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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1998
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Commission File Number 1-3880
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NATIONAL FUEL GAS COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 13-1086010
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Lafayette Square
Buffalo, New York 14203
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(Address of principal executive offices) (Zip Code)
(716) 857-6980
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(Registrant's telephone number, including area code)
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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
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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 January 31, 1999:
38,604,338 shares.
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Company or Group of Companies for which Report is Filed:
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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)
Niagara Independence Marketing Company (NIM)
Seneca Independence Pipeline Company (SIP)
Utility Constructors, Inc. (UCI)
INDEX
Part I. Financial Information Page
----------------------------- ----
Item 1. Financial Statements
a. Consolidated Statements of Income and Earnings
Reinvested in the Business - Three Months
Ended December 31, 1998 and 1997 4
b. Consolidated Balance Sheets - December 31, 1998
and September 30, 1998 5 - 6
c. Consolidated Statement of Cash Flows - Three
Months Ended December 31, 1998 and 1997 7
d. Consolidated Statement of Comprehensive
Income - Three Months Ended December 31, 1998 and 1997 8
e. Notes to Consolidated Financial Statements 9 - 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15 - 37
Item 3. Quantitative and Qualitative Disclosures About Market Risk 37
Part II. Other Information
Item 1. Legal Proceedings *
Item 2. Changes in Securities 38
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 38
Signature 39
* 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.
This Form 10-Q contains "forward-looking statements" as defined by the Private
Securities Litigation Reform Act of 1995. Forward-looking statements should be
read with the cautionary statements included in this Form 10-Q at Item 2
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" (MD&A), under the heading "Safe Harbor for Forward-Looking
Statements." Forward-looking statements are all statements other than statements
of historical fact, including, without limitation, those statements that are
designated with a "1" following the statement, as well as those statements that
are identified by the use of the words "anticipates," "estimates," "expects,"
"intends," "plans," "predicts," "projects," and similar expressions.
Part I. Financial Information
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Item 1. Financial Statements
---------------------
National Fuel Gas Company
-------------------------
Consolidated Statements of Income and Earnings
----------------------------------------------
Reinvested in the Business
--------------------------
(Unaudited)
-----------
Three Months Ended
December 31,
------------------
(Thousands of Dollars, Except Per Share Amounts) 1998 1997
---- ----
INCOME
Operating Revenues $340,422 $371,021
-------- --------
Operating Expenses
Purchased Gas 111,006 164,267
Fuel Used in Heat and Electric Generation 19,973 4,334
Operation 75,271 65,513
Maintenance 5,583 6,347
Property, Franchise and Other Taxes 22,005 24,210
Depreciation, Depletion and Amortization 31,849 31,120
Income Taxes 17,900 22,950
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283,587 318,741
-------- --------
Operating Income 56,835 52,280
Other Income 4,742 1,168
-------- --------
Income Before Interest Charges and
Minority Interest in Foreign Subsidiaries 61,577 53,448
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Interest Charges
Interest on Long-Term Debt 17,367 11,488
Other Interest 5,327 3,999
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22,694 15,487
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Minority Interest in Foreign Subsidiaries (1,264) (427)
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Income Before Cumulative Effect 37,619 37,534
Cumulative Effect of Change in
Accounting for Depletion - (9,116)
-------- --------
Net Income Available for Common Stock 37,619 28,418
EARNINGS REINVESTED IN THE BUSINESS
Balance at October 1 428,112 472,595
-------- --------
465,731 501,013
Dividends on Common Stock
(1998 - $0.45; 1997 - $0.435) 17,298 16,582
-------- --------
Balance at December 31 $448,433 $484,431
======== ========
Basic Earnings Per Common Share:
Income Before Cumulative Effect $0.98 $0.98
Cumulative Effect of Change in Accounting for Depletion - (0.24)
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Net Income Available for Common Stock $0.98 $0.74
===== =====
Diluted Earnings Per Common Share:
Income Before Cumulative Effect $0.97 $0.97
Cumulative Effect of Change in Accounting for Depletion - (0.24)
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Net Income Available for Common Stock $0.97 $0.73
===== =====
Weighted Average Common Shares Outstanding:
Used in Basic Calculation 38,527,543 38,197,757
========== ==========
Used in Diluted Calculation 38,945,864 38,630,484
========== ==========
See Notes to Consolidated Financial Statements
Item 1. Financial Statements (Cont.)
----------------------------
National Fuel Gas Company
-------------------------
Consolidated Balance Sheets
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December 31,
1998 September 30,
(Unaudited) 1998
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(Thousands of Dollars)
ASSETS
Property, Plant and Equipment $3,237,606 $3,186,853
Less - Accumulated Depreciation, Depletion
and Amortization 964,657 938,716
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2,272,949 2,248,137
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Current Assets
Cash and Temporary Cash Investments 32,227 30,437
Receivables - Net 144,865 82,336
Unbilled Utility Revenue 52,040 15,403
Gas Stored Underground 24,757 31,661
Materials and Supplies - at average cost 25,841 24,609
Unrecovered Purchased Gas Costs 7,448 6,316
Prepayments 19,920 19,755
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307,098 210,517
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Other Assets
Recoverable Future Taxes 88,303 88,303
Unamortized Debt Expense 21,657 22,295
Other Regulatory Assets 40,819 41,735
Deferred Charges 10,514 8,619
Other 70,529 64,853
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231,822 225,805
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$2,811,869 $2,684,459
========== ==========
See Notes to Consolidated Financial Statements
Item 1. Financial Statements (Cont.)
----------------------------
National Fuel Gas Company
-------------------------
Consolidated Balance Sheets
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December 31,
1998 September 30,
(Unaudited) 1998
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(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common Stock Equity
Common Stock, $1 Par Value
Authorized - 200,000,000 Shares; Issued
and Outstanding - 38,555,568 Shares and
38,468,795 Shares, Respectively $ 38,555 $ 38,469
Paid in Capital 419,579 416,239
Earnings Reinvested in the Business 448,433 428,112
Cumulative Translation Adjustment 7,395 7,265
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Total Common Stock Equity 913,962 890,085
Long-Term Debt, Net of Current Portion 694,234 692,669
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Total Capitalization 1,608,196 1,582,754
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Minority Interest in Foreign Subsidiaries 26,141 25,479
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Current and Accrued Liabilities
Notes Payable to Banks and
Commercial Paper 392,200 326,300
Current Portion of Long-Term Debt 214,655 216,929
Accounts Payable 70,650 59,933
Amounts Payable to Customers 5,900 5,781
Other Accruals and Current Liabilities 91,559 80,480
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774,964 689,423
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Deferred Credits
Accumulated Deferred Income Taxes 266,974 258,222
Taxes Refundable to Customers 18,404 18,404
Unamortized Investment Tax Credit 12,115 11,372
Other Deferred Credits 105,075 98,805
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402,568 386,803
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Commitments and Contingencies - -
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$2,811,869 $2,684,459
========== ==========
See Notes to Consolidated Financial Statements
Item 1. Financial Statements (Cont.)
----------------------------
National Fuel Gas Company
-------------------------
Consolidated Statement of Cash Flows
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(Unaudited)
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Three Months Ended
December 31,
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(Thousands of Dollars) 1998 1997
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OPERATING ACTIVITIES
Net Income Available for Common Stock $ 37,619 $ 28,418
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Cumulative Effect of Change in Accounting
for Depletion - 9,116
Depreciation, Depletion and Amortization 31,849 31,120
Deferred Income Taxes 12,367 1,355
Minority Interest in Foreign Subsidiaries 1,264 427
Other 2,462 82
Change in:
Receivables and Unbilled Utility Revenue (99,201) (93,268)
Gas Stored Underground and Materials and
Supplies 5,681 10,129
Unrecovered Purchased Gas Costs (1,132) -
Prepayments (164) (669)
Accounts Payable 10,720 5,807
Amounts Payable to Customers 119 (1,399)
Other Accruals and Current Liabilities 9,596 28,032
Other Assets (4,020) 1,754
Other Liabilities 6,269 (3,832)
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Net Cash Provided by
Operating Activities 13,429 17,072
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INVESTING ACTIVITIES
Capital Expenditures (58,610) (37,946)
Investment in Subsidiaries, Net of Cash
Acquired - (15,871)
Other (716) 1,080
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Net Cash Used in Investing Activities (59,326) (52,737)
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FINANCING ACTIVITIES
Change in Notes Payable to Banks and Commercial
Paper 65,900 124,600
Reduction of Long-Term Debt (1,866) (50,536)
Dividends Paid on Common Stock (17,261) (16,549)
Proceeds from Issuance of Common Stock 2,410 1,608
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Net Cash Provided by
Financing Activities 49,183 59,123
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Effect of Exchange Rates on Cash (1,496) -
-------- --------
Net Increase in Cash and
Temporary Cash Investments 1,790 23,458
Cash and Temporary Cash Investments
at October 1 30,437 14,039
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Cash and Temporary Cash Investments at December 31 $ 32,227 $ 37,497
======== ========
See Notes to Consolidated Financial Statements
Item 1. Financial Statements (Cont.)
