- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
--------------
Commission File Number 1-3880
-----------------------------
NATIONAL FUEL GAS COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 13-1086010
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Lafayette Square
Buffalo, New York 14203
------------------ -----
(Address of principal executive offices) (Zip Code)
(716) 857-6980
--------------
(Registrant's telephone number, including area code)
----------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
-------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common stock, $1 par value, outstanding at April 30, 2000:
39,163,991 shares.
- --------------------------------------------------------------------------------
Company or Group of Companies for which Report is Filed:
- --------------------------------------------------------
NATIONAL FUEL GAS COMPANY (Company or Registrant)
DIRECT SUBSIDIARIES: National Fuel Gas Distribution Corporation (Distribution
Corporation)
National Fuel Gas Supply Corporation (Supply Corporation)
Seneca Resources Corporation (Seneca)
Highland Land & Minerals, Inc. (Highland)
Leidy Hub, Inc. (Leidy Hub)
Data-Track Account Services, Inc. (Data-Track)
National Fuel Resources, Inc. (NFR)
Horizon Energy Development, Inc. (Horizon)
Upstate Energy, Inc. (Upstate)
NFR Power, Inc. (NFR Power)
Niagara Independence Marketing Company (NIM)
Seneca Independence Pipeline Company (SIP)
INDEX
Part I. Financial Information Page
----------------------------- ----
Item 1. Financial Statements
a. Consolidated Statements of Income and
Earnings Reinvested in the
Business - Three and Six Months
Ended March 31, 2000 and 1999 4 - 5
b. Consolidated Balance Sheets - March 31, 2000
and September 30, 1999 6 - 7
c. Consolidated Statement of Cash Flows - Six Months
Ended March 31, 2000 and 1999 8
d. Consolidated Statement of Comprehensive
Income - Three and Six Months Ended
March 31, 2000 and 1999 9
e. Notes to Consolidated Financial Statements 10 - 16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17 - 35
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
Part II. Other Information
--------------------------
Item 1. Legal Proceedings 35
Item 2. Changes in Securities 35
Item 3. Defaults Upon Senior Securities o
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 5. Other Information 36
Item 6. Exhibits and Reports on Form 8-K 37
Signature 38
o 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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" (MD&A), under the heading "Safe Harbor for
Forward-Looking Statements." Forward-looking statements are all statements other
than statements of historical fact, including, without limitation, those
statements that are designated with a "*" following the statement, as well as
those statements that are identified by the use of the words "anticipates,"
"estimates," "expects," "intends," "plans," "predicts," "projects," and similar
expressions.
Part I. Financial Information
- ------------------------------
Item 1. Financial Statements
--------------------
National Fuel Gas Company
-------------------------
Consolidated Statements of Income and Earnings
----------------------------------------------
Reinvested in the Business
--------------------------
(Unaudited)
-----------
Three Months Ended
March 31,
(Dollars in Thousands, Except Per Common Share Amounts) 2000 1999
----------------- -----------------
INCOME
Operating Revenues $517,810 $483,404
- -------------------------------------------------------------------------------------------
Operating Expenses
Purchased Gas 218,939 201,818
Fuel Used in Heat and Electric Generation 18,887 17,807
Operation 84,357 78,169
Maintenance 6,236 6,064
Property, Franchise and Other Taxes 23,610 30,683
Depreciation, Depletion and Amortization 33,886 30,708
Income Taxes 40,778 34,680
- -------------------------------------------------------------------------------------------
426,693 399,929
- -------------------------------------------------------------------------------------------
Operating Income 91,117 83,475
Other Income 4,151 1,575
- -------------------------------------------------------------------------------------------
Income Before Interest Charges and
Minority Interest in Foreign Subsidiaries 95,268 85,050
- -------------------------------------------------------------------------------------------
Interest Charges
Interest on Long-Term Debt 16,225 16,083
Other Interest 6,627 6,198
- -------------------------------------------------------------------------------------------
22,852 22,281
- -------------------------------------------------------------------------------------------
Minority Interest in Foreign Subsidiaries (1,365) (1,624)
- ------------------------------------------------------------------------------------------
Net Income Available for Common Stock 71,051 61,145
EARNINGS REINVESTED IN THE BUSINESS
Balance at January 1 499,301 448,433
- -------------------------------------------------------------------------------------------
570,352 509,578
Dividends on Common Stock
(2000 - $0.465; 1999 - $0.45) 18,154 17,345
- -------------------------------------------------------------------------------------------
Balance at March 31 $552,198 $492,233
===========================================================================================
Earnings Per Common Share:
Basic $1.82 $1.58
===========================================================================================
Diluted $1.81 $1.57
===========================================================================================
Weighted Average Common Shares Outstanding:
Used in Basic Calculation 39,076,668 38,609,655
===========================================================================================
Used in Diluted Calculation 39,347,942 38,876,685
===========================================================================================
See Notes to Consolidated Financial Statements
Item 1. Financial Statements (Cont.)
----------------------------
National Fuel Gas Company
-------------------------
Consolidated Statements of Income and Earnings
----------------------------------------------
Reinvested in the Business
--------------------------
(Unaudited)
-----------
Six Months Ended
March 31,
(Dollars in Thousands, Except Per Common Share Amounts) 2000 1999
------------------------
INCOME
Operating Revenues $894,798 $823,826
- ------------------------------------------------------------------------- -----------------
Operating Expenses
Purchased Gas 347,029 312,824
Fuel Used in Heat and Electric Generation 36,667 37,781
Operation 161,881 155,162
Maintenance 11,391 11,647
Property, Franchise and Other Taxes 46,401 52,688
Depreciation, Depletion and Amortization 67,602 60,835
Income Taxes 62,516 52,580
- -------------------------------------------------------------------------------------------
733,487 683,517
- -------------------------------------------------------------------------------------------
Operating Income 161,311 140,309
Other Income 5,365 6,317
- -------------------------------------------------------------------------------------------
Income Before Interest Charges and
Minority Interest in Foreign Subsidiaries 166,676 146,626
- -------------------------------------------------------------------------------------------
Interest Charges
Interest on Long-Term Debt 32,895 33,450
Other Interest 15,186 11,525
- -------------------------------------------------------------------------------------------
48,081 44,975
- ------------------------------------------------------------------------------------------
Minority Interest in Foreign Subsidiaries (2,676) (2,888)
- ------------------------------------------------------------------------------------------
Net Income Available for Common Stock 115,919 98,763
EARNINGS REINVESTED IN THE BUSINESS
Balance at October 1 472,517 428,112
- -------------------------------------------------------------------------------------------
588,436 526,875
Dividends on Common Stock
(2000 - $0.93; 1999 - $0.90) 36,238 34,642
- -------------------------------------------------------------------------------------------
Balance at March 31 $552,198 $492,233
===========================================================================================
Earnings Per Common Share:
Basic $2.97 $2.56
===========================================================================================
Diluted $2.94 $2.54
===========================================================================================
Weighted Average Common Shares Outstanding:
Used in Basic Calculation 38,999,490 38,568,349
===========================================================================================
Used in Diluted Calculation 39,372,508 38,911,856
===========================================================================================
See Notes to Consolidated Financial Statements
Item 1. Financial Statements (Cont.)
----------------------------
National Fuel Gas Company
-------------------------
Consolidated Balance Sheets
---------------------------
March 31,
2000 September 30,
(Unaudited) 1999
------------------ -------------------
(Thousands of Dollars)
ASSETS
Property, Plant and Equipment $3,454,458 $3,390,875
Less - Accumulated Depreciation, Depletion
and Amortization 1,076,634 1,029,643
- ----------------------------------------------------------------------------------------
2,377,824 2,361,232
- ----------------------------------------------------------------------------------------
Current Assets
Cash and Temporary Cash Investments 42,647 29,222
Receivables - Net 194,554 97,828
Unbilled Utility Revenue 39,514 18,674
Gas Stored Underground 10,521 41,099
Materials and Supplies - at average cost 24,348 23,631
Unrecovered Purchased Gas Costs - 4,576
Prepayments 22,566 35,072
- ----------------------------------------------------------------------------------------
334,150 250,102
- ----------------------------------------------------------------------------------------
Other Assets
Recoverable Future Taxes 87,724 87,724
Unamortized Debt Expense 21,212 21,717
Other Regulatory Assets 18,750 25,214
Deferred Charges 13,523 14,266
Other 94,368 82,331
- ----------------------------------------------------------------------------------------
235,577 231,252
- ----------------------------------------------------------------------------------------
$2,947,551 $2,842,586
========================================================================================
See Notes to Consolidated Financial Statements
Item 1. Financial Statements (Cont.)
----------------------------
National Fuel Gas Company
-------------------------
Consolidated Balance Sheets
---------------------------
March 31,
2000 September 30,
(Unaudited) 1999
------------------ -------------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common Stock Equity
Common Stock, $1 Par Value
Authorized - 200,000,000 Shares; Issued
and Outstanding - 39,110,686 Shares and
38,837,499 Shares, Respectively $ 39,111 $ 38,837
Paid in Capital 444,029 431,952
Earnings Reinvested in the Business 552,198 472,517
Accumulated Other Comprehensive Loss (19,654) (4,013)
- -------------------------------------------------------------------------------------
Total Common Stock Equity 1,015,684 939,293
Long-Term Debt, Net of Current Portion 960,734 822,743
- --------------------------------------------------------------------------------------
Total Capitalization 1,976,418 1,762,036
- --------------------------------------------------------------------------------------
Minority Interest in Foreign Subsidiaries 26,106 27,589
- --------------------------------------------------------------------------------------
Current and Accrued Liabilities
Notes Payable to Banks and
Commercial Paper 273,229 393,495
Current Portion of Long-Term Debt 12,549 69,608
Accounts Payable 67,291 82,747
Amounts Payable to Customers 8,496 5,934
Other Accruals and Current Liabilities 171,281 87,310
- --------------------------------------------------------------------------------------
532,846 639,094
- --------------------------------------------------------------------------------------
Deferred Credits
Accumulated Deferred Income Taxes 285,130 275,008
Taxes Refundable to Customers 14,814 14,814
Unamortized Investment Tax Credit 10,476 11,007
Other Deferred Credits 101,761 113,038
- --------------------------------------------------------------------------------------
412,181 413,867
- --------------------------------------------------------------------------------------
Commitments and Contingencies - -
- --------------------------------------------------------------------------------------
$2,947,551 $2,842,586
======================================================================================
See Notes to Consolidated Financial Statements
Item 1. Financial Statements (Cont.)
