United States
Securities
and Exchange Commission
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2002
Commission File Number 1-3880
National
Fuel Gas Company
(Exact name of registrant as specified in its charter)
| New Jersey | 13-1086010 |
|---|---|
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
| 10 Lafayette Square | 14203 |
| Buffalo, New York | (Zip Code) |
(Address of principal executive offices)
(716)
857-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES X NO
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X NO
Indicate the number shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
Common Stock, $1 Par Value, outstanding at January 31, 2003: 80,586,337 shares.
| DIRECT SUBSIDIARIES: | National Fuel Gas Distribution Corporation (Distribution Corporation) |
| National Fuel Gas Supply Corporation (Supply Corporation) | |
| Seneca Resources Corporation (Seneca) | |
| Highland Forest Resources, Inc. (Highland) | |
| Leidy Hub, Inc. (Leidy Hub) | |
| Data-Track Account Services, Inc. (Data-Track) | |
| National Fuel Resources, Inc. (NFR) | |
| Horizon Energy Development, Inc. (Horizon) | |
| Upstate Energy Inc. (Upstate) | |
| Horizon Power, Inc. (Horizon Power) | |
| Niagara Independence Marketing Company (NIM) | |
| Seneca Independence Pipeline Company (SIP) |
INDEX
Part I. Financial Information Page
----------------------------- ----
Item 1. Financial Statements
a. Consolidated Statements of Income and Earnings Reinvested in the
Business - Three Months Ended December 31, 2002 and 2001 4
b. Consolidated Balance Sheets - December 31, 2002
and September 30, 2002 5 - 6
c. Consolidated Statements of Cash Flows - Three Months
Ended December 31, 2002 and 2001 7
d. Consolidated Statements of Comprehensive Income - Three
Months Ended December 31, 2002 and 2001 8
e. Notes to Consolidated Financial Statements 9 - 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15 - 29
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures 29 - 30
Part II. Other Information
--------------------------
Item 1. Legal Proceedings 30
Item 2. Changes in Securities 31
Item 3. Defaults Upon Senior Securities o
Item 4. Submission of Matters to a Vote of Security Holders o
Item 5. Other Information o
Item 6. Exhibits and Reports on Form 8-K 31
Signature 32
Certificatons 33-34
o The Company has nothing to report under this item.
Reference to “the Company” in this report means the Registrant or the Registrant and its subsidiaries collectively, as appropriate in the context of the disclosure. All references to a certain year in this report are to the Company’s fiscal year ended September 30 of that year, unless otherwise noted.
This Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements should be read with the cautionary statements and important factors included in this Form 10-Q at Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A), under the heading “Safe Harbor for Forward-Looking Statements.” Forward-looking statements are all statements other than statements of historical fact, including, without limitation, those statements that are designated with an asterisk (“*”) following the statement, as well as those statements that are identified by the use of the words “anticipates,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” and similar expressions.
National Fuel Gas Company
Consolidated Statements of Income and Earnings
Reinvested in the Business
(Unaudited)
December 31,
(Thousands of Dollars, Except Per Common Share Amounts) 2002 2001
----------------- -----------------
INCOME
Operating Revenues $479,706 $392,327
- -------------------------------------------------------------------------------- ----------------- -----------------
Operating Expenses
Purchased Gas 205,754 129,406
Fuel Used in Heat and Electric Generation 19,027 15,618
Operation and Maintenance 90,772 104,546
Property, Franchise and Other Taxes 18,877 17,205
Depreciation, Depletion and Amortization 45,648 44,045
Income Taxes 27,612 22,709
- -------------------------------------------------------------------------------- ----------------- -----------------
407,690 333,529
- -------------------------------------------------------------------------------- ----------------- -----------------
Operating Income 72,016 58,798
Income (Loss) from Unconsolidated Subsidiaries 241 (57)
Other Income 1,825 2,190
- -------------------------------------------------------------------------------- ----------------- -----------------
Income Before Interest Charges and
Minority Interest in Foreign Subsidiaries 74,082 60,931
- -------------------------------------------------------------------------------- ----------------- -----------------
Interest Charges
Interest on Long-Term Debt 23,027 21,921
Other Interest 3,182 5,180
- -------------------------------------------------------------------------------- ----------------- -----------------
26,209 27,101
- -------------------------------------------------------------------------------- ----------------- -----------------
Minority Interest in Foreign Subsidiaries (939) (623)
- -------------------------------------------------------------------------------- ----------------- -----------------
Income Before Cumulative Effect 46,934 33,207
Cumulative Effect of Change in Accounting (638) -
- -------------------------------------------------------------------------------- ----------------- -----------------
Net Income Available for Common Stock 46,296 33,207
EARNINGS REINVESTED IN THE BUSINESS
Balance at October 1 549,397 513,488
- -------------------------------------------------------------------------------- ----------------- -----------------
595,693 546,695
Dividends on Common Stock
(2002 - $0.26; 2001 - $0.2525) 20,881 20,061
- -------------------------------------------------------------------------------- ----------------- -----------------
Balance at December 31 $574,812 $526,634
================================================================================ ================= =================
Earnings Per Common Share:
Basic:
Income Before Cumulative Effect $0.58 $0.42
Cumulative Effect of Change in Accounting (0.01) -
- -------------------------------------------------------------------------------- ----------------- -----------------
Net Income Available for Common Stock $0.57 $0.42
================================================================================ ================= =================
Diluted:
Income Before Cumulative Effect $0.58 $0.41
Cumulative Effect of Change in Accounting (0.01) -
- -------------------------------------------------------------------------------- ----------------- -----------------
Net Income Available for Common Stock $0.57 $0.41
================================================================================ ================= =================
Weighted Average Common Shares Outstanding:
Used in Basic Calculation 80,404,086 79,471,820
================================================================================ ================= =================
Used in Diluted Calculation 80,803,868 80,417,092
================================================================================ ================= =================
See Notes to Consolidated Financial Statements
National Fuel Gas Company
Consolidated Balance Sheets
December 31,
2002 September 30,
(Unaudited) 2002
-------------------- -------------------
(Thousands of Dollars)
ASSETS
Property, Plant and Equipment $4,577,729 $4,512,651
Less - Accumulated Depreciation, Depletion
and Amortization 1,703,715 1,667,906
- ---------------------------------------------------------------------------- -------------------- -------------------
2,874,014 2,844,745
- ---------------------------------------------------------------------------- -------------------- -------------------
Current Assets
Cash and Temporary Cash Investments 26,648 22,216
Receivables - Net 173,801 95,510
Unbilled Utility Revenue 67,603 21,918
Gas Stored Underground 52,309 77,250
Materials and Supplies - at average cost 33,521 31,582
Unrecovered Purchased Gas Costs 14,500 12,431
Prepayments 35,847 41,354
Fair Value of Derivative Financial Instruments 2,746 3,807
- ---------------------------------------------------------------------------- -------------------- -------------------
406,975 306,068
- ---------------------------------------------------------------------------- -------------------- -------------------
Other Assets
Recoverable Future Taxes 82,385 82,385
Unamortized Debt Expense 20,061 20,635
Other Regulatory Assets 30,707 26,104