----------------------------
National Fuel Gas Company
-------------------------
Consolidated Statement of Comprehensive Income
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(Unaudited)
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Three Months Ended
December 31,
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(Thousands of Dollars) 1998 1997
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Net Income Available for Common Stock $37,619 $28,418
Other Comprehensive Income, Net of Tax:
Cumulative Translation Adjustment 130 (2,303)
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Comprehensive Income Available for
Common Stock $37,749 $26,115
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See Notes to Consolidated Financial Statements
Item 1. Financial Statements (Cont.)
----------------------------
National Fuel Gas Company
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Notes to Consolidated Financial Statements
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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, 1998, 1997 and 1996 that are included in
the Company's combined Annual Report to Shareholders/Form 10-K for 1998. The
fiscal 1999 consolidated financial statements will be examined by the Company's
independent accountants after the end of the fiscal year.
The earnings for the three months ended December 31, 1998 should not
be taken as a prediction of earnings for the entire fiscal year ending September
30, 1999. Most of the Company's business is seasonal in nature and is influenced
by weather conditions. Because of the seasonal nature of the Company's heating
business, earnings during the winter months normally represent a substantial
part of earnings for the entire 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.
Cumulative Effect of Change in Accounting. Effective October 1, 1997, Seneca
changed its method of depletion for oil and gas properties from the gross
revenue method to the units of production method. The units of production method
has been applied retroactively to prior years to determine the cumulative effect
through October 1, 1997. This cumulative effect reduced earnings for 1998 by
$9.1 million, net of income tax.
Item 1. Financial Statements (Cont.)
----------------------------
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 three months ended December 31,
1998 and 1997 amounted to $21.2 million and $10.3 million, respectively. Income
taxes paid during the three months ended December 31, 1998 and 1997 amounted to
$1.8 million and $1.4 million, respectively. The Company received a $1.0 million
refund of taxes and interest from the Internal Revenue Service (IRS) stemming
from the final settlement of the audits of years 1977-1994.
Reclassification. Certain prior year amounts have been reclassified to conform
with current year presentation.
Earnings per Common Share. Basic earnings per common share is computed by
dividing income available for common stock by the weighted average number of
common shares outstanding for the period. Diluted earnings per common share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Such additional shares are added to the denominator of the basic earnings per
common share calculation in order to calculate diluted earnings per common
share. The only potentially dilutive securities the Company has outstanding are
stock options. The diluted weighted average shares outstanding shown on the
Consolidated Statement of Income reflects the potential dilution as a result of
these stock options. Such dilution was determined using the Treasury Stock
Method as required by Statement of Financial Accounting Standards No. 128,
"Earnings per Share."
Note 2 - Income Taxes
The components of federal and state income taxes included in the Consolidated
Statement of Income are as follows (in thousands):
Three Months Ended
December 31,
------------------
1998 1997
---- ----
Operating Expenses:
Current Income Taxes
Federal $ 2,661 $18,921
State 1,586 2,112
Deferred Income Taxes
Federal 12,202 1,109
State 707 246
Foreign Income Taxes 744 562
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17,900 22,950
Other Income:
Deferred Investment Tax Credit (167) (152)
Minority Interest in Foreign Subsidiaries (264) (210)
Cumulative Effect of Change in Accounting - (5,737)
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Total Income Taxes $17,469 $16,851
======= =======
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):
Three Months Ended
December 31,
------------------
1998 1997
---- ----
Net income available for common stock $ 37,619 $ 28,418
Total income taxes 17,469 16,851
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Income before income taxes $ 55,088 $ 45,269
======== ========
Income tax expense, computed at
statutory rate of 35% $ 19,281 $ 15,844
Increase (reduction) in taxes resulting from:
State income taxes 1,490 998
Depreciation 544 662
Prior years tax adjustment (1,286) -
Foreign tax in excess of (less than)
statutory rate (1,638) 127
Miscellaneous (922) (780)
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Total Income Taxes $ 17,469 $ 16,851
======== ========
Significant components of the Company's deferred tax liabilities
(assets) were as follows (in thousands):
At December 31, 1998 At September 30, 1998
-------------------- ---------------------
Deferred Tax Liabilities:
Abandonments $ 17,787 $ 15,545
Excess of tax over book
depreciation 127,952 132,138
Exploration and
intangible well
drilling costs 153,375 147,795
Other 56,229 42,109
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Total Deferred Tax
Liabilities 355,343 337,587
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Deferred Tax Assets:
Overheads capitalized
for tax purposes (23,278) (22,484)
Other (65,091) (56,881)
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Total Deferred Tax
Assets (88,369) (79,365)
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Total Net Deferred
Income Taxes $266,974 $258,222
======== ========
The IRS audits of the Company for the years 1977 - 1994 were settled
during December 1998. Net income for the three months ended December 31, 1998
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 three months ended December 31, 1998, the Company
issued 30,040 shares of common stock under the Company's section 401(k) Plans,
27,326 shares to participants in the Company's Dividend Reinvestment Plan and
7,820 shares to participants in the Company's Customer Stock Purchase Plan.
Additionally, 21,587 shares of common stock were issued under the Company's
stock option and stock award plans, including 4,580 shares of restricted stock.
On December 10, 1998, 615,500 stock options were granted at an
exercise price of $46.0625 per share.
Note 4 - Derivative Financial Instruments
Seneca has entered into certain price swap agreements and call options to manage
a portion of the market risk associated with fluctuations in the price of
natural gas and crude oil, thereby providing more stability to its operating
results. These agreements are not held for trading purposes.
The natural gas price swap agreements call for Seneca to receive
monthly payments from (or make payment to) other parties based upon the
difference between a fixed and a variable price as specified by the agreement.
The variable price is a quoted natural gas price in "Inside FERC." These
variable prices are highly correlated with the market prices received by Seneca
for its natural gas production. At December 31, 1998, Seneca had natural gas
price swap agreements covering a notional amount of 15.7 Bcf extending through
fiscal 2000 at a weighted average fixed rate of $2.41 per Mcf. Seneca had
unrecognized gains of approximately $4.9 million related to these natural gas
price swap agreements.
The crude oil price swap agreements call for Seneca to receive
monthly payments from a counterparty when the average New York Mercantile
Exchange (NYMEX) price falls below a fixed price of $18.00 per barrel (bbl),
such payments being subject to a floor price of $12.50 per bbl. In calendar
1999, if the crude oil price per the NYMEX exceeds $18.00 per bbl, Seneca must
pay the counterparty the price differential multiplied by two times the notional
quantity. Furthermore, the counterparty has been given a call option based on
NYMEX natural gas prices for calendar 1999. In calendar 2000, if the crude oil
price per the NYMEX exceeds $18.00 per bbl, Seneca must pay the counterparty the
price diffferential. Seneca would also owe the counterparty an additional
payment based on one of two additional payment calculations, whichever is
greater. If both additional payment calculations are equal in value, only one of
the additional payments would be made. The additional payment calculations are
as follows:
1) Excess of the crude oil NYMEX price over $18.00 per bbl times the
notional quantity, or
2) A call option for the counterparty based on NYMEX natural gas
prices for calendar 2000.
The crude oil price swap agreements cover a notional amount of 1,462,000 bbls
extending through fiscal 2001 at a fixed rate of $18.00 per bbl (as discussed
above). The written call options cover a notional amount of 24.3 Bcf
Item 1. Financial Statements (Cont.)
----------------------------
extending through fiscal 2001 at weighted average strike price of $2.68 per Mcf.
At December 31, 1998, Seneca had net unrecognized gains or approximately $1.5
million related to these crude oil price swap agreements and written call
options.
Seneca has also purchased call options based on NYMEX crude oil
prices to protect itself in the event that crude oil prices should exceed $18.00
per bbl. At December 31, 1998, the notional amount of the call options was
1,832,000 bbls extending through fiscal 2000 at a strike price of $20.00 per
bbl. The premiums associated with these call options amounted to approximately
$0.4 million and have been deferred on the Consolidated Balance Sheet until the
hedged commodity transaction occurs, at which point they will be reflected in
operating revenues in the Consolidated Statement of Income.
Seneca recognized gains of $1.6 million related to its price swap
agreements during the quarter ended December 31, 1998 and net losses of $8.4
million on such price swap agreements during the quarter ended Decmeber 31,
1997. Gains or losses from these price swap agreements are accrued in operating
revenues on the Consolidated Statement of Income at the contract settlement
dates.