----------------------------
National Fuel Gas Company
-------------------------
Consolidated Statement of Cash Flows
------------------------------------
(Unaudited)
-----------
Six Months Ended
March 31,
---------------------------------------
(Thousands of Dollars) 2000 1999
----------------- ---------------------
OPERATING ACTIVITIES
Net Income Available for Common Stock $115,919 $98,763
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation, Depletion and Amortization 67,602 60,835
Deferred Income Taxes 10,114 18,754
Minority Interest in Foreign Subsidiaries 2,676 2,888
Other (1,447) 2,254
Change in:
Receivables and Unbilled Utility Revenue (118,440) (149,227)
Gas Stored Underground and Materials and
Supplies 29,235 23,821
Unrecovered Purchased Gas Costs 4,576 6,316
Prepayments 12,497 (11,539)
Accounts Payable (14,712) (11,436)
Amounts Payable to Customers 2,562 2,435
Other Accruals and Current Liabilities 85,336 82,734
Other Assets 327 (7,762)
Other Liabilities (11,275) 13,531
- -------------------------------------------------------------------------------------------------
Net Cash Provided by
Operating Activities 184,970 132,367
- -------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital Expenditures (109,893) (113,653)
Investment in Partnerships (4,050) (3,633)
Other 6,791 90
- -------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (107,152) (117,196)
- -------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Change in Notes Payable to Banks and Commercial Paper (120,095) 35,800
Net Proceeds from Issuance of Long-Term Debt 149,334 98,736
Reduction of Long-Term Debt (62,362) (114,334)
Dividends Paid on Common Stock (36,099) (34,559)
Proceeds from Issuance of Common Stock 8,540 4,761
- -------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (60,682) (9,596)
- -------------------------------------------------------------------------------------------------
Effect of Exchange Rates on Cash (3,711) (1,440)
- -------------------------------------------------------------------------------------------------
Net Increase in Cash and Temporary Cash 13,425 4,135
Investments
Cash and Temporary Cash Investments at October 1 29,222 30,437
- -------------------------------------------------------------------------------------------------
Cash and Temporary Cash Investments at March 31 $42,647 $34,572
=================================================================================================
See Notes to Consolidated Financial Statements
Item 1. Financial Statements (Cont.)
----------------------------
National Fuel Gas Company
-------------------------
Consolidated Statement of Comprehensive Income
----------------------------------------------
(Unaudited)
-----------
Three Months Ended
March 31,
----------------------------------------
(Thousands of Dollars) 2000 1999
------------------ ---------------------
Net Income Available for Common Stock $71,051 $61,145
- --------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss), Before Tax:
Foreign Currency Translation Adjustment (7,063) (19,175)
Unrealized Gain on Securities Available for Sale 672 -
- --------------------------------------------------------------------------------------------
Other Comprehensive Loss, Before Tax (6,391) (19,175)
Income Tax Expense Related to Unrealized Gain
on Securities Available for Sale (347) -
- --------------------------------------------------------------------------------------------
Other Comprehensive Loss, Net of Tax (6,738) (19,175)
- --------------------------------------------------------------------------------------------
Comprehensive Income $64,313 $41,970
============================================================================================
Six Months Ended
March 31,
----------------------------------------
(Thousands of Dollars) 2000 1999
------------------ ---------------------
Net Income Available for Common Stock $115,919 $98,763
- --------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss), Before Tax:
Foreign Currency Translation Adjustment (16,564) (19,045)
Unrealized Gain on Securities Available for Sale 1,420 -
- --------------------------------------------------------------------------------------------
Other Comprehensive Loss, Before Tax (15,144) (19,045)
Income Tax Expense Related to Unrealized Gain
on Securities Available for Sale (497) -
- --------------------------------------------------------------------------------------------
Other Comprehensive Loss, Net of Tax (15,641) (19,045)
- --------------------------------------------------------------------------------------------
Comprehensive Income $100,278 $79,718
============================================================================================
See Notes to Consolidated Financial Statements
Item 1. Financial Statements (Cont.)
----------------------------
National Fuel Gas Company
-------------------------
Notes to Consolidated Financial Statements
------------------------------------------
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the
accounts of the Company and its majority owned subsidiaries. The equity method
is used to account for the Company's investment in minority owned entities. All
significant intercompany balances and transactions have been eliminated where
appropriate.
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Quarterly Earnings. The Company, in its opinion, has included all adjustments
that are necessary for a fair statement of the results of operations for the
reported periods. The consolidated financial statements and notes thereto,
included herein, should be read in conjunction with the financial statements and
notes for the years ended September 30, 1999, 1998 and 1997 that are included in
the Company's combined Annual Report to Shareholders/Form 10-K for 1999. The
2000 consolidated financial statements will be examined by the Company's
independent accountants after the end of the fiscal year.
The earnings for the six months ended March 31, 2000 should not be
taken as a prediction of earnings for the entire fiscal year ending September
30, 2000. Most of the Company's business is seasonal in nature and is influenced
by weather conditions. Because of the seasonal nature of the Company's heating
business, earnings during the winter months normally represent a substantial
part of earnings for the entire fiscal year. The impact of abnormal weather on
earnings during the heating season is partially reduced by the operation of a
weather normalization clause (WNC) included in Distribution Corporation's New
York tariff. The WNC is effective for October through May billings. Distribution
Corporation's tariff for its Pennsylvania jurisdiction does not have a WNC. In
addition, Supply Corporation's straight fixed-variable rate design, which allows
for recovery of substantially all fixed costs in the demand or reservation
charge, reduces the earnings impact of weather fluctuations.
Consolidated Statement of Cash Flows. For purposes of the Consolidated Statement
of Cash Flows, the Company considers all highly liquid debt instruments
purchased with a maturity of generally three months or less to be cash
equivalents. Cash interest payments during the six months ended March 31, 2000
and 1999 amounted to $52.2 million and $45.5 million, respectively. Income taxes
paid during the six months ended March 31, 2000 and 1999 amounted to $22.8
million and $18.6 million, respectively. In November 1999, the Company entered
into a non-cash investing activity whereby it issued 54,674 shares of Company
common stock to Supply Corporation, which in turn exchanged those shares for the
assets of Cunningham Natural Gas Corporation. The assets included approximately
$1.2 million of property, plant and equipment and $1.6 million of other assets.
Reclassification. Certain prior year amounts have been reclassified to conform
with current year presentation.
Item 1. Financial Statements (Cont.)
----------------------------
Accumulated Other Comprehensive Income (Loss). The components of Accumulated
Other Comprehensive Income (Loss) are as follows (in thousands):
At March 31, 2000 At September 30, 1999
----------------- ---------------------
Foreign Currency Translation Adjustment $(21,036) $(4,472)
Net Unrealized Gain on Securities
Available for Sale 1,382 459
-------- -------
Accumulated Other Comprehensive Loss $(19,654) $(4,013)
======== =======
Earnings Per Common Share. Basic earnings per common share is computed by
dividing income available for common stock by the weighted average number of
common shares outstanding for the period. Diluted earnings per common share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
The only potentially dilutive securities the Company has outstanding are stock
options. The diluted weighted average shares outstanding shown on the
Consolidated Statement of Income reflects the potential dilution as a result of
these stock options as determined using the Treasury Stock Method.
Note 2 - Income Taxes
The components of federal and state income taxes included in the Consolidated
Statement of Income are as follows (in thousands):
Six Months Ended
March 31,
-------------------------------------
2000 1999
-------------------------------------
Operating Expenses:
Current Income Taxes
Federal $46,675 $26,213
State 4,922 4,513
Deferred Income Taxes
Federal 6,882 16,861
State 505 1,700
Foreign Income Taxes 3,532 3,293
- ------------------------------------------------------------------------------
62,516 52,580
Other Income:
Deferred Investment Tax Credit (525) (332)
Minority Interest in Foreign Subsidiaries (687) (832)
- ------------------------------------------------------------------------------
Total Income Taxes $61,304 $51,416
==============================================================================
The U.S. and foreign components of income before income taxes are as follows:
Six Months Ended
March 31,
2000 1999
------------------------------
U.S. $162,667 $134,864
Foreign 14,556 15,315
- -------------------------------------------------------------------------------
$177,223 $150,179
===============================================================================
Item 1. Financial Statements (Cont.)
----------------------------
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):
Six Months Ended
March 31,
--------------------------------------
2000 1999
----------------- --------------------
Net income available for common stock $115,919 $ 98,763
Total income taxes 61,304 51,416
- -----------------------------------------------------------------------------------
Income before income taxes $177,223 $150,179
===================================================================================
Income tax expense, computed at
statutory rate of 35% $62,028 $ 52,563
Increase (reduction) in taxes resulting from:
State income taxes 3,527 4,038
Depreciation 955 1,037
Prior years tax adjustment - (1,309)
Foreign tax in excess of (less than)
statutory rate (2,250) (2,898)
Miscellaneous (2,956) (2,015)
- -----------------------------------------------------------------------------------
Total Income Taxes $61,304 $ 51,416
===================================================================================
Significant components of the Company's deferred tax liabilities
(assets) were as follows (in thousands):
At March 31, 2000 At September 30, 1999
--------------------------------- ----------------------------
Deferred Tax Liabilities:
Excess of tax over book depreciation $222,609 $227,881
Exploration and intangible well drilling costs 108,560 95,034
Other 39,686 39,040
- ------------------------------------------------------ --------------------------------- ----------------------------
Total Deferred Tax Liabilities 370,855 361,955
- ------------------------------------------------------ --------------------------------- ----------------------------
Deferred Tax Assets:
Capitalized overheads (28,517) (26,861)
Other (57,208) (60,086)
- ------------------------------------------------------ --------------------------------- ----------------------------
Total Deferred Tax Assets (85,725) (86,947)
- ------------------------------------------------------ --------------------------------- ----------------------------
Total Net Deferred Income Taxes $285,130 $275,008
====================================================== ================================= ============================
The Internal Revenue Service audits of the Company for the years 1977
- - 1994 were settled during December 1998. Net income for the six months ended
March 31, 1999 was increased by approximately $3.9 million as a result of
interest, net of tax and other adjustments, related to this settlement.
Item 1. Financial Statements (Cont.)
----------------------------
Note 3 - Capitalization
Common Stock. During the six months ended March 31, 2000, the Company issued
218,513 shares of common stock under the Company's stock and benefit plans. As
previously discussed, 54,674 shares were issued for the purchase of the assets
of Cunningham Natural Gas Corporation.
On February 17, 2000, 725,500 stock options were granted at an
exercise price of $42.6563 per share. On March 17, 2000, 25,000 stock options
were granted at an exercise price of $41.5625 per share.
In February 2000, the Company issued $150.0 million of 7.30%
medium-term notes due in February 2003. After deducting underwriting discounts
and commissions, the net proceeds to the Company amounted to $149.3 million. The
proceeds of this debt issuance were used to redeem $50.0 million of 6.60%
medium-term notes which matured in February 2000 and to reduce short-term debt.