Deferred Charges 3,868 5,914
Other Investments 66,060 65,090
Investments in Unconsolidated Subsidiaries 16,397 16,753
Goodwill 8,255 8,255
Other 24,972 25,360
- ---------------------------------------------------------------------------- -------------------- -------------------
252,705 250,496
- ---------------------------------------------------------------------------- -------------------- -------------------
$3,533,694 $3,401,309
============================================================================ ==================== ===================
See Notes to Consolidated Financial Statements
National Fuel Gas Company
Consolidated Balance Sheets
December 31,
2002 September 30,
(Unaudited) 2002
-------------------- -------------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
Capitalization:
Comprehensive Shareholders' Equity
Common Stock, $1 Par Value
Authorized - 200,000,000 Shares; Issued
And Outstanding - 80,460,851 Shares
80,264,734 Shares, Respectively $ 80,461 $ 80,265
Paid in Capital 450,443 446,832
Earnings Reinvested in the Business 574,812 549,397
- ---------------------------------------------------------------------------- -------------------- -------------------
Total Common Shareholder Equity Before
Items of Other Comprehensive Loss 1,105,716 1,076,494
Accumulated Other Comprehensive Loss (68,319) (69,636)
- ---------------------------------------------------------------------------- -------------------- -------------------
Total Comprehensive Shareholders' Equity 1,037,397 1,006,858
Long-Term Debt, Net of Current Portion 1,143,070 1,145,341
- ---------------------------------------------------------------------------- -------------------- -------------------
Total Capitalization 2,180,467 2,152,199
- ---------------------------------------------------------------------------- -------------------- -------------------
Minority Interest in Foreign Subsidiaries 30,364 28,785
- ---------------------------------------------------------------------------- -------------------- -------------------
Current and Accrued Liabilities
Notes Payable to Banks and
Commercial Paper 272,063 265,386
Current Portion of Long-Term Debt 160,830 160,564
Accounts Payable 140,747 100,886
Amounts Payable to Customers 1,511 -
Other Accruals and Current Liabilities 133,124 121,518
Fair Value of Derivative Financial Instruments 34,723 31,204
- ---------------------------------------------------------------------------- -------------------- -------------------
742,998 679,558
- ---------------------------------------------------------------------------- -------------------- -------------------
Deferred Credits
Accumulated Deferred Income Taxes 358,436 356,220
Taxes Refundable to Customers 15,596 15,596
Unamortized Investment Tax Credit 8,722 8,897
Other Regulatory Liabilities 82,145 82,676
Asset Retirement Obligation 36,723 -
Other Deferred Credits 78,243 77,378
- ---------------------------------------------------------------------------- -------------------- -------------------
579,865 540,767
- ---------------------------------------------------------------------------- -------------------- -------------------
Commitments and Contingencies - -
- ---------------------------------------------------------------------------- -------------------- -------------------
$3,533,694 $3,401,309
============================================================================ ==================== ===================
See Notes to Consolidated Financial Statements
National Fuel Gas Company
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
December 31,
-----------------------------------------
(Thousands of Dollars) 2002 2001
------------------- ---------------------
OPERATING ACTIVITIES
Net Income Available for Common Stock $46,296 $33,207
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation, Depletion and Amortization 45,648 44,045
Deferred Income Taxes 3,009 4,637
Cumulative Effect of Change in Accounting 638 -
(Income) Loss from Unconsolidated Subsidiaries, Net of
Cash Distributions 356 412
Minority Interest in Foreign Subsidiaries 939 623
Other (755) 1,070
Change in:
Receivables and Unbilled Utility Revenue (123,472) (45,022)
Gas Stored Underground and Materials and
Supplies 23,078 27,880
Unrecovered Purchased Gas Costs (2,069) (2,892)
Prepayments 5,511 10,550
Accounts Payable 39,296 (29,413)
Amounts Payable to Customers 1,511 (7,686)
Other Accruals and Current Liabilities 12,845 4,407
Other Assets (4,227) 8,570
Other Liabilities 1,440 (1,713)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Net Cash Provided by
Operating Activities 50,044 48,675
- ---------------------------------------------------------------------------- ------------------- ---------------------
INVESTING ACTIVITIES
Capital Expenditures (32,604) (60,795)
Investment in Partnerships - (383)
Other 915 15,848
- ---------------------------------------------------------------------------- ------------------- ---------------------
Net Cash Used in Investing Activities (31,689) (45,330)
- ---------------------------------------------------------------------------- ------------------- ---------------------
FINANCING ACTIVITIES
Change in Notes Payable to Banks and Commercial Paper 6,654 (133,559)
Net Proceeds from Issuance of Long-Term Debt - 148,977
Reduction of Long-Term Debt (2,704) (1,537)
Dividends Paid on Common Stock (20,830) (20,031)
Proceeds from Issuance of Common Stock 2,541 1,003
- ---------------------------------------------------------------------------- ------------------- ---------------------
Net Cash Used in Financing Activities (14,339) (5,147)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Effect of Exchange Rates on Cash 416 185
- ---------------------------------------------------------------------------- ------------------- ---------------------
Net Increase (Decrease) in Cash and Temporary Cash
Investments 4,432 (1,617)
Cash and Temporary Cash Investments at October 1 22,216 36,227
- ---------------------------------------------------------------------------- ------------------- ---------------------
Cash and Temporary Cash Investments at December 31 $26,648 $34,610
============================================================================ =================== =====================
See Notes to Consolidated Financial Statements
National Fuel Gas Company
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended
December 31,
-----------------------------------------
(Thousands of Dollars) 2002 2001
------------------- ---------------------
Net Income Available for Common Stock $46,296 $33,207
- ---------------------------------------------------------------------------- ------------------- ---------------------
Other Comprehensive Income (Loss), Before Tax:
Foreign Currency Translation Adjustment 4,226 2,909
Unrealized Gain on Securities Available for Sale 439 465
Unrealized Gain (Loss) on Derivative Financial Instruments (13,151) 21,094
Reclassification Adjustment for Realized (Gains) Losses on
Derivative Financial Instruments in Net Income 7,631 (10,822)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Other Comprehensive Income (Loss), Before Tax (855) 13,646
- ---------------------------------------------------------------------------- ------------------- ---------------------
Income Tax Expense Related to Unrealized Gain
on Securities Available for Sale Arising During the Period 154 162
Income Tax Expense (Benefit) Related to Unrealized Gain (Loss)
on Derivative Financial Instruments Arising During the Period (5,589) 7,846
Reclassification Adjustment for Income Tax (Expense) Benefit on
Realized (Gains) Losses from Derivative Financial Instruments
In Net Income 3,263 (4,254)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Income Taxes - Net (2,172) 3,754
- ---------------------------------------------------------------------------- ------------------- ---------------------
Other Comprehensive Income (Loss) 1,317 9,892
- ---------------------------------------------------------------------------- ------------------- ---------------------
Comprehensive Income (Loss) $47,613 $43,099
============================================================================ =================== =====================
See Notes to Consolidated Financial Statements
National Fuel Gas Company
Notes to Consolidated Financial Statements
Principles of Consolidation. The Company consolidates its majority owned entities. The equity method is used to account for minority owned entities. All significant intercompany balances and transactions are eliminated.
