of, the Company. Forward-looking statements include statements concerning plans, objectives, goals, projections, 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 in this report, including, without limitation, those which are
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)designated with an asterisk (“*”) and those which are identified by the use of the words “anticipates,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” and similar expressions, are “forward-looking” statements as defined in the Private Securities Litigation Reform Act of 1995 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 laws and regulations to which the Company is subject, including tax, environmental, safety and employment laws and regulations, and repeal of the Holding Company Act; |
| | 2. | Changes in economic conditions, including economic disruptions caused by terrorist activities or acts of war; |
| | 3. | Changes in demographic patterns and weather conditions, including the occurrence of severe weather; |
| | 4. | Changes in the availability and/or price of natural gas or oil and the effect of such changes on the accounting treatment or valuation of derivative financial instruments or the Company’s natural gas and oil reserves; |
| | 5. | Impairments under the SEC's full cost ceiling test for natural gas and oil reserves; |
| | 6. | Changes in the availability and/or price of derivative financial instruments; |
| | 7. | Changes in the price differentials between various types of oil; |
| | 8. | Failure of the price differential between sour crude oil and light sweet crude oil to return to its historical norm; |
| | 9. | Inability to obtain new customers or retain existing ones; |
| | 10. | Significant changes in competitive factors affecting the Company; |
| | 11. | Governmental/regulatory actions, initiatives and proceedings, including those involving acquisitions, financings, rate cases (which address, among other things, allowed rates of return, rate design and retained gas), affiliate relationships, industry structure, franchise renewal, and environmental/safety requirements; |
| | 12. | Unanticipated impacts of restructuring initiatives in the natural gas and electric industries; |
| | 13. | Significant changes from expectations in actual capital expenditures and operating expenses and unanticipated project delays or changes in project costs; |
| | 14. | The nature and projected profitability of pending and potential projects and other investments; |
| | 15. | Occurrences affecting the Company’s ability to obtain funds from operations, debt or equity to finance needed capital expenditures and other investments, including any downgrades in the Company’s credit ratings; |
| | 16. | Uncertainty of oil and gas reserve estimates; |
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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (Concl.)
| | 17. | Ability to successfully identify and finance acquisitions or other investments and ability to operate and integrate existing and any subsequently acquired business or properties; |
| | 18. | Ability to successfully identify, drill for and produce economically viable natural gas and oil reserves; |
| | 19. | Significant changes from expectations in the Company’s actual production levels for natural gas or oil; |
| | 20. | Regarding foreign operations, changes in trade and monetary policies, inflation and exchange rates, taxes, operating conditions, laws and regulations related to foreign operations, and political and governmental changes; |
| | 21. | Significant changes in tax rates or policies or in rates of inflation or interest; |
| | 22. | Significant changes in the Company’s relationship with its employees or contractors and the potential adverse effects if labor disputes, grievances or shortages were to occur; |
| | 23. | Changes in accounting principles or the application of such principles to the Company; |
| | 24. | The cost and effects of legal and administrative claims against the Company; |
| | 25. | Changes in actuarial assumptions and the return on assets with respect to the Company’s retirement plan and post-retirement benefits; |
| | 26. | Increasing health care costs and the resulting effect on health insurance premiums and on the obligation to provide post-retirement benefits; or |
| | 27. | Increasing costs of insurance, changes in coverage and the ability to obtain insurance. |
The Company disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof.
Back to Table of Contents Refer to the “Market Risk Sensitive Instruments” section in Item 2 – MD&A.
Back to Table of Contents The following information includes the evaluation of disclosure controls and procedures by the Company’s Chief Executive Officer and Principal Financial Officer, along with any significant changes in internal controls of the Company and the current effort to assess the Company’s internal control over financial reporting.
Evaluation of disclosure controls and procedures
The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. These rules refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. The Company’s management, including the Chief Executive Officer and Principal Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
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Item 4. Controls and Procedures (Concl.)