Note 4 - Derivative Financial Instruments
Seneca has entered into certain price swap agreements and options to manage a
portion of the market risk associated with fluctuations in the price of natural
gas and crude oil in an effort to provide more stability to its operating
results. These agreements and options are not held for trading purposes. The
price swap agreements call for Seneca to receive monthly payments from (or make
payments to) other parties based upon the difference between a fixed and a
variable price as specified by the agreement. The variable price is either a
crude oil price quoted on the New York Mercantile Exchange or a natural gas
price quoted in "Inside FERC." These variable prices are highly correlated with
the market prices received by Seneca for its natural gas and crude oil
production. The fair value of outstanding natural gas and crude oil price swap
agreements and options discussed below reflect the estimated amounts Seneca
would pay or receive to terminate its derivative financial instruments at March
31, 2000.
At March 31, 2000, Seneca had natural gas price swap agreements
covering a notional amount of 34.5 billion cubic feet (Bcf) extending through
2003 at a weighted average fixed rate of $2.69 per thousand cubic feet (Mcf).
Seneca also had crude oil price swap agreements covering a notional amount of
3,940,000 barrels (bbls) extending through 2003 at a weighted average fixed rate
of $19.45 per bbl. The fair value of Seneca's outstanding natural gas and crude
oil price swap agreements at March 31, 2000 was a net loss of approximately
$23.0 million. This loss was offset by corresponding unrecognized gains from
Seneca's anticipated natural gas and crude oil production over the terms of the
price swap agreements.
Seneca recognized net losses of $6.2 million and $10.4 million
related to settlements of its price swap agreements during the quarter and six
months ended March 31, 2000, respectively. During the quarter and six months
ended March 31, 1999, Seneca recognized net gains of $4.4 million and $5.9
million, respectively, related to its price swap agreements. Gains or losses
from Seneca's price swap agreements are accrued in operating revenues on the
Consolidated Statement of Income at the contract settlement dates. As the price
swap agreements have been designated as hedges, these gains or losses were
offset by corresponding gains or losses from Seneca's natural gas and crude oil
production.
At March 31, 2000, Seneca had the following options outstanding:
Type of Option Notional Amount Weighted Average Strike Price
- -------------- --------------- -----------------------------
Written Call Options (1) 10.4 Bcf or 550,000 bbls $2.53/Mcf or $18.00/bbl
Written Put Option 550,000 bbls $12.50/bbl
Purchased Call Option 732,000 bbls $20.00/bbl
(1) The counterparty has a choice between a natural gas call option and a crude
oil call option, depending on whichever option has greater value to the
counterparty.
Item 1. Financial Statements (Cont.)
----------------------------
Seneca's call and put options are being marked-to-market with gains or
losses recorded in Operating Revenues on the Consolidated Statement of Income.
The mark-to-market adjustment for the quarter ended March 31, 2000 was a loss of
$2.5 million, which offset the mark-to-market gain reported in the quarter ended
December 31, 1999. There was not a corresponding mark-to-market adjustment
during the quarter or six months ended March 31, 1999. The fair value of the
call and put options at March 31, 2000 was a net loss of $3.6 million. During
the quarter and six months ended March 31, 2000, Seneca paid the counterparty
$2.0 million and $3.5 million, respectively, related to the exercise of a
portion of the written call options and received $3.2 million and $4.8 million,
respectively, from the counterparty related to Seneca's exercise of a portion of
the $20.00 per bbl call options that it had purchased. There were minor
settlements (less than $100,000) related to Seneca's put options during the
quarter and six months ended March 31, 1999. There were no settlements related
to Seneca's call options during the quarter or six months ended March 31, 1999.
The Company is exposed to credit risk on the price swap agreements that
Seneca has entered into, as well as on the call options that Seneca has
purchased. Credit risk relates to the risk of loss that the Company would incur
as a result of nonperformance by counterparties pursuant to the terms of their
contractual obligations. To mitigate such credit risk, management performs an
initial credit check, and then on an ongoing basis monitors counterparty credit
exposure.
NFR utilizes exchange-traded futures and exchange-traded options to
manage a portion of the market risk associated with fluctuations in the price of
natural gas. Such futures and options are not held for trading purposes. At
March 31, 2000, NFR had natural gas futures contracts covering 2.6 Bcf of gas on
a net basis extending through 2002 at a weighted average contract price of $2.72
per Mcf. NFR had sold natural gas options covering 20.9 Bcf of gas extending
through 2001 at a weighted average strike price of $3.24 per Mcf. NFR also had
purchased natural gas options covering 11.2 Bcf of gas extending through 2001 at
a weighted average strike price of $2.92 per Mcf. The exchange-traded futures
and exchange-traded options are used to hedge NFR's purchase and sale
commitments and storage gas inventory. The fair value of NFR's outstanding
exchange-traded futures and exchange-traded options at March 31, 2000 was a net
loss of approximately $0.6 million. This fair value reflects the estimated net
amount that NFR would pay to terminate its exchange-traded futures and
exchange-traded options at March 31, 2000. Since these exchange-traded futures
contracts and exchange-traded options qualify and have been designated as
hedges, any gains or losses resulting from market price changes would be
substantially offset by the related commodity transaction.
Gains or losses from natural gas futures and options are recorded in
Other Deferred Credits on the Consolidated Balance Sheet until the hedged
commodity transaction occurs, at which point they are reflected in operating
revenues on the Consolidated Statement of Income.
NFR recognized net gains of $0.3 million and $1.9 million related to
futures contracts and options during the quarter and six months ended March 31,
2000, respectively. During the quarter and six months ended March 31, 1999, NFR
recognized net losses of $4.4 million and $5.4 million, respectively, related to
futures contracts and options. Since these futures contracts and options qualify
and have been designated as hedges, these net gains or losses were substantially
offset by the related commodity transactions.
Privni severozapadni teplarenska, a.s. (PSZT) utilizes an interest rate
swap to mitigate interest rate fluctuations on its Czech koruna (CZK)
1,516,127,800 term loan ($40.1 million at March 31, 2000), which carries a
variable interest rate of six month Prague Interbank Offered Rate (PRIBOR) plus
0.475%. Under the terms of the interest rate swap, which extends until 2001,
PSZT pays a fixed rate of 8.31% and receives a floating rate of six month
PRIBOR. PSZT recognized a loss of approximately $0.3 million and $0.4 million
related to this interest rate swap during the quarter and six months ended March
31, 2000, respectively. The fair value of PSZT's interest rate swap at March 31,
2000 was a loss of approximately $1.2 million.
Item 1. Financial Statements (Cont.)
----------------------------
Note 5 - Commitments and Contingencies
Environmental Matters. It is the Company's policy to accrue estimated
environmental clean-up costs (investigation and remediation) when such amounts
can reasonably be estimated and it is probable that the Company will be required
to incur such costs. Distribution Corporation and Supply Corporation have
estimated their clean-up costs related to former manufactured gas plant and
former gasoline plant sites and third party waste disposal sites will be in the
range of $8.9 million to $9.9 million. The minimum liability of $8.9 million has
been recorded on the Consolidated Balance Sheet at March 31, 2000. Other than
discussed in Note H of the 1999 Form 10-K (referred to below), the Company is
currently not aware of any material additional exposure to environmental
liabilities. However, adverse changes in environmental regulations or other
factors could impact the Company.
The Company is subject to various federal, state and local laws and
regulations relating to the protection of the environment. The Company has
established procedures for the ongoing evaluation of its operations to identify
potential environmental exposures and comply with regulatory policies and
procedures.
For further discussion refer to Note H - Commitments and Contingencies
under the heading "Environmental Matters" in Item 8 of the Company's 1999 Form
10-K.
Other. The Company is involved in litigation arising in the normal course of
business. The Company is involved in regulatory matters arising in the normal
course of business that involve rate base, cost of service and purchased gas
cost issues. While the resolution of such litigation or regulatory matters could
have a material effect on earnings and cash flows in the year of resolution,
none of this litigation, and none of these regulatory matters, are expected to
have a material adverse effect on the financial condition of the Company at this
time.
Note 6 - Business Segment Information. The Company has six reportable segments:
Utility, Pipeline and Storage, Exploration and Production, International, Energy
Marketing, and Timber. The breakdown of the Company's reportable segments is
based upon a combination of factors including differences in products and
services, regulatory environment and geographic factors.
The data presented in the tables below reflect the reportable segments
and reconciliations to consolidated amounts. There have been no changes in the
basis of segmentation nor in the basis of measuring segment profit or loss from
those used in the 1999 Form 10-K. There have been no material changes in the
amount of assets for any operating segment from the amounts disclosed in the
1999 Form 10-K.
Item 1. Financial Statements (Concl.)
----------------------------
Quarter Ended March 31, 2000 (Thousands)
- -----------------------------------------------------------------------------
Pipeline Exploration
and and Energy
Utility Storage Production International Marketing
----------------------------------------------------------------------------
Revenue from
External Customers $337,834 $20,968 $50,350 $39,609 $53,733
Intersegment
Revenues 8,540 22,228 - - -
Segment Profit:
Net Income 41,525 10,156 7,879 4,317 1,465
Quarter Ended March 31, 2000 (Thousands)
- -------------------------------------------------------------------------------
Total Corporate and
Reportable Intersegment Total
Timber Segments All Other Eliminations Consolidated
------------------------------------------------------------------------------
Revenue from
External Customers $11,531 $514,025 $3,785 $ - $517,810
Intersegment
Revenues - 30,768 - (30,768) -
Segment Profit:
Net Income 4,090 69,432 672 947 71,051
Six Months Ended March 31, 2000 (Thousands)
- -----------------------------------------------------------------------------
Exploration
Pipeline and Energy
Utility and Production InternationalMarketing
Storage
- -----------------------------------------------------------------------------
Revenue from
External
Customers $566,744 $42,039 $100,143 $77,682 $82,908
Intersegment
Revenues 12,846 44,322 225 - -
Segment Profit:
Net Income 63,278 19,438 15,884 9,000 1,448
Six Months Ended March 31, 2000 (Thousands)
- --------------------------------------------------------------------------------
Total Corporate and
Reportable Intersegment Total
Timber Segments All Other Eliminations Consolidated
- --------------------------------------------------------------------------------
Revenue from
External
Customers $20,271 $889,787 $5,011 $ - $894,798
Intersegment
Revenues - 57,393 - (57,393) -
Segment Profit:
Net Income 5,020 114,068 527 1,324 115,919
Quarter Ended March 31, 1999 (Thousands)
- -----------------------------------------------------------------------------
Exploration
Pipeline and Energy
Utility and Production InternationalMarketing
Storage
- -----------------------------------------------------------------------------
Revenue from
External
Customers $342,632 $22,516 $31,170 $40,812 $35,848
Intersegment
Revenues 2,872 21,596 2,490 - -
Segment Profit:
Net Income 40,320 10,769 119 6,209 663
Quarter Ended March 31, 1999 (Thousands)
- -------------------------------------------------------------------------------
Total Corporate and
Reportable Intersegment Total
Timber Segments All Other Eliminations Consolidated
- -------------------------------------------------------------------------------
Revenue from
External
Customers $9,686 $482,664 $740 $ - $483,404
Intersegment
Revenues - 26,958 - (26,958) -
Segment Profit:
Net Income 2,531 60,611 159 375 61,145
Six Months Ended March 31, 1999 (Thousands)
- -----------------------------------------------------------------------------
Exploration
Pipeline and Energy
Utility and Production InternationalMarketing
Storage
- -----------------------------------------------------------------------------
Revenue from
External
Customers $563,621 $43,293 $60,346 $81,077 $56,275
Intersegment
Revenues 4,033 42,913 4,942 - -
Segment Profit:
Net Income 58,999 23,099 407 10,492 884
Six Months Ended March 31, 1999 (Thousands)
- -------------------------------------------------------------------------------
Total Corporate and
Reportable Intersegment Total
Timber Segments All Other Eliminations Consolidated
- -------------------------------------------------------------------------------
Revenue from
External
Customers $17,776 $822,388 $1,438 $ - $823,826
Intersegment
Revenues - 51,888 - (51,888) -
Segment Profit:
Net Income 3,860 97,741 200 822 98,763
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
RESULTS OF OPERATIONS
Earnings. The Company's earnings were $71.1 million, or $1.82 per common share
($1.81 per common share on a diluted basis), for the quarter ended March 31,
2000. This compares with earnings of $61.1 million, or $1.58 per common share
($1.57 per common share on a diluted basis), for the quarter ended March 31,
1999. The increase in earnings of approximately $10.0 million is the result of
higher earnings in the Exploration and Production, Utility, Timber, and Energy
Marketing segments. These higher earnings were offset in part by lower earnings
in the International and Pipeline and Storage segments.