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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, 2002, 2001 and 2000 that are included in the Company’s 2002 Form 10-K. The 2003 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, 2002 should not be taken as a prediction of earnings for the entire fiscal year ending September 30, 2003. Most of the Utility segment’s business is seasonal in nature and is influenced by weather conditions. Because of the seasonal nature of the Utility segment’s heating business, earnings during the winter months normally represent a substantial part of the Utility segment’s 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. While the Pipeline and Storage segment’s business is influenced by weather conditions, 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, 2002, the Company adopted the Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143). SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes the cost of increasing the carrying amount of the related long-lived asset. Over time, the liability is adjusted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. In the Company’s case, SFAS 143 changed the accounting for plugging and abandonment costs associated with the Exploration and Production segment’s crude oil and natural gas wells. In prior fiscal years, the Company accounted for plugging and abandonment costs using Securities and Exchange Commission full cost accounting rules. SFAS 143 was applied retroactively to prior years to determine the cumulative effect through October 1, 2002. This cumulative effect reduced earnings for the quarter ended December 31, 2002 by $0.6 million, net of income tax. If the new method of accounting for plugging and abandonment costs had been effective for the quarter ending December 31, 2001, there would not have been a material change to net income available for common stock for that quarter and the basic and diluted earnings per common share amounts that were reported would have remained the same.
Accounting for Goodwill. Effective October 1, 2002, the Company adopted FASB’s Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). In accordance with SFAS 142, the Company stopped amortization of goodwill and will test for impairment on an annual basis. The Company will complete its initial impairment test by March 31, 2003. As shown on
Item 1. Financial Statements (Cont.)the Consolidated Balance Sheet, the Company has $8.3 million in goodwill. While the quarter ended December 31, 2002 did not have any amortization expense associated with goodwill, the quarter ended December 31, 2001 had $138,867 of goodwill amortization expense.
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.
Reclassification. Certain prior year amounts have been reclassified to conform with current year presentation.
Accumulated Other Comprehensive Income (Loss). The components of Accumulated Other Comprehensive Income (Loss) are as follows (in thousands):
At December 31, 2002 At September 30, 2002
-------------------- ---------------------
Minimum Pension Liability Adjustment $(34,435) $(34,435)
Cumulative Foreign Currency
Translation Adjustment (10,589) (14,815)
Net Unrealized Loss on Derivative
Financial Instruments (23,739) (20,545)
Net Unrealized Gain on Securities
Available for Sale 444 159
---------- ----------
Accumulated Other Comprehensive Loss $(68,319) $(69,636)
======== ========
Earnings Per Common Share. Basic earnings per common share is computed by dividing income available for common stock by the weighted average number of common shares outstanding for the period. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The only potentially dilutive securities the Company has outstanding are stock options. The diluted weighted average shares outstanding shown on the Consolidated Statement of Income reflects the potential dilution as a result of these stock options as determined using the Treasury Stock Method. Stock options that are antidilutive are excluded from the calculation of diluted earnings per common share. For the quarters ended December 31, 2002 and 2001, 11,417,230 and 2,838,732 stock options, respectively, were excluded as being antidilutive.
Item 1. Financial Statements (Cont.)
Three Months Ended
December 31,
----------------------------------------
2002 2001
------------------- --------------------
Operating Expenses:
Current Income Taxes
Federal $18,794 $13,331
State 4,675 4,556
Foreign 1,134 185
Deferred Income Taxes
Federal 1,196 2,023
State (27) 51
Foreign 1,840 2,563
------------------- --------------------
27,612 22,709
Other Income:
Deferred Investment Tax Credit (174) (174)
Minority Interest in Foreign Subsidiaries (425) (249)
Cumulative Effect of Change in Accounting (354) -
------------------- --------------------
Total Income Taxes $26,659 $22,286
=================== ====================
The U.S. and foreign components of income before income taxes are as follows (in thousands):
Three Months Ended
December 31,
2002 2001
------------------- --------------------
U.S. $70,025 $49,236
Foreign 2,930 6,257
- ---------------------------------------------------------------------------- ------------------- --------------------
$72,955 $55,493
============================================================================ =================== ====================
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):
Item 1. Financial Statements (Cont.)