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, before entering into a
price swap agreement with a new counterparty, management performs a credit check
and prepares a report indicating the results of the credit investigation. This
report must be approved by Seneca's board of directors after which a Master Swap
Agreement is executed between Seneca and the counterparty. On an ongoing basis,
periodic reports are prepared by management to monitor counterparty credit
exposure. In the case of the call options that Seneca purchased, the
counterparty selected was one in which Seneca currently has a Master Swap
Agreement, meaning that a credit investigation had been completed and continues
to be monitored. Considering the procedures in place, the Company does not
anticipate any material impact to its financial position, results of operations,
or cash flows as a result of nonperformance by counterparties.
NFR utilizes exchange-traded futures and options to manage a portion of
the market risk associated with fluctuations in the price of natural gas. Such
futures and options are not held for trading purposes. At December 31, 1998, NFR
had natural gas futures contracts related to gas purchase and sale commitments
covering 9.6 Bcf of gas on a net basis extending through 2000 at a weighted
average contract price of $2.69 per Mcf. NFR also had sold natural gas options
related to gas purchase and sale commitments covering 2.8 Bcf of gas on a net
basis extending through 1999 at a weighted average strike price of $2.84 per
Mcf.
Gains or losses from natural gas futures are recorded in Other Deferred
Credits on the Consolidated Balance Sheet until the hedged commodity transaction
occurs, at which point they are reflected in operating revenues in the
Consolidated Statement of Income. At December 31, 1998, NFR had unrealized
losses of $6.1 million related to these futures contracts and options. NFR
recognized net losses of $1.0 million related to futures contracts and options
during the quarter ended December 31, 1998 and a net gain of $1.4 million on
such futures and options during the quarter ended December 31, 1997. Since these
futures contracts and options qualify, and have been designated, as hedges these
net losses and gains were substantially offset by the related commodity
transaction.
Item 1. Financial Statements (Cont.)
----------------------------
Note 5 - Commitments and Contingencies
Environmental Matters. The Company is subject to various federal, state and
local laws and regulations relating to the protection of the environment. The
Company has established procedures for the ongoing evaluation of its operations
to identify potential environmental exposures and assure compliance with
regulatory policies and procedures.
It is the Company's policy to accrue estimated environmental clean-up
costs (investigation and remediation) when such amounts can reasonably be
estimated and it is probable that the Company will be required to incur such
costs. Distribution Corporation has estimated its clean-up costs related to
former manufactured gas plant sites and third party waste disposal sites will be
in the range of $10.9 million to $11.9 million. At December 31, 1998,
Distribution Corporation has recorded the minimum liability of $10.9 million.
The Company is currently not aware of any material additional exposure due to
environmental liabilities. However, adverse changes in environmental regulations
or other factors could impact the Company.
In New York and Pennsylvania, Distribution Corporation is recovering
site investigation and remediation costs in rates. Accordingly, the Consolidated
Balance Sheet at December 31, 1998 includes related regulatory assets in the
amount of approximately $11.7 million.
The Company, in its international operations in the Czech Republic, is
in the process of constructing new fluidized-bed boilers at the district heating
and power generation plant of Prvni severozapadni teplarenska, a.s. (PSZT) to
comply with certain clean air standards mandated by the Czech Republic
government. Capital expenditures related to this construction incurred by PSZT
for the three months ended December 31, 1998 were approximately $5.5 million. An
additional $30.1 million is budgeted for this construction for the rest of 1999.
For further discussion refer to Note H - Commitments and Contingencies
under the heading "Environmental Matters" in Item 8 of the Company's 1998 Form
10-K.
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 at this time, none of this
litigation, and none of these regulatory matters, is expected to have a material
effect on the financial condition of the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
RESULTS OF OPERATIONS
Earnings.
The Company's earnings were $37.6 million, or $0.98 per common share ($0.97 per
common share on a diluted basis), for the first quarter ended December 31, 1998.
This compares to earnings of $28.4 million, or $0.74 per common share ($0.73 per
common share on a diluted basis), for the quarter ended December 31, 1997.
Earnings for the quarter ended December 31, 1997 include a non-cash cumulative
effect of a change in accounting. Without this non-cash item, earnings for the
three months ended December 31, 1997 were $37.5 million, or $0.98 per common
share ($0.97 per common share on a diluted basis). This accounting change was a
change in depletion methods for the Exploration and Production segment's oil and
gas assets, which had a negative $9.1 million (after-tax), or $0.24 per common
share, non-cash cumulative effect through October 1, 1997. The earnings for the
quarter ended December 31, 1998 reflect approximately $3.9 million of after-tax
income from the final settlement of the Internal Revenue Service (IRS) audits of
years 1977-1994, and approximately $4.0 million of after-tax expense related to
an early retirement offer to certain salaried, non-union hourly and union
employees of the Company's Utility and Pipeline and Storage segments, which was
effective December 1, 1998.
For the first quarter of fiscal 1999, higher earnings were reported in
the International segment (which incurred a loss in the same period last year),
the Pipeline and Storage segment and the Other Nonregulated segment. The Utility
segment reported lower earnings. The Exploration and Production segment's
earnings were equivalent to the prior year's first quarter.
In the International segment, Horizon's share of earnings from its
investment in Prvni severozapadni teplarenska, a.s. (PSZT), a company with
district heating and power generation operations located in the Czech Republic,
was the primary reason for its higher earnings. Horizon's initial investment in
PSZT was in February 1998.
In the Pipeline and Storage segment, earnings were up due mainly to
Supply Corporation's portion of interest income related to the previously
mentioned final settlement of IRS audits and related reduction in income taxes.
These positive earnings from the IRS settlement helped to offset lower revenues
from unbundled pipeline sales and open access transportation, as well as Supply
Corporation's share of the above-noted early retirement expense.
The Other Nonregulated segment's earnings were up because of higher
earnings in the timber operations, and because this segment's natural gas
marketing operation experienced higher margins and volumes.
The Utility segment's earnings are down mainly because of the expense
related to the early retirement offer, significantly warmer weather for the
first quarter as compared to the prior year's first quarter, and a rate
reduction in New York that became effective October 1, 1998. The Pennsylvania
jurisdiction was impacted more by the warmer weather since it does not have the
benefit of a weather normalization clause as the New York
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
jurisdiction does. Also, revenues in New York have been reduced to reflect a
special reserve to be applied against incremental costs resulting from the State
of New York Public Service Commission's (PSC) gas restructuring effort. A slight
offset to these items was a reduction of interest expense related to the final
settlement of the IRS audits.
In the Exploration and Production segment, earnings are equivalent to
the prior year's first quarter. Although oil production increased 125%, mainly
from the properties acquired in California in the prior year, oil prices, (after
hedging) were below the prior year's first quarter. While gas production was
basically flat compared to last year's first quarter, gas prices, (after
hedging) were up slightly from last year. Also reserve additions from the
California acquisitions have lowered the depletion rate this year. Interest
expense increased as a result of the borrowings related to these acquisitions.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
OPERATING REVENUES
(in thousands of dollars) Three Months Ended
December 31,
-----------------------------
1998 1997 % Change
---- ---- --------
Utility
Retail Revenues:
Residential $165,081 $209,737 (21.3)
Commercial 29,180 45,201 (35.4)
Industrial 3,405 6,412 (46.9)
-------- --------
197,666 261,350 (24.4)
Off-System Sales 6,849 14,750 (53.6)
Transportation 18,952 15,177 24.9
Other (1,317) (436) (202.1)
--------- --------
222,150 290,841 (23.6)
-------- --------
Pipeline and Storage
Storage Service 15,786 16,486 (4.2)
Transportation 23,450 23,768 (1.3)
Other 2,859 5,604 (49.0)
-------- --------
42,095 45,858 (8.2)
-------- --------
Exploration and
Production 31,628 24,708 28.0
-------- --------
International 40,265 11,589 247.4
-------- --------
Other Nonregulated 29,215 24,177 20.8
-------- --------
Less-Intersegment
Revenues 24,931 26,152 (4.7)
-------- --------
$340,422 $371,021 (8.2)
======== ========
OPERATING INCOME (LOSS) BEFORE
INCOME TAXES
(in thousands of dollars) Three Months Ended
December 31,
-----------------------------
1998 1997 % Change
---- ---- --------
Utility $ 36,624 $ 47,476 (22.9)
Pipeline and Storage 18,829 22,850 (17.6)
Exploration and
Production 8,239 3,448 139.0
International 8,697 886 NM
Other Nonregulated 2,761 1,072 157.6
Corporate (415) (502) 17.3
-------- --------
$ 74,735 $ 75,230 (0.7)
======== ========
NM = Not meaningful.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
SYSTEM NATURAL GAS VOLUMES
(millions of cubic feet-MMcf)
Three Months Ended
December 31,
-----------------------------
1998 1997 % Change
---- ---- --------
Utility Gas Sales
Residential 20,215 24,789 (18.5)
Commercial 3,939 5,914 (33.4)
Industrial 846 1,242 (31.9)
Off-System 2,776 4,478 (38.0)
------- -------
27,776 36,423 (23.7)
------- -------
Non-Utility Gas Sales
Production(in
equivalent MMcf) 14,227 10,890 30.6
------- -------
Total Gas Sales 42,003 47,313 (11.2)
------- -------
Transportation
Utility 14,969 14,650 2.2
Pipeline and Storage 81,538 94,403 (13.6)
Nonregulated 253 276 (8.3)
------- -------
96,760 109,329 (11.5)
------- -------
Marketing Volumes 7,401 5,182 42.8
------- -------
Less-Inter and
Intrasegment Volumes:
Transportation 42,773 44,392 (3.6)
Production 983 994 (1.1)
------- -------
43,756 45,386 (3.6)
------- -------
Total System Natural Gas
Volumes 102,408 116,438 (12.0)
======= =======
Utility.