The Company's earnings were $115.9 million, or $2.97 per common share
($2.94 per common share on a diluted basis), for the six months ended March 31,
2000. This compares with earnings of $98.8 million, or $2.56 per common share
($2.54 per common share on a diluted basis), for the six months ended March 31,
1999. The increase in earnings of $17.1 million is the result of higher earnings
in the Exploration and Production, Utility, Timber, and Energy Marketing
segments. These increases were offset in part by lower earnings in the Pipeline
and Storage and International segments.
Additional discussion of earnings in each of the business segments
can be found in the business segment information that follows.
Earnings by Segment
- ---------------------------- ---------------------------------- ----------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ---------------------------- ---------------------------------- ----------------------------------
- ---------------------------- ---------------- ----------------- ---------------- -----------------
(Thousands) 2000 1999 2000 1999
- ---------------------------- ---------------- ----------------- ---------------- -----------------
Utility $41,525 $40,320 $63,278 $58,999
Pipeline and Storage 10,156 10,769 19,438 23,099
Exploration and Production 7,879 119 15,884 407
International 4,317 6,209 9,000 10,492
Energy Marketing 1,465 663 1,448 884
Timber 4,090 2,531 5,020 3,860
- ---------------------------- ---------------- ----------------- ---------------- -----------------
Total Reportable Segments 69,432 60,611 114,068 97,741
All Other 672 159 527 200
Corporate 947 375 1,324 822
- ---------------------------- ---------------- ----------------- ---------------- -----------------
Total Consolidated $71,051 $61,145 $115,919 $98,763
- ---------------------------- ---------------- ----------------- ---------------- -----------------
Utility
Utility Operating Revenues
- ---------------------------- ---------------------------------- ----------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ---------------------------- ---------------- ----------------- ---------------- -----------------
(Thousands) 2000 1999 2000 1999
- ---------------------------- ---------------- ----------------- ---------------- -----------------
Retail Sales Revenues:
Residential $238,176 $255,452 $407,820 $420,533
Commercial 41,402 49,051 68,562 78,231
Industrial 4,984 5,965 9,475 9,370
- ---------------------------- ---------------- ----------------- ---------------- -----------------
284,562 310,468 485,857 508,134
- ---------------------------- ---------------- ----------------- ---------------- -----------------
Off-System Sales 20,822 10,647 29,188 17,496
Transportation 41,503 27,713 65,306 46,665
Other (513) (3,324) (761) (4,641)
- ---------------------------- ---------------- ----------------- ---------------- -----------------
$346,374 $345,504 $579,590 $567,654
- ---------------------------- ---------------- ----------------- ---------------- -----------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
Utility Throughput
- ---------------------------- ---------------------------------- ----------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ---------------------------- ---------------- ----------------- ---------------- -----------------
(MMcf) 2000 1999 2000 1999
- ---------------------------- ---------------- ----------------- ---------------- -----------------
Retail Sales:
Residential 30,994 34,762 51,460 54,977
Commercial 5,841 7,191 9,518 11,130
Industrial 1,093 1,385 2,079 2,231
- ---------------------------- ---------------- ----------------- ---------------- -----------------
37,928 43,338 63,057 68,338
- ---------------------------- ---------------- ----------------- ---------------- -----------------
Off-System Sales 5,860 5,195 8,620 7,971
Transportation 26,850 22,932 43,659 37,902
- ---------------------------- ---------------- ----------------- ---------------- -----------------
70,638 71,465 115,336 114,211
- ---------------------------- ---------------- ----------------- ---------------- -----------------
2000 Compared with 1999
Operating revenues for the Utility segment increased $0.9 million and $11.9
million, respectively, for the quarter and six months ended March 31, 2000 as
compared with the same periods a year ago. These increases resulted from higher
transportation, off-system sales and other revenue offset in part by lower
retail gas sales revenue.
Lower volumes of retail gas sales because of weather that was warmer
than the prior year's periods and because of the migration of residential and
small commercial retail customers to transportation service were the primary
reasons for the decrease in retail gas sales revenue. This migration to
transportation service was also the primary cause of the increase in volumes
transported and transportation revenue. On a combined basis, retail gas sales
and transportation revenue decreased $12.1 million and $3.6 million for the
quarter and six months ended March 31, 2000, respectively, as compared with the
same periods a year ago. As customers continue to migrate to marketers for their
gas supplies while using Distribution Corporation for gas transportation
service, Utility operating revenues are expected to decline since such revenues
will not include the gas costs associated with the gas that is delivered on
behalf of the marketers under this transportation service.* However, the Company
realized an increase in operating revenues in its Energy Marketing segment
related to this customer migration. See the Energy Marketing section below.
Restructuring in the Utility segment's service territory is further discussed in
the "Rate Matters" section that follows.
Off-system gas sales increased $10.2 million and $11.7 million,
respectively, for the quarter and six months ended March 31, 2000, as compared
with the same periods a year ago, largely due to increased gas prices in
combination with higher volumes. However, the margins resulting from off-system
sales are minimal.
Other operating revenues increased $2.8 million and $3.9 million,
respectively, for the quarter and six months ended March 31, 2000, as compared
with the same periods a year ago. Other operating revenues in the quarter and
six months ended March 31, 1999 were reduced by $3.2 million and $4.9 million,
respectively, for the recording of a special gas restructuring reserve to be
applied against incremental costs that could result from the New York Public
Service Commission's (NYPSC) gas restructuring effort. No such reserve is
required in 2000 by the terms of the current rate settlement. Partly offsetting
this increase to other operating revenues, Distribution Corporation accrued an
estimated refund provision for a 50% sharing with customers of earnings over a
predetermined amount in accordance with the New York rate settlement of 1998.
The estimated refund provision was $1.1 million for the quarter ended March 31,
2000 and $2.2 million for the six months ended March 31, 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
The Utility segment's second quarter 2000 earnings were $41.5 million,
an increase of $1.2 million when compared with second quarter 1999 earnings. The
most significant reason for the increase was that, as noted above, last year's
quarter included a portion (approximately $2.1 million reduction to earnings) of
the 1999 special gas restructuring reserve. Partially offsetting this increase,
the second quarter 2000 earnings included an estimated refund provision
(approximately $0.7 million reduction to earnings), which is also discussed
above. Weather, which in the Pennsylvania jurisdiction was approximately 7.8%
warmer than last year's quarter, also partially offset the increase resulting
from the nonrecurrence of the special gas restructuring reserve. The impact of
weather variations on earnings in the New York jurisdiction is mitigated by that
jurisdiction's weather normalization clause (WNC). The WNC in New York, which
covers the eight month period from October through May, has had a stabilizing
effect on earnings for the New York rate jurisdiction. In addition, in periods
of colder than normal weather, the WNC benefits Distribution Corporation's New
York customers. For the quarters ended March 31, 2000 and 1999, as the weather
was warmer than normal in both periods, the WNC preserved earnings of $4.0
million and $1.9 million, respectively.
The Utility segment's earnings for the six months ended March 31, 2000
were $63.3 million, an increase of $4.3 million when compared with the earnings
for the six months ended March 31, 1999. This increase can be attributed
primarily to expenses related to an early retirement offer in 1999
(approximately $3.0 million reduction to earnings in 1999) as well as the 1999
special gas restructuring reserve (approximately $3.2 million reduction to
earnings in 1999), which was discussed above. Both the early retirement offer
and the gas restructuring reserve did not recur in 2000. For the six months
ended March 31, 2000, an estimated refund provision (approximately $1.4 million
reduction to earnings) was recorded, as previously discussed. This partially
offset the earnings increase resulting from the nonrecurrence of the early
retirement offer and the gas restructuring reserve in 2000. Weather, which in
the Pennsylvania jurisdiction was approximately 2.4% warmer than the six months
ended March 31, 1999, also reduced earnings in 2000. In the New York
jurisdiction, the impact of weather variations was mitigated by the WNC. For the
six months ended March 31, 2000 and 1999, the WNC preserved earnings of $6.7
million and $4.8 million, respectively.
Degree Days
- ---------------------------- -------------- -------------- -------------------- --------------------------------
Percent (Warmer)
Three Months Ended Colder Than
--------------------------------
March 31 Normal 2000 1999 Normal Prior Year
- ---------------------------- -------------- -------------- -------------------- ----------------- --------------
Buffalo 3,430 3,058 3,277 (10.8%) (6.7%)
Erie 3,221 2,789 3,026 (13.4%) (7.8%)
- ---------------------------- -------------- -------------- -------------------- ----------------- --------------
Six Months Ended
March 31
- ---------------------------- -------------- -------------- -------------------- ----------------- --------------
Buffalo 5,757 5,154 5,249 (10.5%) (1.8%)
Erie 5,256 4,643 4,758 (11.7%) (2.4%)
- ---------------------------- -------------- -------------- -------------------- ----------------- --------------
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 Six Months Ended
March 31, March 31,
- ------------------------------ ---------------- ----------------- ---------------- -----------------
(Thousands) 2000 1999 2000 1999
- ------------------------------ ---------------- ----------------- ---------------- -----------------
Firm Transportation $24,417 $24,308 $47,178 $47,593
Interruptible Transportation 152 135 212 300
- ------------------------------ ---------------- ----------------- ---------------- -----------------
24,569 24,443 47,390 47,893
- ------------------------------ ---------------- ----------------- ---------------- -----------------
Firm Storage Service 16,128 15,805 32,112 31,462
Interruptible Storage Service 50 34 172 163
- ------------------------------ ---------------- ----------------- ---------------- -----------------
16,178 15,839 32,284 31,625
- ------------------------------ ---------------- ----------------- ---------------- -----------------
Other 2,449 3,830 6,687 6,688
- ------------------------------ ---------------- ----------------- ---------------- -----------------
$43,196 $44,112 $86,361 $86,206
- ------------------------------ ---------------- ----------------- ---------------- -----------------
Pipeline and Storage Throughput
- ------------------------------ ---------------------------------- ----------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ------------------------------ ---------------- ----------------- ---------------- -----------------
(MMcf) 2000 1999 2000 1999
- ------------------------------ ---------------- ----------------- ---------------- -----------------
Firm Transportation 102,109 106,901 184,739 186,424
Interruptible Transportation 2,206 1,666 2,448 3,682
- ------------------------------ ---------------- ----------------- ---------------- -----------------
104,315 108,567 187,187 190,106
- ------------------------------ ---------------- ----------------- ---------------- -----------------
2000 Compared with 1999
Operating revenues for the Pipeline and Storage segment decreased $0.9 million
for the quarter ended March 31, 2000, as compared with the same period a year
ago. This decrease was due mainly to lower revenues from unbundled pipeline
sales and open access transportation, offset partially by higher storage service
revenues. For the six months ended March 31, 2000, operating revenues were
basically flat with operating revenues for the six months ended March 31, 1999.