Three Months Ended
December 31,
----------------------------------------
2002 2001
------------------- --------------------
Income tax expense, computed at
statutory rate of 35% $25,534 $19,422
Increase (reduction) in taxes resulting from:
State income taxes 3,021 2,995
Foreign tax differential (1,404) 309
Miscellaneous (492) (440)
- ---------------------------------------------------------------------------- ------------------- --------------------
Total Income Taxes $26,659 $22,286
============================================================================ =================== ====================
Significant components of the Company's deferred tax liabilities (assets) were as follows (in thousands):
At December 31, 2002 At September 30, 2002
--------------------------------- ----------------------------
Deferred Tax Liabilities:
Property, Plant and Equipment $431,047 $417,673
Other 20,805 27,930
- ------------------------------------------------------ --------------------------------- ----------------------------
Total Deferred Tax Liabilities 451,852 445,603
- ------------------------------------------------------ --------------------------------- ----------------------------
Deferred Tax Assets:
Other (93,416) (89,383)
- ------------------------------------------------------ --------------------------------- ----------------------------
Total Deferred Tax Assets (93,416) (89,383)
- ------------------------------------------------------ --------------------------------- ----------------------------
Total Net Deferred Income Taxes $358,436 $356,220
====================================================== ================================= ============================
Common Stock. During the three months ended December 31, 2002, the Company issued 199,561 shares of common stock under the Company’s stock and benefit plans. The Company also repurchased and cancelled 3,444 shares of common stock.
Environmental Matters. The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. The Company has established procedures for the ongoing evaluation of its operations to identify potential environmental exposures and comply with regulatory policies and procedures. It is the Company’s policy to accrue estimated environmental clean-up costs (investigation and remediation) when such amounts can reasonably be estimated and it is probable that the Company will be required to incur such costs. At December 31, 2002, the Company has estimated its remaining clean-up costs related to former manufactured gas plant sites and third party waste disposal sites will be in the range of $5.1 million to $6.1 million. The minimum liability of $5.1 million has been recorded on the Consolidated Balance Sheet at December 31, 2002. Other than discussed in Note H of the 2002 Form 10-K (referred to below), the Company is currently not aware of any material additional exposure to environmental liabilities. However, adverse changes in environmental regulations or other factors could impact the Company.
For further discussion refer to Note H - Commitments and Contingencies under the heading “Environmental Matters” in Item 8 of the Company’s 2002 Form 10-K.
Item 1. Financial Statements (Cont.)Other. The Company is involved in litigation arising in the normal course of business. Also in the normal course of business, the Company is involved in tax, regulatory and other governmental audits, inspections, investigations and other proceedings that involve state and federal taxes, safety, compliance with regulations, rate base, cost of service and purchased gas cost issues, among other things. While the resolution of such matters could have a material effect on earnings and cash flows in the period of resolution, none of these matters are expected to change materially the Company's present liquidity position, nor have a material adverse effect on the financial condition of the Company.
Note 5 – Business Segment Information. The Company has six reportable segments: Utility, Pipeline and Storage, Exploration and Production, International, Energy Marketing, and Timber. The breakdown of the Company’s reportable segments is based upon a combination of factors including differences in products and services, regulatory environment and geographic factors.
The data presented in the tables below reflect the reportable segments and reconciliations to consolidated amounts. There have been no changes in the basis of segmentation nor in the basis of measuring segment profit or loss from those used in the 2002 Form 10-K. There have been no material changes in the amount of assets for any operating segment from the amounts disclosed in the 2002 Form 10-K.
Quarter Ended December 31, 2002 (Thousands)
- ---------------------------------------------------------------------------------------------------------------------------------------
Exploration Total Corporate and
Pipeline and Energy Reportable Intersegment Total
Utility and Storage Production International Marketing Timber Segments All Other Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------------
Revenue from
External
Customers $290,073 $21,435 $73,471 $37,790 $42,676 $13,789 $479,234 $472 $ - $479,706
Intersegment
Revenues 4,742 21,678 - - - - 26,420 - (26,420) -
Segment
Profit
(Loss):
Income Before
Cumulative
Effect of
Change in 19,277 10,734 8,811 2,771 1,586 3,722 46,901 180 (147) 46,934
Accounting
Quarter Ended December 31, 2001 (Thousands)
- ---------------------------------------------------------------------------------------------------------------------------------------
Exploration Total Corporate and
Pipeline and Energy Reportable Intersegment Total
Utility and Storage Production International Marketing Timber Segments All Other Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------------
Revenue from
External
Customers $222,355 $20,794 $75,000 $30,538 $32,785 $10,331 $391,803 $524 $ - $392,327
Intersegment
Revenues 5,633 22,151 - - - - 27,784 1,844 (29,628) -
Segment
Profit
(Loss): 18,041 10,014 1,441 993 1,948 1,538 33,975 5 (773) 33,207
Net Income
Note 6 - Subsequent Event. On February 6, 2003, the Company acquired the Empire State Pipeline (Empire) from Duke Energy Corporation for $180.0 million in cash plus approximately $58.0 million of project debt. Empire is a 157-mile, 24-inch pipeline that begins at the United States/Canadian border at the Chippawa Channel of the Niagara River near Buffalo, New York, which is within the Company’s service territory, and terminates in Central New York just north of Syracuse, New York. Empire can transport 525 million cubic feet of gas per day and currently has almost all of its capacity under contract, with a substantial portion being long-term contracts. The initial financing of the acquisition was accomplished through short-term borrowings. Long-term financing alternatives include issuing stock and selling non-regulated assets such as Timber acreage and Exploration and Production reserves. Presently, negotiations are ongoing for the sale of 70,000 acres of timber and the Company expects that a purchase agreement will be finalized soon.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsFor a complete discussion of critical accounting policies, refer to “Critical Accounting Policies” in Item 7 of the Company’s 2002 Form 10-K. There have been no subsequent changes to that disclosure.
The Company’s earnings were $46.3 million, or $.57 per common share ($.57 per common share on a diluted basis), for the quarter ended December 31, 2002. This compares to earnings of $33.2 million, or $0.42 per common share ($0.41 per common share on a diluted basis), for the quarter ended December 31, 2001. However, earnings for the three months ended December 31, 2002 included a reduction to earnings in the amount of $0.6 million ($0.01 per common share on a basic and diluted basis) representing the cumulative effect of a change in accounting for plugging and abandonment costs in the Company’s Exploration and Production segment. Earnings for the three months ended December 31, 2002 before the cumulative effect of a change in accounting were $46.9 million. The increase in earnings of $13.7 million (exclusive of the cumulative effect of change in accounting) is primarily the result of higher earnings in the Exploration and Production segment. Additional discussion of earnings in each of the business segments can be found in the business segment information that follows.