Operating revenues for the Utility segment decreased $68.7 million for the
quarter ended December 31, 1998, as compared with the same period a year ago.
This decrease primarily reflects the recovery of lower gas costs which resulted
from a decrease in gas sales (an 8.6 billion cubic feet (Bcf) decrease for the
quarter ended December 31, 1998), and a decrease in the average cost of
purchased gas ($3.81 and $4.41 per thousand cubic feet (Mcf) during the quarters
ended December 31, 1998 and 1997, respectively), as well as the general base
rate decrease in the New York jurisdiction effective October 1, 1998. While the
decrease in gas sales also reflects, in part, the migration of certain retail
customers to transportation service in both the New York and Pennsylvania
jurisdictions, as a result of new aggregator services, the major reason for the
decrease stems from warmer weather and lower normalized gas usage per customer
account. The switch to new aggregator services is discussed further in the "Rate
Matters" section that
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
follows. Other operating revenues in the quarter ended December 31, 1998 were
reduced by the recording of a gas restructuring reserve, to be applied against
incremental costs resulting from the New York PSC's gas restructuring effort.
Operating income before income taxes for the Utility segment decreased
$10.9 million for the quarter ended December 31, 1998, as compared to the same
period a year ago. This decrease resulted primarily from the revenue decrease
noted above combined with an increase in Operation and Maintenance (O&M) expense
primarily resulting from the early retirement offer, also mentioned above. The
negative impact of warmer weather was greater in the Pennsylvania jurisdiction,
since Pennsylvania does not have a weather normalization clause (WNC). The
impact of warmer weather experienced by the New York jurisdiction was tempered
by the WNC, which preserved pretax operating income of $3.6 million for the
quarter ended December 31, 1998, in comparison to the benefit to customers of
$0.3 million for the quarter ended December 31, 1997.
Degree Days.
Three Months Ended December 31:
- -------------------------------
Percent (Warmer) Colder
in 1998 Than
Normal 1998 1997 Normal 1997
- ---------------------------------------------------------------------
Buffalo 2,260 1,971 2,294 (12.8) (14.1)
Erie 2,045 1,732 2,096 (15.3) (17.4)
Pipeline and Storage.
Operating income before income taxes for the Pipeline and Storage segment
decreased $4.0 million for the quarter ended December 31, 1998, as compared with
the same period a year ago. The decrease is primarily attributable to lower
revenue from unbundled pipeline sales and open access transportation but this
decrease was offset slightly by lower O&M expense. O&M expense decreased as a
result of lower benefits expense, but this decrease was partially offset partly
by the impact of reversing a reserve for a storage project in the quarter ending
December 31, 1997, which did not recur in the quarter ending December 31, 1998.
The decrease in benefits expense occurred despite the costs related to the early
retirement offer effective December 1, 1998.
Exploration and Production.
Operating income before income taxes from the Company's Exploration and
Production segment increased $4.8 million for the quarter ended December 31,
1998, compared with the same period a year ago. This increase resulted from
higher oil and gas revenues (net of hedging activities) during the quarter and
lower depletion expense, offset in part by a higher lease operating expense. Oil
and gas revenues (net of hedging activities) increased mainly as a result of
West Coast production from the properties acquired in the Whittier Trust Company
(Whittier), HarCor Energy, Inc. (HarCor) and
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
Bakersfield Energy Resources (BER) acquisitions. Increases in the weighted
average price of gas (after hedging) also helped to increase revenues for the
quarter while significantly lower oil prices (after hedging) reduced the current
quarter's revenues (see tables below for production and price information). The
decrease in depletion expense is the result of a lower depletion rate,
determined under the units of production method, because of the significant
addition to reserves resulting from the Whittier, HarCor and BER acquisitions in
the prior year, as well as the continued success in adding new reserves from
exploratory drilling. During the quarter, reserves increased 35 Bcf equivalent
(Bcfe), from 725 Bcfe at September 30, 1998 to 760 Bcfe at December 31, 1998.
The increase in reserves was the result of successful drilling in the Gulf of
Mexico, offshore Texas and Louisiana, as well as onshore in West Texas and in
California, in the Midway Sunset Field and Lost Hills Field. Lease operating
expense increased mainly due to the additional expenses of operating the
properties acquired in the prior year.
PRODUCTION VOLUMES
Exploration and Production.
Three Months Ended
December 31,
--------------------------
1998 1997 % Change
Gas Production - (MMcf)
Gulf Coast 6,435 6,842 (5.9)
West Coast 803 254 216.1
Appalachia 1,157 1,208 (4.2)
----- -----
8,395 8,304 1.1
===== =====
Oil Production - (Thousands of
Barrels - bbls)
Gulf Coast 333 314 6.1
West Coast 636 114 457.9
Appalachia 3 3 -
--- ---
972 431 125.5
=== ===
AVERAGE PRICES
Exploration and Production.
Three Months Ended
December 31,
---------------------------
1998 1997 % Change
---- ---- --------
Average Gas Price/Mcf
Gulf Coast $1.99 $3.04 (34.5)
West Coast $2.39 $2.40 (0.4)
Appalachia $2.41 $3.01 (19.9)
Weighted Average $2.09 $3.01 (30.6)
Weighted Average After
Hedging $2.16 $2.06 4.9
Average Oil Price/bbl
Gulf Coast $11.86 $19.01 (37.6)
West Coast $ 8.82 $15.90 (44.5)
Appalachia $12.99 $19.23 (32.4)
Weighted Average $ 9.88 $18.19 (45.7)
Weighted Average After
Hedging $10.84 $17.17 (36.9)
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
Seneca has entered into certain price swap agreements to manage a
portion of the market risk associated with fluctuations in the price of natural
gas and crude oil, thereby providing more stability to its operating results
(refer to "Market Risk Sensitive Instruments" in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for further
discussion). The following summarizes Seneca's settlements under such price swap
agreements:
Three Months Ended
December 31,
---------------------
(thousands of dollars) 1998 1997
---- ----
Natural Gas Price Swap Agreements:
Notional Quantities - Equivalent Bcf 5.8 7.4
Gain (Loss) $618 ($7,949)
Crude Oil Price Swap Agreements:
Notional Quantities - Equivalent bbls 135,000 234,000
Gain (Loss) $936 ($438)
International.
Operating income before income taxes for the International segment increased
$7.8 million for the quarter ended December 31, 1998, compared with the same
period a year ago. This increase, as well as the significant revenue increase
shown in the "Operating Revenue" table above, resulted from the operations of
PSZT, a district heating and power generation plant located in the northern part
of the Czech Republic.
Horizon first acquired 75.3% of the outstanding shares of PSZT in
February 1998 and currently owns 86.2%. Accordingly, the prior year's first
quarter reflected no operating income or revenues from PSZT. The following table
summarizes the heating and electricity sales of the International segment for
the quarters ended December 31, 1998 and 1997, respectively:
Heating and Electric Volumes
Three Months Ended December 31:
1998 1997
---- ----
Heating (Gigajoules) 3,978,897 1,030,181
Electricity (Megawatt hours) 306,281 12,876
Heating and Electric Revenues
Three Months Ended December 31:
(in thousands)
1998 1997
---- ----
Heating $29,041 $ 7,874
Electricity $ 9,913 $ 384
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
Other Nonregulated.
The Other Nonregulated operations experienced an increase in operating income
before income taxes of $1.7 million for the quarter ended December 31, 1998,
compared with the same period a year ago. This increase is the result of
improved performance in the Company's timber operations and energy marketing
subsidiary. The increased performance in the timber operations resulted from the
1998 purchases of timber property and two lumber mills. The increased
performance in NFR, the Company's energy marketing subsidiary, was the result of
increased volumes and margins.