Higher storage service revenues were largely offset by lower transportation
revenues.
The Pipeline and Storage segment's second quarter 2000 earnings were
$10.2 million, a decrease of $0.6 million when compared with the second quarter
of 1999's earnings. Lower revenues from unbundled pipeline sales and open access
transportation combined with higher operation and maintenance expense
contributed to this decrease.
The Pipeline and Storage segment's earnings for the six months ended
March 31, 2000 were $19.4 million, a decrease of $3.7 million when compared with
the earnings for the six months ended March 31, 1999. Higher operation and
maintenance expense contributed to this decrease combined with the fact that the
prior year's earnings included interest income and a reduction in income taxes
related to the final settlement of Internal Revenue Service audits of years
1977-1994.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
Exploration and Production
Exploration and Production Operating Revenues
- ---------------------------- ---------------------------------- ----------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ---------------------------- ---------------------------------- ----------------------------------
- ---------------------------- ---------------- ----------------- ---------------- -----------------
(Thousands) 2000 1999 2000 1999
- ---------------------------- ---------------- ----------------- ---------------- -----------------
Gas (after Hedging) $28,580 $19,529 $55,211 $37,678
Oil (after Hedging) 19,860 10,782 37,435 21,316
Gas Processing Plant 4,279 2,865 8,371 5,592
Other (2,369) 484 (649) 702
- ---------------------------- ---------------- ----------------- ---------------- -----------------
$50,350 $33,660 $100,368 $65,288
- ---------------------------- ---------------- ----------------- ---------------- -----------------
2000 Compared with 1999
Operating revenues for the Exploration and Production segment increased $16.7
million and $35.1 million, respectively, for the quarter and six months ended
March 31, 2000, as compared with the same periods a year ago. For the quarter
ended March 31, 2000, gas production revenue (after hedging) and oil production
revenue (after hedging) each increased $9.1 million due to increased production
and prices. For the six months ended March 31, 2000, gas production revenue
(after hedging) and oil production revenue (after hedging) increased $17.5
million and $16.1 million, respectively, due to increased production and prices.
Refer to the tables below for production volumes and average price information.
Revenue from Seneca's gas processing plant was up $1.4 million and $2.8 million,
respectively, for the quarter and six months ended March 31, 2000 as compared
with the same periods a year ago. Other revenue decreased $2.9 million and $1.4
million, respectively, for the quarter and six months ended March 31, 2000, as
compared with the same periods a year ago. The decreases to other revenues
resulted primarily from mark-to-market and other revenue adjustments related to
written options. Refer to further discussion of written options in the "Market
Risk Sensitive Instruments" section that follows and in Item 1, Note 4 -
Derivative Financial Instruments.
The Exploration and Production segment's second quarter 2000 earnings
were $7.9 million, an increase of $7.8 million when compared with the second
quarter of 1999's earnings. As discussed above, significant improvement in oil
and gas pricing combined with an increase in production were the main reasons
for higher earnings. A 19% increase in gas production was attributable mainly to
offshore production at Vermilion block 309 and to production from the South Lost
Hills field in California. Partly offsetting these increases in revenues were
increases in depletion expense (due to higher production volumes and higher
depletable base) and lease operating costs (due to increased production), and a
negative mark-to-market revenue adjustment related to written options.
The Exploration and Production segment's earnings for the six months
ended March 31, 2000 were $15.9 million, an increase of $15.5 million when
compared with the earnings for the six months ended March 31, 1999. As discussed
above, significant improvement in oil and gas pricing combined with an increase
in production were the main reasons for higher earnings. Partly offsetting these
increases were higher depletion expense and lease operating costs. Earnings were
also reduced due to revenue adjustments related to written options discussed
above. In addition, there was a decrease in interest income as 1999 included
nonrecurring interest received from the final settlement of the IRS audits in
December 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
Production Volumes
- ---------------------------- ---------------------------------- ----------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ---------------------------- ---------------- ----------------- ---------------- -----------------
2000 1999 2000 1999
- ---------------------------- ---------------- ----------------- ---------------- -----------------
Gas Production (MMcf)
Gulf Coast 8,142 6,507 16,087 12,941
West Coast 1,126 985 2,243 1,789
Appalachia 1,045 1,154 2,152 2,311
- ---------------------------- ---------------- ----------------- ---------------- -----------------
10,313 8,646 20,482 17,041
- ---------------------------- ---------------- ----------------- ---------------- -----------------
Oil Production (thousands of barrels)
Gulf Coast 331 337 653 670
West Coast 707 657 1,392 1,293
Appalachia 1 2 5 5
- ---------------------------- ---------------- ----------------- ---------------- -----------------
1,039 996 2,050 1,968
- ---------------------------- ---------------- ----------------- ---------------- -----------------
Average Prices
- ---------------------------- ---------------------------------- ----------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ---------------------------- ---------------- ----------------- ---------------- -----------------
2000 1999 2000 1999
- ---------------------------- ---------------- ----------------- ---------------- -----------------
Average Gas Price/Mcf
Gulf Coast $2.59 $1.73 $2.58 $1.86
West Coast $2.61 $1.85 $2.75 $2.09
Appalachia $2.89 $2.53 $2.89 $2.47
Weighted Average $2.62 $1.85 $2.63 $1.97
Weighted Average After Hedging $2.77 $2.26 $2.70 $2.21
Average Oil Price/bbl
Gulf Coast $28.67 $11.67 $26.05 $11.76
West Coast $23.88 $9.09 $21.96 $8.96
Appalachia $25.10 $11.45 $22.58 $12.31
Weighted Average $25.41 $9.97 $23.26 $9.92
Weighted Average After Hedging $19.12 $10.83 $18.26 $10.83
- ---------------------------- ---------------- ----------------- ---------------- -----------------
International
International Operating Revenues
- ----------------------------- ---------------------------------- ----------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ----------------------------- ---------------- ----------------- ---------------- -----------------
(Thousands) 2000 1999 2000 1999
- ----------------------------- ---------------- ----------------- ---------------- -----------------
Heating $29,331 $30,737 $56,690 $59,799
Electricity 9,082 9,458 18,325 19,371
Other 1,196 617 2,667 1,907
- ----------------------------- ---------------- ----------------- ---------------- -----------------
$39,609 $40,812 $77,682 $81,077
- ----------------------------- ---------------- ----------------- ---------------- -----------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
International Heating and Electric Volumes
- ------------------------------------------------ ---------------------------------- ----------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ------------------------------------------------ ---------------- ----------------- ---------------- -----------------
2000 1999 2000 1999
- ------------------------------------------------ ---------------- ----------------- ---------------- -----------------
Heating Sales (Gigajoules) (1) 4,296,704 4,263,515 8,264,472 8,235,486
Electricity Sales (megawatt hours) 322,042 311,561 639,697 617,842
- ------------------------------------------------ ---------------- ----------------- ---------------- -----------------
(1) Gigajoules = one billion joules. A joule is a unit of energy.
2000 Compared with 1999
Operating revenues for the International segment decreased $1.2 million and $3.4
million, respectively, for the quarter and six months ended March 31, 2000 as
compared to the same periods a year ago. The decrease reflects a decrease in the
value of the Czech koruna as well as the impact of warm weather and conservation
efforts by customers.
The International segment's second quarter 2000 earnings were $4.3
million, a decrease of $1.9 million when compared with the earnings for the
second quarter of 1999. Earnings were adversely affected by the decline in the
value of the Czech koruna, as discussed above, as well as by lower margins
resulting from warmer weather and higher fuel costs.
The International segment's earnings for the six months ended March 31,
2000 were $9.0 million, a decrease of $1.5 million when compared with the
earnings for the six months ended March 31, 1999. This decrease can be
attributed primarily to lower margins stemming from warm weather and
conservation efforts by customers combined with the decline in the value of the
Czech koruna.
Energy Marketing
Energy Marketing Operating Revenues
- ---------------------------- ---------------------------------- ----------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ---------------------------- ---------------- ----------------- ---------------- -----------------
(Thousands) 2000 1999 2000 1999
- ---------------------------- ---------------- ----------------- ---------------- -----------------
Natural Gas (after Hedging) $52,934 $36,156 $81,562 $56,286
Electricity 395 424 754 708
Other 404 (732) 592 (719)
- ---------------------------- ---------------- ----------------- ---------------- -----------------
$53,733 $35,848 $82,908 $56,275
- ---------------------------- ---------------- ----------------- ---------------- -----------------
Energy Marketing Volumes
- ---------------------------- ---------------------------------- ----------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ---------------------------- ---------------- ----------------- ---------------- -----------------
2000 1999 2000 1999
- ---------------------------- ---------------- ----------------- ---------------- -----------------
Natural Gas - (MMcf) 13,101 12,938 22,263 20,338
- ---------------------------- ---------------- ----------------- ---------------- -----------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
2000 Compared with 1999
Operating revenues for the Energy Marketing segment increased $17.9 million and
$26.6 million, respectively, for the quarter and six months ended March 31,
2000, as compared with the same periods a year ago. This increase reflects
higher marketing volumes and revenues as NFR's customer base continues to
increase.
NFR utilizes exchange-traded futures and exchange-traded options to
manage a portion of the market risk associated with fluctuations in the price of
natural gas. Refer to further discussion of these hedging activities in Item 1,
Note 4 - Derivative Financial Instruments.
Earnings in the Energy Marketing segment increased $0.8 million and
$0.6 million, respectively, for the quarter and six months ended March 31, 2000,
as compared with the same periods a year ago. These increases reflect the higher
marketing volumes and revenues discussed above. Currently, NFR serves
approximately 29,000 residential customers. As NFR has increased its residential
customer base, margins have improved as residential margins are higher than the
commercial and industrial margins that NFR largely experienced in previous
years. Partially offsetting the increase in margins for the six month period,
NFR experienced higher operating costs from significant advertising costs
related to marketing efforts in the first quarter of 2000.