Earnings (Loss) by Segment
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
Increase
Three Months Ended December 31 (Thousands) 2002 2001 (Decrease)
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
Utility $ 19,277 $ 18,041 $ 1,236
Pipeline and Storage 10,734 10,014 720
Exploration and Production (1) 8,173 1,441 6,732
International 2,771 993 1,778
Energy Marketing 1,586 1,948 (362)
Timber 3,722 1,538 2,184
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
Total Reportable Segments 46,263 33,975 12,288
All Other 180 5 175
Corporate (147) (773) 626
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
Total Consolidated (1) $ 46,296 $ 33,207 $ 13,089
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
(1) Exclusive of the Cumulative Effect of Change in Accounting, earnings for the three months ended December 31, 2002 for the Exploration and Production segment and Total Consolidated would have been $8,811 and $46,934, respectively.Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)
Utility
Utility Operating Revenues
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
Increase
Three Months Ended December 31 (Thousands) 2002 2001 (Decrease)
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
Retail Sales Revenues:
Residential $207,985 $164,836 $ 43,149
Commercial 34,840 25,994 8,846
Industrial 6,835 3,166 3,669
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
249,660 193,996 55,664
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
Off-System Sales 26,308 11,345 14,963
Transportation 22,510 22,493 17
Other (3,663) 154 (3,817)
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
$294,815 $227,988 $ 66,827
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
Utility Throughput
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
Increase
Three Months Ended December 31 (million cubic feet) (MMcf) 2002 2001 (Decrease)
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
Retail Sales:
Residential 22,880 17,913 4,967
Commercial 4,095 3,117 978
Industrial 1,310 698 612
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
28,285 21,728 6,557
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
Off-System Sales 5,267 3,949 1,318
Transportation 16,523 15,235 1,288
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
50,075 40,912 9,163
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
Operating revenues for the Utility segment increased $66.8 million for the quarter ended December 31, 2002 as compared with the quarter ended December 31, 2001. The increase in revenues is primarily the result of an increase in sales volumes, as shown above, and an increase in the average cost of purchased gas ($5.67 and $4.91 per thousand cubic feet (Mcf) during the quarters ended December 31, 2002 and 2001, respectively). Purchased gas costs are recovered dollar for dollar in revenues. Colder weather, as shown in the table below, was the major factor for the increase in retail sales volumes and transportation volumes. Greater off-system sales volumes and higher gas prices for such sales contributed to an increase in off-system sales revenues; however, the margins resulting from off-system sales are minimal. The decrease in other revenues primarily reflects estimated refund provisions recorded in the quarters ended December 31, 2002 and 2001 amounting to $5.5 million and $1.6 million, respectively. These refund provisions were recorded in the Utility’s New York jurisdiction under an earnings sharing mechanism. This earnings sharing mechanism, which is in accordance with the three-year rate settlement reached with the NYPSC that went into effect October 1, 2000 (New York Rate Settlement), requires the Utility to share with customers 50% of earnings above a predetermined amount. The final refund for the New York Rate Settlement will not be known until the end of 2003.
The Utility segment’s earnings for the quarter ended December 31, 2002 were $19.3 million, an increase of $1.2 million when compared with the quarter ended December 31, 2001. The major factor for this increase was the impact of weather, which in the Pennsylvania jurisdiction was approximately 34% colder than last year’s first quarter. The impact of weather variations on earnings in the New York jurisdiction is mitigated by that jurisdiction’s weather normalization clause (WNC). The WNC in New York,
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)which covers the eight-month period from October through May, has had a stabilizing effect on earnings for the New York rate jurisdiction. In addition, in periods of colder than normal weather, the WNC benefits Distribution Corporation’s New York customers. For the quarter ended December 31, 2002, the WNC resulted in a benefit to customers of $1.3 million since it was colder than normal. For the quarter ended December 31, 2001, the WNC preserved earnings of $4.5 million (after tax) for Distribution Corporation since it was warmer than normal. The refund provision discussed above partially offset the positive impact of colder weather in the Pennsylvania jurisdiction as the New York jurisdiction trued-up its cumulative refund provision under the earnings sharing mechanism in its New York Rate Settlement through December 31, 2002. As mentioned above, the final refund will not be known until the end of 2003.
Degree Days
- ---------------------------------- -------------- -------------- -------------------- --------------------------------
Percent
Three Months Ended Colder Than
--------------------------------
December 31 Normal 2002 2001 Normal Prior Year
- ---------------------------------- -------------- -------------- -------------------- ----------------- --------------
Buffalo 2,311 2,383 1,799 3.1 32.5
Erie 2,016 2,227 1,659 10.5 34.2
- ---------------------------------- -------------- -------------- -------------------- ----------------- --------------
Pipeline and Storage
Pipeline and Storage Operating Revenues
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
Increase
Three Months Ended December 31 (Thousands) 2002 2001 (Decrease)
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
Firm Transportation $21,813 $22,383 $ (570)
Interruptible Transportation 347 780 (433)
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
22,160 23,163 (1,003)
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
Firm Storage Service 15,769 15,374 395
Other 5,184 4,408 776
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
$43,113 $42,945 $ 168
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
Pipeline and Storage Throughput
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
Increase
Three Months Ended December 31 (Thousands) 2002 2001 (Decrease)
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
Firm Transportation 84,694 72,050 12,644
Interruptible Transportation 790 1,990 (1,200)
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
85,484 74,040 11,444
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
Operating revenues for the Pipeline and Storage segment increased $.2 million for the quarter ended December 31, 2002 as compared with the quarter ended December 31, 2001. Higher revenues from unbundled pipeline sales and open access transportation and higher storage service revenues were largely offset by lower transportation revenues. Unbundled pipeline sales and open access transportation revenues are included in “Other” revenue in the table above. While transportation volumes increased, volume fluctuations generally do not have a significant impact on revenues as a result of Supply Corporation’s straight fixed-variable rate design which allows for recovery of substantially all fixed costs in the demand or reservation charge.
Earnings in the Pipeline and Storage segment increased $.7 million from $10.0 million for the quarter ended December 31, 2001 to $10.7 million for the quarter ended December 31, 2002. The major factor for this increase was lower operation and maintenance expense.