Income Taxes.
Income taxes decreased $5.0 million for the quarter ended December 31, 1998,
primarily as a result of a decrease in pretax income (pretax income before
cumulative effect, for the three months ended December 31, 1997). For further
discussion of income taxes, refer to Note 2 - Income taxes in Item 1 of this
report.
Other Income.
Other income increased $3.6 million for the quarter ended December 31, 1998.
This increase resulted mainly from interest income related to the final
settlement of IRS audits of years 1977-1994.
Interest Charges.
Total interest charges increased $7.2 million for the quarter ended December 31,
1998. Interest on long-term debt increased $5.9 million for the quarter mainly
because of a higher average amount of long-term debt outstanding compared to the
same period a year ago. Long-term debt balances have grown significantly as a
result of last year's acquisitions of Severoceske teplarny, a.s. (SCT), PSZT,
HarCor, Whittier and BER. Other interest increased $1.3 million for the quarter
primarily due to an increase in the average amount of short-term debt
outstanding, offset by a reduction in interest expense related to the final
settlement of the previously mentioned IRS audits.
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary sources of cash during the three-month period consisted of
cash provided by operating activities and short-term bank loans and commercial
paper.
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, the cumulative
effect of change in accounting for depletion, minority interest in foreign
subsidiaries and allowance for funds used during construction.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
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 Company
considers supplier refunds and over-recovered purchased gas costs as a
substitute for short-term borrowings. The impact of weather on cash flow is
tempered in the Utility segment's New York rate jurisdiction by its WNC and in
the Pipeline and Storage segment by Supply Corporation's straight fixed-variable
(SFV) rate design.
Because of the seasonal nature of the Company's heating business,
revenues are relatively high during the three months ended December 31 and
receivables historically increase from September to December because of winter
weather.
The storage gas inventory normally declines during the first and second
quarters of the fiscal 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 $13.4 million for the
three months ended December 31, 1998, a decrease of $3.7 million compared with
$17.1 million provided by operating activities for the three months ended
December 31, 1997. The majority of this decrease occurred in the Utility
segment. The Utility segment experienced a decrease in cash receipts from gas
sales and transportation service (sales were down mainly due to warmer weather,
as well as a rate reduction in the New York jurisdiction effective October 1,
1998), partially offset by lower cash payments for gas purchases.
Investing Cash Flow.
Capital Expenditures and Other Investing Activities
- ---------------------------------------------------
Capital expenditures represent the Company's additions to property, plant and
equipment and are exclusive of other investments in corporations (stock
acquisitions) and/or partnerships. Such investments are treated separately in
the Statement of Cash Flows and further discussed in the segment discussion
below.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
The Company's capital expenditures and other investments totaled $60.4
million during the three months ended December 31, 1998. The following table
summarizes the Company's capital expenditures and other investments by business
segment:
(in millions of dollars)
Other Total
Capital Investments Capital
Expenditures through Expenditures and
through 12/31/98 12/31/98 Other Investments
---------------- -------- -----------------
Utility $ 9.4 $ - $ 9.4
Pipeline and Storage 7.4 1.8 9.2
Exploration and Production 32.0 - 32.0
International 7.0 - 7.0
Other Nonregulated 2.8 - 2.8
----- ----- -----
$58.6 $ 1.8 $60.4
===== ===== =====
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.
During the quarter, SIP made a $1.8 million investment in Independence
Pipeline Company, a Delaware general partnership bringing its total investment
through December 31, 1998 to $7.3 million. This investment represents a
one-third partnership interest. The investment has been financed with short-term
borrowings. Independence Pipeline Company intends to build a 370 mile natural
gas pipeline (Independence Pipeline Project) from Defiance, Ohio to Leidy,
Pennsylvania at an estimated cost of $675 million.1 If the Independence Pipeline
Project is not constructed, SIP's share of the development costs (including
SIP's investment in Independence Pipeline Company) is estimated not to exceed
$9.0 - $13.0 million.
Exploration and Production
- --------------------------
The Exploration and Production segment capital expenditures for the three months
ended December 31, 1998 included approximately $20.8 million for Seneca's
offshore program in the Gulf of Mexico, including offshore drilling
expenditures, offshore construction, lease acqusition costs and geological and
geophysical expenditures. Offshore drilling was concentrated on Vermilion 309,
Galveston 239, Vermilion 252/253, Brazos 414S and Brazos 375. Offshore
construction occurred primarily at West Delta 78 and Vermilion 309. Lease
acquisition costs resulted from successful bidding on six state of Texas tracts
in the Gulf of Mexico. Offshore geological and geophysical expenditures were
made for purchases of 3-D seismic data.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
The remaining $11.2 million of capital expenditures included onshore
drilling, construction and recompletion costs for wells located in Louisiana,
Texas, Alabama and California as well as onshore geological and geophysical
costs, including the purchase of certain 3-D seismic data and fixed asset
purchases.
International
- -------------
The majority of the International segment capital expenditures were made by PSZT
for the construction of new fluidized-bed boilers at its district heating and
power generation plant to comply with stricter clean air standards. Short-term
borrowings and cash from operations were used to finance these capital
expenditures.
Other Nonregulated
- ------------------
Other Nonregulated capital expenditures consisted primarily of land and timber
purchases for Seneca's timber operations, as well as the installation of new
equipment for Highland's sawmill and kiln operations.
The capital expenditure programs of the Company's subsidiaries are
under continuous review. The amounts are subject to modification for
opportunities in the natural gas industry such as the acquisition of attractive
oil and gas properties or storage facilities and the expansion of transmission
line capacities. While the majority of capital expenditures in the Utility
segment are necessitated by the continued need for replacement and upgrading of
mains and service lines, the magnitude of future capital expenditures in the
Company's other business segments depends, to a large degree, upon market
conditions.1
Financing Cash Flow.
Consolidated short-term debt increased by $65.9 million during the first three
months of fiscal 1999. The Company continues to consider short-term bank loans
and commercial paper important sources of cash for temporarily financing capital
expenditures, other investments and/or acquisitions and working capital needs.
In addition, the Company considers supplier refunds and over-recovered purchased
gas costs as a substitute for short-term debt. Fluctuations in these items can
have a significant impact on the amount and timing of short-term debt.
At December 31, 1998, the Company had $200.0 million of debentures
and/or medium-term notes remaining unissued and registered with the SEC under a
shelf registration filed pursuant to the Securities Act of 1933. In March 1998,
the Company obtained authorization from the SEC, under the Public Utility
Holding Company Act of 1935, to issue, in the aggregate, long-term debt
securities and equity securities amounting to $2.0 billion during the order's
authorization period, which extends to December 31, 2002.
The Company's indenture contains covenants which limit, among other
things, the incurrence of funded debt. Funded debt basically is indebtedness
maturing, or extendable to, more than one year after the date of issuance.
Because of the impairment of oil and gas properties recorded by the Company in
March 1998, these covenants will restrict the Company's ability to issue
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
substantial amounts of additional funded debt, with certain exceptions, until
the third quarter of fiscal 1999. This will not, however, limit the Company's
issuance of funded debt to refund existing funded debt. The Company has $100.0
million of 5.58% medium-term notes coming due March 1, 1999. It is the intention
of the Company to refund this debt with $100.0 million of medium-term notes in
late February 1999.1
The Company has adequate financing resources available to meet expected
operating and capital requirements.1 At December 31, 1998, the Company had
regulatory authorizations and unused short-term credit lines that would have
permitted it to borrow an additional $357.8 million of short-term debt.
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, at this time, 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.1
Market Risk Sensitive Instruments
For a complete discussion of market risk sensitive instruments, refer to "Market
Risk Sensitive Instruments" in Item 7 of the Company's 1998 Form 10-K. The
following discussion is an update to that disclosure.
Energy Commodity Price Risk
Certain of the Company's non-regulated subsidiaries (primarily Seneca and NFR)
utilize various derivative financial instruments (derivatives), including price
swap agreements and exchange-traded futures and options, as part of the
Company's overall energy commodity price risk management strategy. The following
table summarizes the natural gas price swap agreements in effect at December 31,
1998. The table does not reflect the earnings impact of the physical
transactions that are expected to offset the financial gains and losses arising
from the use of the natural gas price swap agreements.
Natural Gas Price Swap Agreements
- ---------------------------------
Expected
Maturity Dates
--------------
Fiscal Fiscal
1999 2000 Total
------ ------ -----
Notional Quantities (Equivalent Bcf) 13.3 2.4 15.7
Weighted Average Fixed Rate (per Mcf) $2.41 $2.37 $2.41
Weighted Average Variable Rate (per Mcf)* $2.19 $2.19 $2.19
*Index prices at December 31, 1998. These prices do not represent the final
prices at which the swap agreements will be settled.