Timber
Timber Operating Revenues
- ---------------------------- ---------------------------------- ----------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ---------------------------- ---------------- ----------------- ---------------- -----------------
2000 1999 2000 1999
- ---------------------------- ---------------- ----------------- ---------------- -----------------
Log Sales $7,874 $6,401 $13,354 $11,853
Green Lumber Sales 1,233 1,154 2,129 2,097
Kiln Dry Lumber Sales 2,274 1,821 4,464 3,322
Other 150 310 324 504
---------------- ----------------- ---------------- -----------------
$11,531 $9,686 $20,271 $17,776
- ---------------------------- ---------------------------------- ----------------------------------
- ---------------------------- ---------------------------------- ----------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ---------------------------- ---------------- ----------------- ---------------- -----------------
Board Feet (Thousands) 2000 1999 2000 1999
- ---------------------------- ---------------- ----------------- ---------------- -----------------
Log Sales 2,574 2,227 5,108 4,080
Green Lumber Sales 2,160 2,443 4,154 4,631
Kiln Dry Lumber Sales 1,690 1,300 3,297 2,304
---------------- ----------------- ---------------- -----------------
6,424 5,970 12,559 11,015
- ---------------------------- ---------------- ----------------- ---------------- -----------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
2000 Compared with 1999
Operating revenues for the Timber segment increased $1.8 million and $2.5
million, respectively, for the quarter and six months ended March 31, 2000, as
compared with the same periods a year ago. The increase for the quarter and six
month period resulted primarily from higher veneer log sales and kiln dry lumber
sales. The increase in kiln dry lumber sales is due to the operation of
additional kilns purchased late in the quarter ended December 31, 1998.
Earnings in the Timber segment increased $1.6 million and $1.2 million,
respectively, for the quarter and six months ended March 31, 2000, as compared
with the same periods a year ago. These increases resulted primarily from a
pretax gain of $2.3 million ($1.5 million after tax) on the sale of land and
standing timber in January 2000.
Other Income and Interest Charges
Although variances in Other Income items and Interest Charges are discussed in
the earnings discussion by segment above, following is a recap on a consolidated
basis:
Other Income
Other income increased $2.6 million for the quarter ended March 31, 2000
compared with the quarter ended March 31, 1999. This increase resulted primarily
from the $2.3 million gain on the sale of land and standing timber in the Timber
segment, as discussed above.
Other income decreased $1.0 million for the six months ended March 31,
2000 compared with the six months ended March 31, 1999. This decrease resulted
mainly from approximately $3.2 million of interest income related to the final
settlement of IRS audits for years 1977 - 1994 which was recorded during 1999
and did not recur this year. Partially offsetting this decrease was the gain on
the sale of land and standing timber discussed previously.
Interest Charges
Interest on long-term debt increased $0.1 million for the quarter ended March
31, 2000 as compared with the quarter ended March 31, 1999. This increase can be
attributed primarily to a slightly higher average amount of long-term debt
outstanding combined with higher weighted average interest rates. For the six
months ended March 31, 2000, interest on long-term debt decreased $0.6 million.
This decrease can be attributed to a lower average amount of long-term debt
outstanding offset in part by higher weighted average interest rates.
Other interest charges increased $0.4 million for the quarter ended
March 31, 2000. This increase resulted mainly from higher weighted average
interest rates in the current quarter, offset partially by a decrease in the
average amount of short-term debt outstanding. For the six months ended March
31, 2000, other interest charges increased $3.7 million. Higher weighted average
interest rates for the six month period together with an increase in the average
amount of short-term debt outstanding contributed to this increase. Also, a
reduction in interest charges was recorded in the quarter ended December 1998
related to the final settlement of IRS audits of years 1977 - 1994.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary sources of cash during the six-month period ended March
31, 2000, consisted of cash provided by operating activities, long-term debt and
short-term bank loans and commercial paper. These sources were supplemented by
issuances of common stock under the Company's stock and benefit plans.
Operating Cash Flow.
Internally generated cash from operating activities consists of net income
available for common stock, adjusted for non-cash expenses, non-cash income and
changes in operating assets and liabilities. Non-cash items include
depreciation, depletion and amortization, deferred income taxes and minority
interest in foreign subsidiaries.
Cash provided by operating activities in the Utility and the Pipeline
and Storage segments may vary from period to period because of the impact of
rate cases. In the Utility segment, supplier refunds, over- or under-recovered
purchased gas costs and weather also significantly impact cash flow. The impact
of weather on cash flow is tempered in the Utility segment's New York rate
jurisdiction by its WNC and in the Pipeline and Storage segment by Supply
Corporation's straight fixed-variable rate design.
Because of the seasonal nature of the Company's heating business,
revenues are relatively high during the six months ended March 31 and
receivables and unbilled utility revenue historically increase from September to
March because of winter weather.
The storage gas inventory normally declines during the first and second
quarters of the year and is replenished during the third and fourth quarters.
For storage gas inventory accounted for under the last-in, first-out (LIFO)
method, the current cost of replacing gas withdrawn from storage is recorded in
the Consolidated Statements of Income and a reserve for gas replacement is
recorded in the Consolidated Balance Sheets and is included under the caption
"Other Accruals and Current Liabilities." Such reserve is reduced as the
inventory is replenished.
Net cash provided by operating activities totaled $185.0 million for
the six months ended March 31, 2000, an increase of $52.6 million compared with
$132.4 million provided by operating activities for the six months ended March
31, 1999. The increase can be attributed primarily to higher cash receipts from
the sale of oil and gas and lower interest payments in the Exploration and
Production segment. Higher cash receipts for oil and gas production resulted
from increased oil and gas production and significantly higher prices. Interest
payments are down in this segment due to the retirement of the HarCor Energy,
Inc. 14.875% Senior Secured Notes in March 1999 and July 1999.
Investing Cash Flow.
Expenditures for Long-Lived Assets
Expenditures for long-lived assets include additions to property, plant and
equipment (capital expenditures) and investments in corporations (stock
acquisitions) or partnerships, net of any cash acquired.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
The Company's expenditures for long-lived assets totaled $115.1 million
during the six months ended March 31, 2000. The table below presents these
expenditures:
- --------------------------------- ----------------------- ----------------------- ------------------------
Six Months Ended March 31, 2000
(in millions of dollars)
- --------------------------------- ----------------------- ----------------------- ------------------------
Investments in Total
Capital Corporations Expenditures for
Expenditures and Partnerships Long-Lived Assets
- --------------------------------- ----------------------- ----------------------- ------------------------
Utility $28.6 $- $28.6
Pipeline and Storage 23.0 1.4 24.4
Exploration and Production 50.1 - 50.1
International 4.1 - 4.1
Timber 4.3 - 4.3
Energy Marketing - - -
All Other 1.0 2.6 3.6
- --------------------------------- ----------------------- ----------------------- ------------------------
$111.1 (1) $4.0 $115.1
- --------------------------------- ----------------------- ----------------------- ------------------------
(1)Includes non-cash acquisition of $1.2 million in a stock-for-asset swap.
Utility
- -------
The majority of the Utility capital expenditures were made for replacement of
mains and main extensions, as well as for the replacement of service lines.
Pipeline and Storage
- --------------------
The majority of the Pipeline and Storage capital expenditures were made for
additions, improvements, and replacements to this segment's transmission and
storage systems. Of the total capital expenditures, $9.2 million was related to
Supply Corporation's acquisition of another company's interest in the Niagara
Spur Loop Line and the Ellisburg-Leidy pipeline in January 2000. This
acquisition was financed with short-term borrowings. The capital expenditures
also include approximately $1.2 million of natural gas wells and related
pipelines as well as some undeveloped timber property acquired from Cunningham
Natural Gas Corporation (Cunningham) in November 1999. These assets were
acquired through the issuance of 54,674 shares of Company common stock. In
addition to the assets identified above, the Company received Cunningham's
temporary cash investments in exchange for the shares of Company common stock.
During the six months ended March 31, 2000, SIP made a $1.4 million
investment in Independence Pipeline Company, a Delaware general partnership,
bringing its total investment through March 31, 2000 to $12.2 million. This
investment represents a one-third partnership interest. The investment has been
financed with short-term borrowings. Independence Pipeline Company intends to
build a 370 mile natural gas pipeline (Independence Pipeline) from Defiance,
Ohio to Leidy, Pennsylvania at an estimated cost of $680 million.* If the
Independence Pipeline project is not constructed, SIP's share of the development
costs (including SIP's investment in Independence Pipeline Company) is estimated
not to exceed $15.0 million.*
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
On December 17, 1999, the Federal Energy Regulatory Commission (FERC)
issued an Interim Order on the various proceedings making up the Independence
Pipeline project. The Interim Order concluded that construction and operation of
the proposed project would be an environmentally acceptable action, subject to
environmental conditions listed in the Order. The Order conditionally approved
the project, but stated that the FERC would issue a final certificate only after
the project sponsors file new evidence of market support in the form of
long-term transportation contracts with non-affiliates for at least 35% of the
capacity of the Independence and SupplyLink portions of the Independence
Pipeline project. Construction would not be permitted to begin until, among
other things, executed contracts for about 69% of the project's capacity are
filed with the FERC. On April 26, 2000, the FERC issued an order which requires
the Independence Pipeline project sponsors to show by June 26, 2000 that they
have contracted with non-affiliates for 35% of the capacity of the Independence
and SupplyLink portions of the Independence Pipeline project, or FERC will
dismiss the SupplyLink and Independence applications. The Independence Pipeline
project sponsors are working on obtaining the required customer commitments.*
Exploration and Production
- --------------------------
The Exploration and Production segment capital expenditures for the six months
ended March 31, 2000 included approximately $35.6 million for Seneca's offshore
program in the Gulf of Mexico, including offshore drilling expenditures,
offshore construction, lease acquisition costs and geological and geophysical
expenditures. The remaining $14.5 million of capital expenditures included
onshore drilling, construction and recompletion costs for wells located in
Louisiana, Texas and California as well as onshore geological and geophysical
costs, including the purchase of certain 3-D seismic data and fixed asset
purchases.
On April 24, 2000, Seneca announced that an agreement had been reached
whereby Seneca would offer to acquire all of the outstanding shares of Tri Link
Resources Ltd. (Tri Link) at a price of $7.05 (Canadian dollars) per share in
cash.* Mailing of the offering documents to shareholders commenced on May 9,
2000. The transaction value, including assumed debt, is approximately $340
million in Canadian dollars or approximately $230 million in U.S. dollars.* The
offer is subject to the tendering of a minimum 66-2/3% of the Tri Link common
shares to Seneca and obtaining the required regulatory approvals and other
customary conditions. Tri Link has also agreed to pay a $6.3 million (Canadian
dollars) non-completion fee to Seneca under certain circumstances.