Internal controls over financial reporting
The Company maintains a system of internal control over financial reporting that is designed to provide reasonable assurance that the Company’s transactions are properly authorized, the Company’s assets are safeguarded against unauthorized or improper use, and the Company’s transactions are properly recorded and reported to permit preparation of the Company’s financial statements in conformity with generally accepted accounting principles in the United States of America. There were no changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company is currently undergoing a comprehensive effort to ensure compliance with Sarbanes-Oxley Act of 2002 - Section 404, "Management Assessment of Internal Controls" that takes effect for the Company as of September 30, 2005. This effort includes documentation of the Company’s internal control over financial reporting under the direction of senior management. In the course of its ongoing evaluation, management has identified certain areas of the internal control over financial reporting requiring improvement, which the Company is addressing. Management routinely reviews potential internal control issues with the Company’s Audit Committee. The Company continues to believe that it will be compliant with the requirements of the Sarbanes-Oxley Act of 2002 - Section 404 at September 30, 2005.*
Part II. Other Information
Back to Table of Contents In an action instituted in the New York State Supreme Court, Chautauqua County on January 31, 2000 against Seneca, NFR and “National Fuel Gas Corporation,” Donald J. and Margaret Ortel and Brian and Judith Rapp, “individually and on behalf of all those similarly situated, “allege, in an amended complaint which adds National Fuel Gas Company as a party defendant that (a) Seneca underpaid royalties due under leases operated by it, and (b) Seneca’s co-defendants (i) fraudulently participated in and concealed such alleged underpayment, and (ii) induced Seneca’s alleged breach of such leases. Plaintiffs seek an accounting, declaratory and related injunctive relief, and compensatory and exemplary damages. Defendants have denied each of plaintiffs’ material substantive allegations and set up twenty-five affirmative defenses in separate verified answers.
A motion was made by plaintiffs on July 15, 2002 to certify a class comprising all persons presently and formerly entitled to receive royalties on the sale of natural gas produced and sold from wells operated in New York by Seneca (and its predecessor Empire Exploration, Inc). On December 23, 2002, the court granted certification of the proposed class, as modified to exclude those leaseholders whose leases provide for calculation of royalties based upon a flat fee, or flat fee per cubic foot of gas produced. The court’s order states that there are approximately 749 potential class members. Discovery closed on July 31, 2005, and the plaintiffs thereafter filed a formal demand for a jury trial and a "Note of Issue and Statement of Readiness" to proceed to trial. A trial date has not been set.
In an action instituted in the New York State Supreme Court, Kings County on February 18, 2003 against Distribution Corporation and Paul J. Hissin, an unaffiliated third party, plaintiff Donna Fordham-Coleman, as administratrix of the estate of Velma Arlene Fordham, alleges that Distribution Corporation’s denial of natural gas service in November 2000 to the plaintiff’s decedent, Velma Arlene Fordham, caused decedent’s death in February 2001. Plaintiff seeks damages for wrongful death and pain and suffering, plus punitive damages. Distribution Corporation has denied plaintiff’s material allegations, set up seven affirmative defenses in separate verified answers and filed a cross-claim against the co-defendant. Distribution Corporation believes and will vigorously assert that plaintiff’s allegations lack merit. The Court changed venue of the action to New York State Supreme Court, Erie County. The litigation is in the discovery stage.
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Item 1. Legal Proceedings (Concl.)
On December 22, 2003, the Pennsylvania Department of Environmental Protection (DEP) issued an order to Seneca to halt its timber harvesting operations on 21,000 acres in Cameron, Elk and McKean counties in Pennsylvania. The order asserts certain violations of DEP regulations concerning erosion, sedimentation and stream crossings. The order requires Seneca to apply for certain permits, control erosion, submit plans for removal of water encroachments not included in permit applications, notify the DEP of additional current or planned timber harvesting operations, and grant the DEP access to timber acreage. On January 9, 2004, Seneca filed with the Pennsylvania Environmental Hearing Board (Hearing Board) a notice of appeal, objecting to each finding and order contained in the order, and asserting that the DEP’s findings are factually incorrect, an arbitrary exercise of the DEP’s functions and duties, and contrary to law. Also on January 9, 2004, Seneca filed with the Hearing Board a petition requesting a stay of operation of portions of the order. On January 20, 2004, the parties settled Seneca’s request for a stay. Seneca has resumed its timber harvesting operations pursuant to the terms of the settlement. The settlement preserves various issues raised by the DEP’s order for a hearing on the merits of Seneca’s notice of appeal. Seneca is engaged in settlement negotiations as it continues to litigate this matter.* The most substantial question in the appeal involves whether Seneca is required to apply for a permit under Section 102.5(b) of Title 25 of the Pennsylvania Code, governing earth disturbance activities of greater than 25 acres. The DEP takes the position that Seneca must aggregate the acreage of all of its logging sites across its entire 21,000 acre tract for purposes of determining whether its earth disturbing activities meet the 25 acres threshold. Seneca maintains that no permit is required, because the law does not require aggregation and each of its individual logging sites disturbs less than 25 acres.