Exploration and Production
Exploration and Production Operating Revenues
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
Increase
Three Months Ended December 31 (Thousands) 2002 2001 (Decrease)
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
Gas (after Hedging) $35,762 $35,104 $ 658
Oil (after Hedging) 36,629 33,337 3,292
Gas Processing Plant 6,561 4,219 2,342
Other (461) 5,442 (5,903)
Intrasegment Elimination * (5,020) (3,102) (1,918)
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
$73,471 $75,000 $(1,529)
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
* Represents the elimination of certain West Coast gas production included in "Gas (after Hedging)" in the table above that was sold
to the gas processing plant shown in the table above. An elimination for the same dollar amount was made to reduce the gas
processing plant's Purchased Gas expense.
Production Volumes
- ------------------------------------------------------------------ ---------------- ---------------- ----------------
Increase
Three Months Ended December 31 2002 2001 (Decrease)
- ------------------------------------------------------------------ ---------------- ---------------- ----------------
Gas Production (million cubic feet)
Gulf Coast 5,359 7,188 (1,829)
West Coast 1,196 1,246 (50)
Appalachia 1,088 1,058 30
Canada 1,506 1,831 (325)
- ------------------------------------------------------------------ ---------------- ---------------- ----------------
9,149 11,323 (2,174)
- ------------------------------------------------------------------ ---------------- ---------------- ----------------
Oil Production (thousands of barrels)
Gulf Coast 390 454 (64)
West Coast 736 748 (12)
Appalachia 2 2 -
Canada 640 755 (115)
- ------------------------------------------------------------------ ---------------- ---------------- ----------------
1,768 1,959 (191)
- ------------------------------------------------------------------ ---------------- ---------------- ----------------
Average Prices
- ------------------------------------------------------------------ --------------- ----------------- ----------------
Increase
Three Months Ended December 31 2002 2001 (Decrease)
- ------------------------------------------------------------------ --------------- ----------------- ----------------
Average Gas Price/Mcf
Gulf Coast $4.19 $2.41 $1.78
West Coast $4.05 $2.35 $1.70
Appalachia $3.62 $3.66 $(0.04)
Canada $3.59 $2.07 $1.52
Weighted Average $4.01 $2.47 $1.54
Weighted Average After Hedging $3.91 $3.10 $0.81
Average Oil Price/barrel (bbl)
Gulf Coast $26.99 $19.16 $7.83
West Coast $23.79 $15.35 $8.44
Appalachia $27.47 $24.93 $2.54
Canada $23.03 $14.40 $8.63
Weighted Average $24.23 $15.88 $8.35
Weighted Average After Hedging $20.72 $17.01 $3.71
- ------------------------------------------------------------------ --------------- ----------------- ----------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)
Operating revenues for the Exploration and Production segment decreased $1.5 million for the quarter ended December 31, 2002 as compared with the quarter ended December 31, 2001. The main reason for this decrease is that the quarter ended December 31, 2001 included a positive mark-to-market adjustment associated with certain derivative financial instruments in the amount of $5.1 million that did not recur in the quarter ended December 31, 2002. The mark-to-market adjustment is reflected in the “Other” revenues decrease of $5.9 million shown in the table above. Offsetting this decrease, oil production revenue after hedging increased $3.3 million from the quarter ended December 31, 2001 as the weighted average price of oil after hedging increased 22%, and gas processing plant revenues increased $2.3 million due to higher gas prices. Gas production revenue after hedging also increased $0.7 million as the weighted average price of gas after hedging increased 26%. The revenue increase resulting from higher weighted average gas prices after hedging helped offset the revenue decrease associated with a 2.2 billion cubic feet (Bcf) decline in gas production. Most of this production decline occurred in the Gulf Coast of Mexico (a 1.8 Bcf decline). The Company had anticipated some of this decline in production due to its plan to phase out of that region. However, the production decline in the Gulf Coast of Mexico was amplified by the shutting-in of production during Hurricane Lili. As a result of the hurricane, some wells have not returned (and are not expected to return) to pre-hurricane production levels and certain anticipated production for fiscal 2003 will be delayed until fiscal 2004. As a result, the Company has revised its fiscal 2003 production estimates from 80 to 85 Bcf equivalent (Bcfe) to 76 to 81 Bcfe.*
The Exploration and Production segment’s earnings for the quarter ended December 31, 2002 were $8.2 million compared with earnings of $1.4 million for the quarter ended December 31, 2001. However, as discussed above, earnings for the three months ended December 31, 2002 included a reduction to earnings in the amount of $0.6 million representing the cumulative effect of a change in accounting for plugging and abandonment costs. Exclusive of the cumulative effect, earnings in the Exploration and Production segment for the three months ended December 31, 2002 were $8.8 million. In the quarter ended December 31, 2001, this segment recorded a non-recurring net $3.3 million (after tax) non-cash charge to reserve for the Company’s exposure to Enron Corp. (“Enron”). Exclusive of this non-cash charge, earnings in the Exploration and Production segment for the three months ended December 31, 2001 were $4.7 million. The increase in earnings of $4.1 million (exclusive of the cumulative effect of change in accounting and the non-cash Enron reserve) was largely due to higher oil and gas prices and lower workover expenses in the Gulf of Mexico.
International
International Operating Revenues
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
Increase
Three Months Ended December 31 (Thousands) 2002 2001 (Decrease)
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
Heating $28,155 $22,673 $ 5,482
Electricity 8,929 7,099 1,830
Other 706 766 (60)
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
$37,790 $30,538 $ 7,252
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)
International Heating and Electric Volumes
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
Increase
Three Months Ended December 31 2002 2001 (Decrease)
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
Heating Sales (Gigajoules) (1) 3,234,863 3,231,692 3,171
Electricity Sales (megawatt hours) 284,089 261,681 22,408
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
(1) Gigajoules = one billion joules. A joule is a unit of energy.
Operating revenues for the International segment increased $7.3 million for the quarter ended December 31, 2002 as compared with the quarter ended December 31, 2001. The increase was primarily due to higher heating revenues and electricity revenues. Heating revenues increased due to higher rates (approximately 3%) and higher volumes. Electricity revenues increased due to a 9% increase in electric volumes, which more than offset a 3% rate decrease. Another factor in the overall increase in International segment revenues was an increase in the average value of the Czech Koruna (CZK) compared to the U.S. dollar.
The International segment's earnings for the quarter ended December 31, 2002 were $2.8 million, an increase of $1.8 million when compared with earnings of $1.0 million for the quarter ended December 31, 2001. The increase can largely be attributed to higher margins resulting from the increase in heating and electricity revenues and the increase in the average value of the CZK discussed above.