Tri Link is a Calgary, Alberta based exploration and production company
which controls nearly three million undeveloped acres in Alberta, Saskatchewan
and Manitoba, Canada. This acquisition will build Seneca's total reserves base
to nearly one trillion cubic feet equivalent.*
Due to the timing of the projected transaction closing date (on or
about June 15, 2000), the Company anticipates that the initial financing of the
acquisition will utilize short-term debt.* After the transaction closing date,
the Company may replace the short-term debt with long-term debt or a combination
of long-term debt and equity securities.*
International
- -------------
The majority of the International segment capital expenditures were concentrated
in the areas of improvements and replacements within the district heating and
power generation plants in the Czech Republic.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
Timber
- ------
The majority of the Timber segment capital expenditures were made for purchases
of timber for Seneca's timber operations, as well as equipment for Highland's
sawmill and kiln operations. As discussed under the Timber segment's results of
operations, in January 2000, this segment sold land and timber with a book value
of $3.0 million for $5.3 million. The resulting gain on this sale of $2.3
million was included in earnings for the quarter ending March 31, 2000.
All Other
- ---------
Expenditures for Long-Lived Assets for all other subsidiaries consisted of
Upstate's purchase of a 50% interest in a gas processing facility and NFR
Power's purchase of a 50% partnership interest in Seneca Energy II, LLC (Seneca
Energy). Seneca Energy generates and sells electricity to a public utility.
Seneca Energy generates the electricity by using methane gas obtained from a
landfill in Seneca Falls, New York, which is owned by an outside party.
The Company continuously evaluates capital expenditures and investments
in corporations and partnerships. The amounts are subject to modification for
opportunities such as the acquisition of attractive oil and gas properties,
timber or storage facilities and the expansion of transmission line capacities.
While the majority of capital expenditures in the Utility segment are
necessitated by the continued need for replacement and upgrading of mains and
service lines, the magnitude of future capital expenditures or other investments
in the Company's other business segments depends, to a large degree, upon market
conditions.*
Financing Cash Flow.
Consolidated short-term debt decreased $120.3 million during the first six
months of 2000. The Company continues to consider short-term bank loans and
commercial paper important sources of cash for temporarily financing capital
expenditures and investments in corporations and/or partnerships, gas-in-storage
inventory, unrecovered purchased gas costs, exploration and development
expenditures and other working capital needs. Fluctuations in these items can
have a significant impact on the amount and timing of short-term debt.
In February 2000, the company issued $150.0 million of 7.30%
medium-term notes due in February 2003. After deducting underwriting discounts
and commissions, the net proceeds to the Company amounted to $149.3 million. The
proceeds of this debt issuance were used to redeem $50.0 million of 6.60%
medium-term notes which matured in February 2000 and to reduce short-term debt.
In March 1998, the Company obtained authorization from the Securities
and Exchange Commission (SEC), under the Public Utility Holding Company Act of
1935, to issue long-term debt securities and equity securities in amounts not
exceeding $2.0 billion at any one time outstanding during the order's
authorization period, which extends to December 31, 2002. In August 1999, the
Company registered $625.0 million of debt and equity securities under the
Securities Act of 1933. After the February 2000 medium-term note issuance
discussed above, the Company currently has $475.0 million of debt and equity
securities registered under the Securities Act of 1933.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
The Company's present liquidity position is believed to be adequate to
satisfy known demands.* Under the Company's existing indenture covenants, at
March 31, 2000, the Company would have been permitted to issue up to a maximum
of $519.0 million in additional long-term unsecured indebtedness at projected
market interest rates. In addition, at March 31, 2000, the Company had
regulatory authorizations and unused short-term credit lines that would have
permitted it to borrow an additional $476.8 million of short-term debt.
The amounts and timing of the issuance and sale of debt and/or equity
securities will depend on market conditions, regulatory authorizations, and the
requirements of the Company.
The Company is involved in litigation arising in the normal course of
business. The Company is involved in regulatory matters arising in the normal
course of business that involve rate base, cost of service and purchased gas
cost issues, among other things. While the resolution of such litigation or
regulatory matters could have a material effect on earnings and cash flows in
the year of resolution, none of this litigation, and none of these regulatory
matters are expected to change materially the Company's present liquidity
position, nor have a material adverse effect on the financial condition of the
Company.*
Market Risk Sensitive Instruments
For a complete discussion of market risk sensitive instruments, refer to "Market
Risk Sensitive Instruments" in Item 7 of the Company's 1999 Form 10-K. There
have been no subsequent material changes to the Company's exposure to market
risk sensitive instruments.
RATE MATTERS
Utility Operation
New York Jurisdiction
On October 21, 1998, the NYPSC approved a rate plan for Distribution Corporation
for the period beginning October 1, 1998 and ending September 30, 2000. The plan
was the result of a settlement agreement entered into by Distribution
Corporation, Staff for the NYPSC (Staff), Multiple Intervenors (an advocate for
large industrial customers) and the State Consumer Protection Board. Under the
plan, Distribution Corporation's rates decreased by $7.2 million, or 1.1%. In
addition, the plan provided customers with up to $6.0 million in bill credits,
disbursed volumetrically over the two year term, reflecting a predetermined
share of excess earnings under a 1996 settlement. An allowed return on equity of
12%, above which additional earnings are to be shared equally with the
customers, was maintained from a 1996 settlement. Finally, as provided by the
rate plan, $7.2 million of 1999 revenues were set aside in a special reserve to
be applied against Distribution Corporation's incremental costs resulting from
the NYPSC's gas restructuring effort further described below.
On November 3, 1998, the NYPSC issued its Policy Statement Concerning
-----------------------------
the Future of the Natural Gas Industry in New York State and Order Terminating
- ----------------------------- ------------------------------------ -----------
Capacity Assignment (Policy Statement). The Policy Statement sets forth the
- --------------------
NYPSC's "vision" on "how best to ensure a competitive market for natural gas in
New York." That vision includes the following goals:
(1) Effective competition in the gas supply market for retail customers;
(2) Downward pressure on customer gas prices;
(3) Increased customer choice of gas suppliers and service options;
(4) A provider of last resort (not necessarily the utility);
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
(5) Continuation of reliable service and maintenance of operations
procedures that treat all participants fairly;
(6) Sufficient and accurate information for customers to use in making
informed decisions;
(7) The availability of information that permits adequate oversight of the
market to ensure fair competition; and
(8) Coordination of Federal and State policies affecting gas supply and
distribution in New York State.
The Policy Statement provides that the most effective way to establish
a competitive market in gas supply is "for local distribution companies to cease
selling gas." The NYPSC indicated in its order that it hopes to accomplish that
objective over a three-to-seven year transition period from the date the Policy
Statement was issued, taking into account "statutory requirements" and the
individual needs of each local distribution company (LDC).* The Policy Statement
directs Staff to schedule "discussions" with each LDC on an "individualized plan
that would effectuate our vision." In preparation for negotiations, LDCs will be
required to address issues such as a strategy to hold new capacity contracts to
a minimum, a long-term rate plan with a goal of reducing or freezing rates, and
a plan for further unbundling. In addition, Staff was instructed to hold
collaborative sessions with multiple parties to discuss generic issues including
reliability and market power regulation. Distribution Corporation has
participated in the collaborative sessions. These collaborative sessions have
not yet produced a consensus document on all issues before the NYPSC.
Distribution Corporation will continue to participate in all future
collaborative sessions.*
Distribution Corporation was recently advised, on an informal basis,
that its "individualized plan" for restructuring to "effectuate [the NYPSC's]
vision" may be included in discussions anticipated in connection with the
current rate settlement, which expires on its own terms on September 30, 2000.
Consistent with that information, Distribution Corporation has tentative plans
to develop a rate and restructuring proposal to be filed on or about July 1,
2000, for an effective date of October 1, 2000.*
On March 22, 2000, the NYPSC issued an order directing electric and gas
utilities to file tariff amendments "to accommodate the wishes of retail access
customers who prefer to receive combined, single bills from either their utility
company or their [marketer]" (the Billing Order). The tariff amendments will
provide for marketer single-bill or utility single-bill services, thereby
allowing a customer to choose a billing preference through the customer's choice
of suppliers - utility or marketer. Distribution Corporation has permitted
marketer single billing since 1996. The Billing Order will permit Distribution
Corporation to provide a single retail bill service for marketers.
Included in the Billing Order is a requirement that utilities design a
"back-out" credit equal to the long run costs avoided by each utility when
billing is provided by another party. On April 24, 2000 Distribution Corporation
submitted draft tariff sheets setting forth a proposed back-out credit
methodology for review and comment by NYPSC Staff and other interested parties.
Although a methodology is described, no back-out credit was calculated.
Distribution Corporation's filing included provisions for a billing service to
be provided by Distribution Corporation, together with additional rules and
regulations governing marketer-provided retail billing.
Several utilities filed requests for rehearing of the Billing Order.
The requests include, among other things, arguments challenging the NYPSC's
authority to impose a back-out credit based on long run avoided costs.
Distribution Corporation chose against joining the other utilities on rehearing
and may, if necessary, pursue other avenues of relief.* At this time,
Distribution Corporation is unable to ascertain the outcome of matters relating
to the Billing Order.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
In conversations with NYPSC Staff prior to the release of the Billing
Order, Distribution Corporation requested approval for a temporary, interim
billing service to be provided in response to marketer inquiries. As a result of
Distribution Corporation's efforts, the Billing Order included a provision for a
billing service as requested. Accordingly, beginning on May 1, 2000,
Distribution Corporation commenced a retail billing service for two marketers
serving approximately 2000 retail customers. The billing service is being
offered to the marketer community for a per-bill fee of $0.50, subject to
modification pursuant to the Billing Order. The temporary billing service will
remain available for interested marketers until it is replaced by a permanent
billing service under the Billing Order.
On April 12, 2000, the NYPSC issued an order setting forth procedures
for implementation of electronic data interchange (EDI) for electronic exchange
of retail access data in New York (EDI Order). As described by the NYPSC, EDI is
the computer-to-computer exchange of routine business information in a standard
form. The NYPSC believes that EDI is necessary to develop uniform data exchange
protocol for the state's customer choice initiatives. The EDI Order adopts
provisions of a report prepared after an EDI collaborative involving utilities,
marketers and other interests. Utilities, including Distribution Corporation,
are required to submit EDI implementation plans on May 26, 2000. Distribution
Corporation was an active participant in the EDI collaborative. The Company is
currently evaluating the EDI Order to determine its effect on current and
planned operations.