The Company believes, based on the information presently known, that the ultimate resolution of these matters, individually or in the aggregate, will not be material to the consolidated financial condition, results of operations, or cash flow of the Company.* No assurances can be given, however, as to the ultimate outcomes of these matters, and it is possible that the outcomes, individually or in the aggregate, could be material to the Company's results of operations or cash flow for a particular quarter or annual period.*
For a discussion of various environmental matters, refer to Part I, Item 1 at Note 6 and Part I, Item 2 – MD&A of this report under the heading “Environmental Matters.”
The Company is involved in litigation arising in the normal course of business. Also in the normal course of business, the Company is involved in tax, regulatory and other governmental audits, inspections, investigations and other proceedings that involve state and federal taxes, safety, compliance with regulations, 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 quarterly and annual period 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.*
Back to Table of Contents On April 1, 2005, the Company issued a total of 2,100 unregistered shares of Company common stock to the seven non-employee directors of the Company, 300 shares to each such director. All of these shares were issued as partial consideration for the directors’ services during the quarter ended June 30, 2005, 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 transactions not involving a public offering.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (Concl.)
Issuer Purchases of Equity Securities
- ------------------------- ---------------------- ---------------------- ------------------------ ------------------------
Total Number of Shares Maximum Number of
Purchased as Part of Shares that May Yet Be
Total Number of Publicly Announced Purchased Under Share
Shares Average Price Share Repurchase Plans Repurchase Plans or
Period Purchased (a) Paid per Share or Programs Programs
- ------------------------- ---------------------- ---------------------- ------------------------ ------------------------
Apr. 1 - 30, 2005 61,412 $28.40 - -
- ------------------------- ---------------------- ---------------------- ------------------------ ------------------------
May 1 - 31, 2005 13,354 $27.14 - -
- ------------------------- ---------------------- ---------------------- ------------------------ ------------------------
June 1 - 30, 2005 178,692 $28.80 - -
- ------------------------- ---------------------- ---------------------- ------------------------ ------------------------
Total 253,458 $28.61 - -
- ------------------------- ---------------------- ---------------------- ------------------------ ------------------------
(a) Represents (i) shares of common stock of the Company purchased on the open market with Company
"matching contributions" for the accounts of participants in the Company's 401(k) plans, and (ii)
shares of common stock of the Company tendered to the Company by holders of stock options or
shares of restricted stock for the payment of option exercise prices and/or applicable withholding
taxes.
Back to Table of Contents
(a) Exhibits
Exhibit
Number Description of Exhibit
12 Statements regarding Computation of Ratios:
Ratio of Earnings to Fixed Charges for the Twelve Months Ended June 30, 2005
and the Fiscal Years Ended September 30, 2000 through 2004.
31.1 Written statements of Chief Executive Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) under the Securities Exchange Act of 1934.
31.2 Written statements of Principal Financial Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a) under the Securities Exchange Act of 1934.
32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99 National Fuel Gas Company Consolidated Statement of Income for the Twelve
Months Ended June 30, 2005 and 2004.
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Back to Table of ContentsSIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NATIONAL FUEL GAS COMPANY
(Registrant)
/s/R. J. Tanski
R. J. Tanski
Treasurer and Principal Financial Officer
/s/K. M. Camiolo
K. M. Camiolo
Controller and Principal Accounting Officer
Date: August 9, 2005
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EXHIBIT INDEX
(Form 10-Q)
Exhibit 12 Statements regarding Computation of Ratios:
Ratio of Earnings to Fixed Charges for the Twelve
Months Ended March 31, 2005 and the Fiscal Years Ended
September 30, 2000 through 2004.
Exhibit 31.1 Written statements of Chief Executive Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) under the Securities Exchange Act of 1934.
Exhibit 31.2 Written statements of Principal Financial Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) under the Securities Exchange Act of 1934.
Exhibit 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99 National Fuel Gas Company Consolidated Statement of
Income for the Twelve Months Ended March 31, 2005
and 2004.