Energy Marketing
Energy Marketing Operating Revenues
- ---------------------------------------------------------------------- ------------------- ---------------- -----------------
Increase
Three Months Ended December 31 (Thousands) 2002 2001 (Decrease)
- ---------------------------------------------------------------------- ------------------- ---------------- -----------------
Natural Gas (after Hedging) $42,674 $32,804 $9,870
Other 2 (19) 21
- ---------------------------------------------------------------------- ------------------- ---------------- -----------------
$42,676 $32,785 $9,891
- ---------------------------------------------------------------------- ------------------- ---------------- -----------------
Energy Marketing Volumes
- ---------------------------------------------------------------------- ------------------- ---------------- -----------------
Increase
Three Months Ended December 31 2002 2001 (Decrease)
- ---------------------------------------------------------------------- ------------------- ---------------- -----------------
Natural Gas - (MMcf) 7,674 7,190 484
- ---------------------------------------------------------------------- ------------------- ---------------- -----------------
Operating revenues for the Energy Marketing segment increased $9.9 million for the quarter ended December 31, 2002 as compared with the quarter ended December 31, 2001. This increase largely reflects higher gas sales revenue due to an increase in the price of natural gas.
The Energy Marketing segment’s earnings for the quarter ended December 31, 2002 were $1.6 million, a decrease of $0.3 million when compared with earnings of $1.9 million for the quarter ended December 31, 2001. This decrease is largely a result of lower margins on gas sales.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)
Timber
Timber Operating Revenues
- ---------------------------------------------------------------------- ------------------- ---------------- -----------------
Increase
Three Months Ended December 31 (Thousands) 2002 2001 (Decrease)
- ---------------------------------------------------------------------- ------------------- ---------------- -----------------
Log Sales $7,720 $5,378 $2,342
Green Lumber Sales 1,582 1,644 (62)
Kiln Dry Lumber Sales 4,215 3,082 1,133
Other 272 227 45
- ---------------------------------------------------------------------- ------------------- ---------------- -----------------
Operating Revenues $13,789 $10,331 $3,458
- ---------------------------------------------------------------------- ------------------- ---------------- -----------------
Timber Volumes (in Board Feet)
- ---------------------------------------------------------------------- ------------------- ---------------- -----------------
Increase
Three Months Ended December 31 (Thousands) 2002 2001 (Decrease)
- ---------------------------------------------------------------------- ------------------- ---------------- -----------------
Log Sales 2,576 2,123 453
Green Lumber Sales 3,163 3,010 153
Kiln Dry Lumber Sales 2,774 1,972 802
- ---------------------------------------------------------------------- ------------------- ---------------- -----------------
8,513 7,105 1,408
- ---------------------------------------------------------------------- ------------------- ---------------- -----------------
Operating revenues for the Timber segment increased $3.5 million for the quarter ended December 31, 2002 as compared with the quarter ended December 31, 2001. This increase is largely due to an increase in sales volume, specifically cherry logs and cherry lumber. Cherry logs and lumber command the highest price.
The Timber segment’s earnings for the quarter ended December 31, 2002 were $3.7 million, an increase of $2.2 million when compared with earnings of $1.5 million for the quarter ended December 31, 2001. Higher margin resulting from the increase in sales volume discussed above was the main factor in the earnings increase.
The Company’s unconsolidated subsidiaries consist of equity method investments in Seneca Energy II, LLC (Seneca Energy), Model City Energy, LLC (Model City), and Energy Systems North East, LLC (ESNE). The Company has 50% ownership interests in each of these entities. Seneca Energy and Model City generate and sell electricity using methane gas obtained from landfills owned by outside parties. ESNE generates electricity from an 80-megawatt, combined cycle, natural gas-fired power plant in North East, Pennsylvania. ESNE sells its electricity into the New York power grid.
The Company recorded income of $0.2 million during the quarter ended December 31, 2002 related to its investments in the unconsolidated subsidiaries discussed above. This compares with a loss of $0.1 million recorded during the quarter ended December 31, 2001. The increase of $0.3 million is largely due to a $0.4 million increase in income from the Company’s investment in Seneca Energy.
Interest on long-term debt increased $1.1 million for the quarter ended December 31, 2002 as compared with the quarter ended December 31, 2001. This increase can be attributed primarily to a higher average amount of long-term debt outstanding.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)Other interest charges decreased $2.0 million for the quarter ended December 31, 2002 as compared with the quarter ended December 31, 2001. This decrease resulted mainly from a decrease in the average amount of short-term debt outstanding.
The increase in the average amount of long-term debt outstanding and the decrease in the average amount of short-term debt outstanding and the resulting impact on interest expense can be attributed to the November 2001 medium-term note issuance. In November 2001, the Company issued $150.0 million of 6.70% medium-term notes due in November 2011. Proceeds from the medium-term note issuance were used to reduce short-term borrowings.
The Company’s primary source of cash during the three-month period ended December 31, 2002 consisted of cash provided by operating activities. This source of cash was supplemented by issuances of common stock under the Company’s stock and benefit plans, as well as by short-term borrowings.
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, cumulative effect of change in accounting, income or loss from unconsolidated subsidiaries net of cash distributions, and minority interest in foreign subsidiaries.
Cash provided by operating activities in the Utility and the Pipeline and Storage segments may vary from period to period because of the impact of rate cases. In the Utility segment, supplier refunds, over- or under-recovered purchased gas costs and weather may also significantly impact cash flow. The impact of weather on cash flow is tempered in the Utility segment’s New York rate jurisdiction by its WNC and in the Pipeline and Storage segment by Supply Corporation’s straight fixed-variable rate design.
Because of the seasonal nature of the heating business in the Utility, Energy Marketing and International segments, revenues in these segments are relatively high during the heating season, primarily the first and second quarters of the fiscal year, and receivables historically increase during these periods from what was receivable at September 30.
The storage gas inventory normally declines during the first and second quarters of the year and is replenished during the third and fourth quarters. For storage gas inventory accounted for under the 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 under the caption “Other Accruals and Current Liabilities.” Such reserve is reduced as the inventory is replenished.
Cash provided by operating activities in the Exploration and Production segment may vary from period to period as a result of changes in the commodity prices of natural gas and crude oil. The Company uses various derivative financial instruments, including price swap agreements and no cost collars in an attempt to manage this energy commodity price risk.