At December 31, 1998, Seneca would have received approximately $4.9 million to
terminate the natural gas price swap agreements in effect at that date.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
During the quarter ended December 31, 1998, the Company entered into
additional crude oil price swap agreements containing written call options. The
following table summarizes the crude oil swap agreements in effect at December
31, 1998. The table does not reflect the earnings impact of the physical
transactions that are expected to offset the financial gains and losses arising
from the use of the crude oil price swap agreements.
Crude Oil Price Swap Agreements
- -------------------------------
Expected Maturity Dates
-----------------------
Fiscal Fiscal Fiscal
1999 2000 2001 Total
------ ------ ------ -----
Notional Quantities
(Equivalent bbls) 546,000 732,000 184,000 1,462,000
Weighted Average
Fixed Rate (per bbl) $18.00 $18.00 $18.00 $18.00
Weighted Average
Variable Rate (per bbl) $12.50 $12.50 $12.50 $12.50
Under the terms of the crude oil price swap agreements shown above,
which cover calendar 1999 and calendar 2000, Seneca receives payments from the
counterparty when the average NYMEX crude oil price falls below a fixed price of
$18.00 per bbl, such payments being subject to a floor price of $12.50 per bbl.
The average NYMEX price was below $12.50 per bbl at December 31, 1998.
In calendar 1999, if the crude oil price per the NYMEX exceeds $18.00
per bbl, Seneca must pay the counterparty the price differential multiplied by
two times the notional quantity. Furthermore, the counterparty has been given a
call option based on NYMEX natural gas prices for calendar 1999. The notional
amount of the call option for calendar 1999 is 10.4 Bcf equivalent at a weighted
average strike price of $2.76 per Mcf.
In calendar 2000, if the crude oil price per the NYMEX exceeds $18.00
per bbl, Seneca must pay the counterparty the price differential. Seneca would
also owe the counterparty an additional payment based on one of two additional
payment calculations, whichever is greater. If both additional payment
calculations are equal in value, only one of the additional payments would be
made. The additional payment calculations are as follows:
1) Excess of the crude oil NYMEX price over $18.00 per bbl times the
notional quantity, or
2) A call option for the counterparty based on NYMEX natural gas
prices for calendar 2000. The notional amount of the call option
for calendar 2000 is 13.9 Bcf equivalent at a weighted average
strike price of $2.62 per Mcf.
At December 31, 1998, Seneca would have receieved approximately $4.4
million to terminate the crude oil price swap agreements outstanding at that
date. However, Seneca would have paid approximately $2.9 million to settle the
natural gas call options outstanding at that date.
To protect itself in the event that crude oil prices should exceed
$18.00 per bbl, Seneca has purchased call options with a strike price of $20.00
per bbl covering the period of July 1999 through September 2000. The notional
amount of these call options is 1,832,000 bbls. Seneca paid approximately $0.4
million to purchase the call options.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
The following table discloses the net notional quantities, weighted
average contract prices and weighted average settlement prices by expected
maturity date at December 31, 1998 for exchange-traded futures contracts
utilized by NFR to manage natural gas price risk. The table does not reflect the
earnings impact of the physical transactions that are expected to offset the
financial gains and losses arising from the use of the futures contracts.
Exchange-Traded Futures Contracts
- ---------------------------------
Expected
Maturity Dates
--------------
Fiscal Fiscal
1999 2000 Total
------ ------ -----
Contract Volumes Purchased (Equivalent Bcf) 5.8 3.8 9.6
Weighted Average Contract Price
(per Mcf) $2.78 $2.57 $2.69
Weighted Average Settlement Price
(per Mcf) $2.04 $2.38 $2.17
At December 31, 1998, NFR would have paid approximately $5.5 million
to settle the exchange-traded futures outstanding at that date.
The following table discloses the net notional quantities and weighted
average strike prices by expected maturity dates at December 31, 1998 for
exchange-traded options utilized by NFR to manage natural gas price risk. The
table does not reflect the earnings impact of the physical transactions that
would offset any financial gains or losses that might arise if an option were to
be exercised.
Exchange-Traded Options
- -----------------------
Expected
Maturity Dates
--------------
Fiscal
1999
------
Option Volumes Purchased (Sold)(Equivalent Bcf) (2.8)
Weighted Average Strike Price
(per Mcf) $2.84
At December 31, 1998, NFR would have paid approximately $0.6 million
to settle the exchange-traded options outstanding at that date.
Exchange Rate Risk
Horizon's investment (through intermediate subsidiaries) in the Czech
Republic is valued in Czech Korunas, and as such, this investment is subject to
currency exchange risk when the Czech Korunas are translated into U.S. Dollars.
During the three months ended December 31, 1998, the Czech Koruna increased in
value in relation to the U.S. dollar, resulting in a $0.1 million positive
adjustment to the Cumulative Translation Adjustment. Further valuation changes
to the Czech Koruna would result in corresponding positive or negative
adjustments to the Cumulative Translation Adjustment. Management cannot predict
whether the Czech Koruna will increase or decrease in value against the U.S.
Dollar.1
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
RATE MATTERS
Utility Operation.
New York Jurisdiction
On October 21, 1998, the PSC approved a rate plan for Distribution Corporation
for the period beginning October 1, 1998 and ending September 30, 2000. The plan
is the result of a settlement agreement entered into by Distribution
Corporation, Staff for the PSC (Staff), Multiple Intervenors (an advocate for
large industrial customers) and the State Consumer Protection Board. Under the
plan, Distribution Corporation's rates are reduced by $7.2 million, or 1.1%. In
addition, customers will receive up to $6.0 million in bill credits, disbursed
volumetrically over the two year term, reflecting a predetermined share of
excess earnings under a 1996 settlement. An allowed return on equity of 12%,
above which 50% of additional earnings are shared with the customers, is
maintained from the 1996 settlement. Finally, the rate plan also provides that
$7.2 million of 1999 revenues will be set aside in a special reserve to be
applied against Distribution Corporation's incremental costs resulting from the
PSC's gas restructuring effort further described below.
On November 3, 1998, the PSC issued its Policy Statement Concerning the
-------------------------------
Future of the Natural Gas Industry in New York State and Order Terminating
- --------------------------------------------------------------------------------
Capacity Assignment (Policy Statement). The Policy Statement sets forth the
- --------------------
PSC's "vision" on "how best to ensure a competitive market for natural gas in
New York." That vision includes the following goals:
(1) Effective competition in the gas supply market for retail
customers;
(2) Downward pressure on customer gas prices;
(3) Increased customer choice of gas suppliers and service options;
(4) A provider of last resort (not necessarily the utility);
(5) Continuation of reliable service and maintenance of operations
procedures that treat all participants fairly;
(6) Sufficient and accurate information for customers to use in making
informed decisions;
(7) The availability of information that permits adequate oversight of
the market to ensure fair competition; and
(8) Coordination of Federal and State policies affecting gas supply
and distribution in New York State.
The Policy Statement provides that the most effective way to establish
a competitive market in gas supply is "for local distribution companies to cease
selling gas." The PSC hopes to accomplish that objective over a three-to-seven
year transition period, taking into account "statutory requirements" and the
individual needs of each local distribution company (LDC). The Policy Statement
directs Staff to schedule "discussions" with each LDC on an "individualized plan
that would effectuate our vision." In preparation for negotiations, LDCs will be
required to address issues such as a strategy to hold new capacity contracts to
a minimum, a long-term rate plan with a goal
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
of reducing or freezing rates, and a plan for further unbundling. In addition,
Staff was instructed to hold collaborative sessions with multiple parties to
discuss generic issues including reliability and market power regulation.
As of February 1, 1999, Staff has convened a multitude of
collaboratives, proceedings and discussions on various issues relating to
restructuring, including reliability of service, billing and allocation of
stranded costs. Distribution Corporation is participating in all facets of
Staff's effort.
The PSC's Order Terminating Capacity Assignment, included with th
----------------------------------------
Policy Statement, directed the state's LDCs to file proposed tariffs, by no
later than February 1, 1999, revising the current requirement that marketers
take assignment of an allocation of upstream capacity for each customer that
elects to purchase gas from a marketer other than the LDC. Although the order
states that the so-called "mandatory assignment" feature of aggregation service
is terminated effective April 1, 1999, LDCs are permitted to show that their
individual circumstances may warrant continuation of the requirement. The order
also recognizes that LDCs with intermediate pipelines, like Distribution
Corporation, could present "unique cost and reliability issues which require
further consideration." The order provides that to the extent all or part of an
LDC's mandatory assignment authority is indeed terminated, there will be a
reasonable opportunity to recover stranded costs.1
On February 1, 1999, Distribution Corporation filed revised tariff
sheets in compliance with the Order Terminating Capacity Assignment.