The NYPSC continues to address, through various proceedings and
"collaboratives," upstream pipeline capacity issues arising from the
restructuring. At this point, Distribution Corporation remains authorized to
release upstream intermediate capacity to marketers serving former sales
customers. Costs relating to retained upstream transmission capacity are
recovered through a transition cost surcharge. At this time, Distribution
Corporation does not foresee any material changes to upstream capacity
requirements in the near term.*
Pennsylvania Jurisdiction
Distribution Corporation currently does not have a rate case on file with the
Pennsylvania Public Utility Commission (PaPUC). Management will continue to
monitor its financial position in the Pennsylvania jurisdiction to determine the
necessity of filing a rate case in the future.
Effective October 1, 1997, Distribution Corporation commenced a PaPUC
approved customer choice pilot program called Energy Select. Energy Select,
which lasted until April 1, 1999, allowed approximately 19,000 small commercial
and residential customers of Distribution Corporation in the greater Sharon,
Pennsylvania area to purchase gas supplies from qualified, participating
non-utility suppliers (or marketers) of gas. Distribution Corporation was not a
supplier of gas in this pilot. Under Energy Select, Distribution Corporation
delivered the gas to the customer's home or business and remained responsible
for reading customer meters, the safety and maintenance of its pipeline system
and responding to gas emergencies. NFR was a participating supplier in Energy
Select.
Effective February 11, 1999, Distribution Corporation's System Wide
Energy Select tariff was approved by the PaPUC. This program is intended to
expand the Energy Select pilot program described above to apply across
Distribution Corporation's entire Pennsylvania service territory. The plan
borrows many features of the Energy Select pilot, but several important changes
were adopted. Most significantly, the new program includes Distribution
Corporation as a choice for retail consumers, in furtherance of Distribution
Corporation's objective to remain a merchant. Also departing from the pilot
scheme, Distribution Corporation resumes its role as provider of last resort and
maintains customer contact by providing a billing service on its own behalf and,
as an option, for participating marketers.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
A natural gas restructuring bill was signed into law on June 22, 1999.
Entitled the Natural Gas Choice and Competition Act (Act), the new law requires
all Pennsylvania LDCs to file tariffs designed to provide retail customers with
direct access to competitive gas markets. Distribution Corporation submitted its
compliance filing on October 1, 1999 for an effective date on or about July 1,
2000. The filing largely mirrors the System Wide Energy Select program currently
in effect, which substantially complies with the Act's requirements. After
negotiations with PaPUC Staff and intervenors, a settlement was reached with all
parties except for the Pennsylvania Office of Consumer Advocate (OCA).
Accordingly, hearings were held and briefs filed on OCA's open issues. In a
Recommended Decision issued on March 31, 2000, the Administrative Law Judge
rejected the OCA's arguments and recommended approval of the settlement
agreement. Distribution Corporation expects the PaPUC to issue a final decision
on or about July 1, 2000.*
Base rate adjustments in both the New York and Pennsylvania
jurisdictions do not reflect the recovery of purchased gas costs. Such costs are
recovered through operation of the purchased gas adjustment clauses of the
appropriate regulatory authorities.
Pipeline and Storage
Supply Corporation currently does not have a rate case on file with the FERC.
Its last case was settled with the FERC in February 1996. As part of that
settlement, Supply Corporation agreed not to seek recovery of revenues related
to certain terminated service from storage customers until April 1, 2000.
Currently, Supply Corporation does not intend to seek recovery of revenues
related to terminated service from storage customers. Supply Corporation has
been successful in marketing and obtaining executed contracts for such
terminated storage service (at discounted rates) and expects to continue
obtaining executed contracts for additional terminated storage service as it
arises.*
Other Matters
Environmental Matters
It is the Company's policy to accrue estimated environmental clean-up costs
(investigation and remediation) when such amounts can reasonably be estimated
and it is probable that the Company will be required to incur such costs.
Distribution Corporation and Supply Corporation have estimated their clean-up
costs related to former manufactured gas plant and former gasoline plant sites
and third party waste disposal sites will be in the range of $8.9 million to
$9.9 million.* The minimum liability of $8.9 million has been recorded on the
Consolidated Balance Sheet at March 31, 2000. Other than discussed in Note H of
the 1999 Form 10-K (referred to below), the Company is currently not aware of
any material additional exposure to environmental liabilities. However, adverse
changes in environmental regulations or other factors could impact the Company.*
The Company is subject to various federal, state and local laws and
regulations relating to the protection of the environment. The Company has
established procedures for the ongoing evaluation of its operations to identify
potential environmental exposures and comply with regulatory policies and
procedures.
For further discussion refer to Note H - Commitments and Contingencies
under the heading "Environmental Matters" in Item 8 of the Company's 1999 Form
10-K.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Cont.)
---------------------
Safe Harbor for Forward-Looking Statements. The Company is including the
following cautionary statement in this Form 10-Q to make applicable and take
advantage of the safe harbor provisions of Section 21E of the Securities
Exchange Act of 1934 for any forward-looking statements made by, or on behalf
of, the Company. Forward-looking statements include statements concerning plans,
objectives, goals, strategies, future events or performance, and underlying
assumptions and other statements which are other than statements of historical
facts. From time to time, the Company may publish or otherwise make available
forward-looking statements of this nature. All such subsequent forward-looking
statements, whether written or oral and whether made by or on behalf of the
Company, are also expressly qualified by these cautionary statements. Certain
statements contained herein, including without limitation those which are
designated with a "*", are forward-looking statements and accordingly involve
risks and uncertainties which could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. The
forward-looking statements contained herein are based on various assumptions,
many of which are based, in turn, upon further assumptions. The Company's
expectations, beliefs and projections are expressed in good faith and are
believed by the Company to have a reasonable basis, including, without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectations, beliefs or
projections will result or be achieved or accomplished. In addition to other
factors and matters discussed elsewhere herein, the following are important
factors that, in the view of the Company, could cause actual results to differ
materially from those discussed in the forward-looking statements:
1. Changes in economic conditions, demographic patterns and weather
conditions
2. Changes in the availability and/or price of natural gas and oil
3. Inability to obtain new customers or retain existing ones
4. Significant changes in competitive factors affecting the Company
5. Governmental/regulatory actions and initiatives, including those
affecting acquisitions, financings, allowed rates of return, industry
and rate structure, franchise renewal, and environmental/safety
requirements
6. Unanticipated impacts of restructuring initiatives in the natural gas
and electric industries
7. Significant changes from expectations in actual capital expenditures
and operating expenses and unanticipated project delays or changes in
project costs
8. The nature and projected profitability of pending and potential
projects and other investments
9. Occurrences affecting the Company's ability to obtain funds from
operations, debt or equity to finance needed capital expenditures and
other investments
10. Uncertainty of oil and gas reserve estimates
11. Ability to successfully identify and finance oil and gas property
acquisitions and ability to operate existing and any subsequently
acquired properties
12. Ability to successfully identify, drill for and produce economically
viable natural gas and oil reserves
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (Concl.)
----------------------
13. Changes in the availability and/or price of derivative financial
instruments
14. Inability of the various counterparties to meet their obligations with
respect to the Company's financial instruments
15. Regarding foreign operations - changes in foreign trade and monetary
policies, laws and regulations related to foreign operations,
political and governmental changes, inflation and exchange rates,
taxes and operating conditions
16. Significant changes in tax rates or policies or in rates of inflation
or interest
17. Significant changes in the Company's relationship with its employees
and the potential adverse effects if labor disputes or grievances were
to occur
18. Changes in accounting principles and/or the application of such
principles to the Company
The Company disclaims any obligation to update any forward-looking
statements to reflect events or circumstances after the date hereof.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Refer to the "Market Risk Sensitive Instruments" section in Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Part II. Other Information
- ---------------------------
Item 1. Legal Proceedings
-----------------
For a discussion of various environmental matters, refer to Part I, Item 1 at
Note 5 and to Part I, Item 2 - MD&A of this report under the heading "Other
Matters."
Item 2. Changes in Securities
---------------------
On January 3, 2000, the Company issued 653 unregistered shares of Company common
stock to the non-employee directors of the Company. The shares were issued as
partial consideration for the directors' service during the quarter ended March
31, 2000, pursuant to the Company's Retainer Policy for Non-Employee Directors.
These transactions were exempt from registration by Section 4(2) of the
Securities Act of 1933, as amended, as transactions not involving a public
offering.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Annual Meeting of Shareholders of National Fuel Gas Company was
held on February 17, 2000. At that meeting, the shareholders elected directors,
appointed independent accountants, approved the Annual At Risk Compensation
Incentive Program, approved amendments to the National Fuel Gas Company 1997
Award and Option Plan, and rejected a shareholder proposal.
The total votes were as follows:
Against Broker
For or Withheld Abstain Non-Votes
--- ----------- ------- ---------
(i) Election of directors
to serve for a three-
year term:
- Eugene T. Mann 32,771,583 597,663 - -
- George L. Mazanec 32,832,827 536,419 - -
Directors whose term of office continued after the meeting:
Term expiring in 2001: Philip C. Ackerman, James V. Glynn and Bernard S. Lee.
Term expiring in 2002: Robert T. Brady, William J. Hill and Bernard J. Kennedy.
(ii) Appointment of
PricewaterhouseCoopers
LLP as independent
accountants 33,012,619 197,448 159,176 -
(iii) Approval of the Annual
At Risk Compensation
Incentive Program 31,137,734 1,664,810 566,699 -
(iv) Approval of amendments
to the National Fuel Gas
Company 1997 Award and
Option Plan 27,564,260 5,201,522 603,461 -
(v) Action on shareholder
proposed resolution
regarding minority
employment 1,597,964 23,187,734 2,454,065 11,740,343
Item 5. Other Information
-----------------
Richard Hare retired from his position as President and a Director of Supply
Corporation effective March 31, 2000. Mr. Hare was succeeded as President and a
Director of Supply Corporation by Dennis J. Seeley. Until March 31, 2000, Mr.
Seeley was a Senior Vice President of Distribution Corporation and (since
January 2000) Vice President of the Company. He resigned his positions in
Distribution Corporation and the Company upon his election as President of
Supply Corporation.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
(10) Material Contracts
10.1 National Fuel Gas Company 1997 Award and
Option Plan, as amended and restated through
February 17, 2000.
10.2 Severance Agreement, Release and Waiver
dated March 27, 2000, between National Fuel
Gas Supply
Corporation and Richard Hare
(12) Statements regarding Computation of Ratios:
Ratio of Earnings to Fixed Charges for the
Twelve Months Ended March 31, 2000 and the
Fiscal Years Ended September 30, 1995
through 1999.
(27) Financial Data Schedules
27.1 Financial Data Schedule for the Six Months
Ended March 31, 2000.
27.2 Restated Financial Data Schedule for the Six
Months Ended March 31, 1999.
(99) National Fuel Gas Company Consolidated
Statement of Income for the Twelve Months
Ended March 31, 2000 and 1999.
(b) Reports on Form 8-K
None.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL FUEL GAS COMPANY
-------------------------
(Registrant)
/s/Joseph P. Pawlowski
--------------------------------
Joseph P. Pawlowski
Treasurer and
Principal Accounting Officer
Date: May 15, 2000
------------