-------------------------------------------
Distribution Corporation's compliance filing is designed to comply with the
PSC's directives and operate in the same manner as the company's "System Wide
Energy Select" program approved for the Pennsylvania Division (described below).
Toward that end, the compliance filing, if approved, will partially terminate
the mandatory capacity requirement, as directed by the PSC, and provide as
follows:
1) Marketers will be required to take mandatory assignment of
Distribution Corporation's upstream capacity to serve only 36% of
the marketers' aggregated retail load (as opposed to the current
100% requirement). This piece of the capacity requirement will
include storage.
2) Distribution Corporation will retain upstream capacity needed to
meet 25% of each marketer's aggregated retail load. Charges for
such retained capacity will be billed by Distribution Corporation
directly to the retail customers (by a surcharge included in the
transportation rate).
3) The remaining 39% of each marketer's aggregated retail load will
be served by the marketer's capacity.
To the extent any stranded pipeline costs are generated by the above
proposal, they would be recovered in entirety from firm service customers
through a stranded pipeline cost surcharge mechanism.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
The proposed effective date for the compliance filing is April 1, 1999.
Distribution Corporation cannot ascertain an outcome at this time. It is
expected that Distribution Corporation will meet with Staff and other interested
parties to negotiate the terms and conditions contained in the February 1, 1999
filing.
Pennsylvania Jurisdiction
Distribution Corporation currently does not have a rate case on file with the
Pennsylvania Public Utility Commission (PaPUC). Management will continue to
monitor its financial position in the Pennsylvania jurisdiction to determine the
necessity of filing a rate case in the future.
Effective October 1, 1997, Distribution Corporation commenced a PaPUC
approved customer choice pilot program called Energy Select. Energy Select,
which will last until April 1, 1999, allows approximately 19,000 small
commercial and residential customers of Distribution Corporation in the greater
Sharon, Pennsylvania area to purchase gas supplies from qualified, participating
non-utility suppliers (or marketers) of gas. Distribution Corporation is not a
supplier of gas in this pilot. Under Energy Select, Distribution Corporation
will continue to deliver the gas to the customer's home or business and will
remain responsible for reading customer meters, the safety and maintenance of
its pipeline system and responding to gas emergencies. NFR is a participating
supplier in Energy Select.
On February 11, 1999, Distribution Corporation's System Wide Energy
Select tariff was approved by the PaPUC for an effective date of February 12,
1999. 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
will include Distribution Corporation as a choice for retail consumers, in
furtherance of Distribution Corporation's objective to remain a merchant. Also
departing from the pilot scheme, Distribution Corporation will resume its role
as provider of last resort, and will maintain customer contact by providing a
billing service on its own behalf and, as an option, for participating
marketers. Finally, the System Wide Energy Select program addresses upstream
capacity requirements in a manner substantially similar to the method proposed
for Distribution Corporation's New York compliance filing, described above.
A gas restructuring bill (Senate Bill No. 943) was introduced in the
Pennsylvania General Assembly in 1997 proposing to amend the Public Utility Code
to allow all retail customers, including residential, the ability to choose
their own gas supplier. Senate Bill No. 943 has not yet been enacted into law.
However, in December 1997, the Chairman of the PaPUC convened a collaborative of
gas industry interests to develop a consensus bill using Senate Bill No. 943 as
the starting point. As a member of the utility interest group, Distribution
Corporation is and will continue to be an active participant in the
collaborative.1 Distribution Corporation is not able to predict the outcome of
the bill.
Base rate adjustments in both the New York and Pennsylvania
jurisdictions do not reflect the recovery of purchased gas costs. Such costs are
recovered through operation of the purchased gas adjustment clauses of the
appropriate regulatory authorities.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
Pipeline and Storage.
Supply Corporation currently does not have a rate case on file with the Federal
Energy Regulatory Commission (FERC). Its last case was settled with the FERC in
February 1996. As part of that settlement, Supply Corporation agreed not to seek
recovery of revenues related to certain terminated service from storage
customers until April 1, 2000, as long as the terminations were not greater than
approximately 30% of the terminable service. Supply Corporation has been
successful in marketing and obtaining executed contracts for such terminated
storage service (at discounted rates) and expects to continue obtaining executed
contracts for additional terminated storage service as it arises.1
OTHER MATTERS
Environmental Matters.
The Company is subject to various federal, state and local laws and regulations
relating to the protection of the environment. The Company has established
procedures for the ongoing evaluation of its operations to identify potential
environmental exposures and assure compliance with regulatory policies and
procedures.
It is the Company's policy to accrue estimated environmental clean-up
costs (investigation and remediation) when such amounts can reasonably be
estimated and it is probable that the Company will be required to incur such
costs. Distribution Corporation has estimated its clean-up costs related to
former manufactured gas plant sites and third party waste disposal sites will be
in the range of $10.9 million to $11.9 million.1 At December 31, 1998,
Distribution Corporation has recorded the minimum liability of $10.9 million.
The Company is currently not aware of any material additional exposure to
environmental liabilities. However, adverse changes in environmental regulations
or other factors could impact the Company.
In New York and Pennsylvania, Distribution Corporation is recovering
site investigation and remediation costs in rates. Accordingly, the Consolidated
Balance Sheet at December 31, 1998 includes related regulatory assets in the
amount of approximately $11.7 million.
The Company, in its international operations in the Czech Republic, is
in the process of constructing new fluidized-bed boilers at the district heating
and power generation plant of PSZT to comply with certain clean air standards
mandated by the Czech Republic government. Capital expenditures related to this
construction incurred by PSZT for the three months ended December 31, 1998 were
approximately $5.5 million. An additional $30.1 million is budgeted for this
construction for the rest of 1999.
For further discussion refer to Note H - Commitments and Contingencies
under the heading "Environmental Matters" in Item 8 of the Company's 1998 Form
10-K.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
Year 2000 Readiness Disclosure.
Numerous media reports have heightened concern that information technology
computer systems, software programs and semiconductors may not be capable of
recognizing dates after the Year 2000 because such systems use only two digits
to refer to a particular year. Such systems may read dates in the Year 2000 and
thereafter as if those dates represent the year 1900 or thereafter and in
certain instances, such systems may fail to function properly.
State of Readiness
The Company anticipates that the majority of its systems will be Year 2000 ready
by March 31, 1999, and that the remaining systems (i.e. primarily those for
which implementation is being deferred until after the 1998-1999 heating season)
will be Year 2000 ready by April 30, 1999.1 Following the completion of an
early-impact analysis study, a formal project manager at the Company was
designated to spearhead the Year 2000 remediation effort. The methodology
adopted by the Company to address the Year 2000 issue is a combination of
methods recommended by respected industry consultants and efforts tailored to
meet the Company's specific needs. The Company's Year 2000 plan addresses five
primary areas.
A. Mainframe Corporate Business Applications Developed and Maintained by the
Company: A detailed plan and impact analysis was conducted in 1996-1997 to
determine the extent of Year 2000 implications on the Company's mainframe-based
computer systems. The remediation and testing in this area are 98 percent
complete and are expected to be fully completed by March 31, 1999.1
B. Personal Computer Business Applications Software Developed and Supported by
the Company: The Company has retained a consulting firm to perform a detailed
impact analysis of the personal computer business application systems supported
by the Company's Information Services Department. The firm is in the process of
correcting Year 2000 problems identified by its analysis. Certain applications
identified by the consulting firm as potentially problematic have been retired
and replaced with Year 2000 compliant applications. The required changes and
testing for these applications are complete.1
C. Vendor-Supplied Software, Hardware, and Services for Corporate Business
Applications Supported by the Company: This category includes all mainframe
infrastructure products as well as all PC client / server software and hardware.
The Company has sent letters to its vendors asking if their products and
services will continue to perform as expected after January 1, 2000. These
vendors are responsible for approximately 200 products and services associated
with corporate computer applications. The Company has received responses from
all vendors which the Company believes supply critical hardware, software,
date-sensitive embedded chips and related computer services. The Company expects
to complete testing and implementation of the vendor-supplied Year 2000
compliant products and services by April 30, 1999.1
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
D. Vendor-Supplied Products and Services Used on a Corporate Wide Basis: This
category includes the critical products and services that are used by multiple
departments within the Company including all products containing embedded chips
which might be date sensitive. The Company has sent letters to the primary
vendors who provide these products and services to the Company, requesting Year
2000 compliance plans. The Company is monitoring their responses and
incorporating them into the Company's overall Year 2000 project and contingency
plans. The Company expects to complete testing and implementation of the
products and services of these vendors by March 31, 1999 (reference is made to
the "Risks" section below).1
E. User-Department Maintained Business Applications: The Company uses certain
business software applications that were either built in-house or
vendor-supplied and subsequently maintained by individual departments of the
Company. The scope of such applications includes, but is not limited to,
spreadsheets, databases, vendor provided products and services and embedded
process controls. A corporate wide Year 2000 task force is in place and has
established a process to identify and resolve Year 2000 problems in this area.
This task force meets on a monthly basis to coordinate ongoing activities and
report on the project status. Providers of critical products and services have
been identified and the Company has sent letters requesting their Year 2000
compliance plans. Responses are being monitored and incorporated into the Year
2000 planning of the various departments. All applications and services under
this category are expected to be Year 2000 ready by April 30, 1999.1
Cost
The cost of upgrading both vendor supplied and internally developed systems and
services is being expensed as incurred. Management estimates that such cost will
total approximately $2.2 million, of which approximately $1.4 million has been
incurred to date and $0.8 million remains to be spent.1
Risks
The Company's main concern is to ensure the safe and reliable production and
delivery of natural gas and Company-provided services to its customers. Based on
the efforts discussed above, the Company expects to be able to operate its own
facilities without interruption and continue normal operation in Year 2000 and
beyond.1 However, the Company has no control over the systems and services used
by third parties with whom it interfaces. While the Company has placed its major
third parties on notice that the Company expects their products and services to
perform as expected after January 1, 2000, the Company cannot predict with
accuracy the actual adverse consequences to the Company that could result if
such third parties are not Year 2000 compliant.1 The widespread failure of
electric, telecommunication, and upstream gas supply could potentially affect
gas service to utility customers, and the Company is pursuing contingency plans
to avoid such disruptions.
The majority of the devices which control the Company's physical
delivery system are not susceptible to Year 2000 problems because they do not
contain micro-processors. The Company has conducted an extensive review of its
existing micro processors (embedded technology) and is replacing non-Year 2000
compliant hardware. The Company expects to complete these replacements by April
30, 1999.1
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
Distribution Corporation is subject to regulatory review by both the
PSC and the PaPUC. Both of these regulatory bodies have issued orders concerning
the Year 2000 issue, and both have established dates in 1999 by which
jurisdictional utilities must have taken the necessary steps to ensure that its
critical systems are Year 2000 ready. In the event Distribution Corporation
fails to meet the requirements of those orders, it may be subject to the
imposition of fines or formal enforcement actions by the regulatory bodies.
Contingency Planning
The Company formed its Corporate Year 2000 task force in mid-1997. The primary
function of this group is to: (1) raise awareness of the Year 2000 issue within
the Company, (2) facilitate identification and remediation of Year 2000
potential problems within the Company, and (3) facilitate and develop corporate
contingency plans. The group is comprised of middle to senior level managers and
Company executives. The Company's main thrust at present in contingency planning
is identification and prioritization of the potential risks posed by Year 2000
failures outside of the Company's control. All departments and subsidiaries have
submitted lists of potential risks, which are now being prioritized, in relation
to the overall corporation, in the order of human safety, reliability/delivery
of Company services and administrative services. The Company has existing
disaster/contingency plans to deal with operational gas supply or delivery
problems, loss of the corporate data center, and loss of the corporate customer
telephone centers. These plans are being reviewed to address failures resulting
from Year 2000 problems created or occurring outside of the Company (i.e. loss
of electricity, telephone service, etc.). The Company expects to have its Year
2000 contingency plans completed by mid-September 1999.1 The Company has
selected this date as opposed to one in early 1999 so that the contingency plans
are current and operational and that the Company will be able to use them
immediately, if required.1
Safe Harbor for Forward-Looking Statements. The Company is including the
following cautionary statement in this Form 10-Q to make applicable and take
advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 for any forward-looking statements made by, or on behalf of,
the Company. Forward-looking statements include statements concerning plans,
objectives, goals, strategies, future events or performance, and underlying
assumptions and other statements which are other than statements of historical
facts. From time to time, the Company may publish or otherwise make available
forward-looking statements of this nature. All such subsequent forward-looking
statements, whether written or oral and whether made by or on behalf of the
Company, are also expressly qualified by these cautionary statements. Certain
statements contained herein, including without limitation those which are
designated with a "1", 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
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
accomplished. In addition to other factors and matters discussed elsewhere
herein, the following are important factors that, in the view of the Company,
could cause actual results to differ materially from those discussed in the
forward-looking statements:
1. Changes in economic conditions, demographic patterns and weather
conditions
2. Changes in the availability and/or price of natural gas and oil
3. Inability to obtain new customers or retain existing ones
4. Significant changes in competitive factors affecting the Company
5. Governmental/regulatory actions and initiatives, including those
affecting financings, allowed rates of return, industry and rate
structure, franchise renewal, and environmental/safety requirements
6. Unanticipated impacts of restructuring initiatives in the natural gas and
electric industries
7. Significant changes from expectations in actual capital expenditures and
operating expenses and unanticipated project delays
8. Occurrences affecting the Company's ability to obtain funds from
operations, debt or equity to finance needed capital expenditures and
other investments
9. Ability to successfully identify and finance oil and gas property
acquisitions and ability to operate existing and any subsequently
acquired properties
10. Ability to successfully identify, drill for and produce economically
viable natural gas and oil reserves
11. Changes in the availability and/or price of derivative financial
instruments
12. Inability of the various counterparties to meet their obligations with
respect to the Company's financial instruments
13. Regarding foreign operations - changes in foreign trade and monetary
policies, laws and regulations related to foreign operations, political
and governmental changes, inflation and exchange rates, taxes and
operating conditions
14. Significant changes in tax rates or policies or in rates of inflation or
interest
15. Significant changes in the Company's relationship with its employees and
the potential adverse effects if labor disputes or grievances were to
occur
16. Changes in accounting principles and/or the application of such
principles to the Company
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont.)
-----------------------------
17. Unanticipated problems related to the Company's internal Year 2000
initiative as well as potential adverse consequences related to third
party Year 2000 compliance.
The Company disclaims any obligation to update any forward-looking
statements to reflect events or circumstances after the date hereof.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Refer to the "Market Rate Sensitive Instruments" section in Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Part II. Other Information
- ---------------------------
Item 2. Changes in Securities
---------------------
On October 1, 1998, the Company issued 700 unregistered shares of Company common
stock to the seven non-employee directors of the Company, 100 shares to each
such director. These shares were issued as partial consideration for the
directors' services as directors during the quarter ended December 31, 1998,
pursuant to the Company's Retainer Policy for Non-Employee Directors.
These transactions were exempt from registration by Section 4(2) of the
Securities Act of 1933, as amended, as transactions not involving a public
offering.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit
Number Description of Exhibit
-------- ----------------------
(10) Material Contracts
10.1 Amendment Number 2 to the National Fuel Gas
Company Tophat Plan, dated December 10, 1998
10.2 Amendments to the National Fuel Gas Company
and Participating Subsidiaries Executive
Retirement Plan, dated December 10, 1998
10.3 Administrative Rules of the Compensation
Committee of the Board of Directors of
National Fuel Gas Company, as amended and
restated, effective December 10, 1998
(12) Statements regarding Computation of Ratios:
Ratio of Earnings to Fixed Charges for the
Twelve Months Ended December 31, 1998 and
the Fiscal Years Ended September 30, 1994
through 1998.
(27) Financial Data Schedules
27.1 Financial Data Schedule for the Three Months
Ended December 31, 1998.
27.2 Financial Data Schedule, as Restated, for
the Twelve Months Ended September 30, 1998.
(99) National Fuel Gas Company Consolidated
Statement of Income for the Twelve Months
Ended December 31, 1998 and 1997.
(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: February 16, 1999
-----------------
EXHIBIT INDEX
(Form 10Q)
Exhibit 10.1 Amendment Number 2 to the National Fuel Gas Company
Tophat Plan, dated December 10, 1998
Exhibit 10.2 Amendments to the National Fuel Gas Company and
Participating Subsidiaries Executive Retirement
Plan, dated December 10, 1998
Exhibit 10.3 ` Administrative Rules of the Compensation Committee
of the Board of Directors of National Fuel Gas
Company, as amended and restated, effective
December 10, 1998
Exhibit 12 Ratio of Earnings to Fixed Charges for the Twelve
Months Ended December 31, 1998 and the Fiscal Years
Ended September 30, 1994 through 1998
Exhibit 27.1 Financial Data Schedule for the Three Months Ended
December 31, 1998
Exhibit 27.2 Financial Data Schedule, as Restated, for the Twelve
Months Ended September 30, 1998
Exhibit 99 Consolidated Statement of Income of National Fuel Gas
Company for the Twelve Months Ended December 31, 1998
and December 31, 1997