Net cash provided by operating activities totaled $50.0 million for the three months ended December 31, 2002, an increase of $1.3 million compared with the $48.7 million provided by operating activities for the three months ended December 31, 2001. Higher cash receipts from the sale of oil and
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)gas in the Exploration and Production segment due to higher oil and gas prices were largely offset by higher working capital requirements in the Utility segment due to higher gas prices.
Expenditures for long-lived assets include additions to property, plant and equipment.
The Company’s expenditures for long-lived assets totaled $32.6 million during the three months ended December 31, 2002. The table below presents these expenditures:
------------------------------------------------------------- ----------------------- -----------------------
Three Months Ended December 31, 2002
(in millions of dollars)
-------------------------------------- ---------------------- ----------------------- -----------------------
Total
Expenditures for
Long-Lived Assets
-------------------------------------- ---------------------- ----------------------- -----------------------
Utility $13.1
Pipeline and Storage 5.6
Exploration and Production 12.7
International 0.5
Timber 0.7
Energy Marketing -
All Other -
-------------------------------------- ---------------------- ----------------------- -----------------------
$32.6
-------------------------------------- ---------------------- ----------------------- -----------------------
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 StorageThe majority of the Pipeline and Storage capital expenditures were made for additions, improvements, and replacements to this segment’s transmission and storage systems.
February 6, 2003, the Company acquired the Empire State Pipeline (Empire) from Duke Energy Corporation for $180.0 million in cash plus approximately $58.0 million of project debt. Empire is a 157-mile, 24-inch pipeline that begins at the United States/Canadian border at the Chippawa Channel of the Niagara River near Buffalo, New York, which is within the Company’s service territory, and terminates in Central New York just north of Syracuse, New York. Empire can transport 525 million cublc feet of gas per day and currently has almost all of its capacity under contract, with a substantial portion being long-term contracts. The initial financing of the acquisition was accomplished through short-term borrowings. Long-term financing alternatives include issuing stock and selling non-regulated assets such as Timber acreage and Exploration and Production reserves.* Presently, negotiations are ongoing for the sale of 70,000 acres of timber and the Company expects that a purchase agreement will be finalized soon.*
The Company also continues to explore various opportunities to participate in transporting gas to the Northeast, either through Supply Corporation’s system or in partnership with others. This includes the proposed Northwinds Pipeline that the Company and TransCanada PipeLines Limited are pursuing. This project would be a 215-mile, 30-inch natural gas pipeline that would originate in Kirkwall, Ontario, cross into the United States near Buffalo, New York and follow a southerly route to its destination in the Ellisburg-Leidy area in Pennsylvania.* The Company did not incur any material costs associated with this project during the quarter ended December 31, 2002. The initial capacity of the pipeline would be approximately 500 million cubic feet of natural gas per day with the estimated cost of the pipeline ranging from $350-$400 million.* If the pipeline is constructed, it is possible that a significant amount of the construction costs would be financed by banks or other financial institutions with the pipeline serving as collateral for the financing arrangement.*
Exploration and ProductionThe Exploration and Production segment capital expenditures for the three months ended December 31, 2002 included approximately $12.2 million for on-shore drilling construction and recompletion costs for wells located in Louisiana, Texas, California and Canada as well as onshore geological and geophysical costs and fixed asset purchases. Of the $12.2 million amount, $7.1 million was spent on the Exploration and Production segment’s Canadian properties. The Exploration and Production segment’s capital expenditures also included approximately $0.5 million for Seneca’s offshore program in the Gulf of Mexico.
InternationalThe majority of the International segment capital expenditures were concentrated in improvements and replacements within the district heating and power generation plants in the Czech Republic.
TimberThe majority of the Timber segment capital expenditures were made for purchases of equipment for Highland’s sawmill and kiln operations. As discussed above, negotiations are ongoing for the sale of 70,000 acres of timber and the Company expects that a purchase agreement will be finalized soon.*
The Company continuously evaluates capital expenditures and investments in corporations and partnerships. The amounts are subject to modification for opportunities such as the acquisition of attractive oil and gas properties, timber or storage facilities and the expansion of transmission line capacities. While the majority of capital expenditures in the Utility segment are necessitated by the continued need for replacement and upgrading of mains and service lines, the magnitude of future capital expenditures or other investments in the Company’s other business segments depends, to a large degree, upon market conditions.*
Consolidated short-term debt increased $6.7 million during the first quarter of 2003. The Company continues to consider short-term debt an important source of cash for temporarily financing capital expenditures and investments in corporations and/or partnerships, gas-in-storage inventory, unrecovered purchased gas costs, exploration and development expenditures and other working capital needs. Fluctuations in these items can have a significant impact on the amount and timing of short-term debt. The Company has Securities and Exchange Commission (SEC) authorization under the Public Utility Holding Company Act of 1935, as amended, to borrow and have outstanding as much as $750.0
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)million of short-term debt at any time through December 31, 2005. The total amount available to be issued under the Company’s commercial paper program is $200.0 million. The commercial paper program is backed by a committed $220 million, 364-day and 3-year credit facility. Under this committed credit facility, the Company agrees that its debt to capitalization ratio will not at the last day of any fiscal quarter, exceed .65 from September 30, 2002 through September 30, 2003, .625 from October 1, 2003 through September 30, 2004 and .60 from October 1, 2004 and thereafter. With regards to the Company’s short-term notes payable to banks, the Company utilizes uncommitted bank lines of credit aggregating to $440.0 million. These uncommitted bank lines of credit are revocable at the option of the financial institutions and are reviewed on an annual basis. The Company anticipates that these lines of credit will continue to be renewed.* If a downgrade in the Company’s commercial paper program credit ratings were to occur, access to the commercial paper markets might not be possible.* However, the Company expects that it could borrow under its uncommitted bank lines of credit or seek other liquidity sources, including cash provided by operations.* At December 31, 2002, the Company had outstanding short-term notes payable to banks and commercial paper of $152.3 million and $119.8 million, respectively.
The Company’s present liquidity position is believed to be adequate to satisfy known demands.* Under the Company’s existing indenture covenants, at December 31, 2002, the Company would have been permitted to issue up to a maximum of $230.0 million in additional long-term unsecured indebtedness at projected market interest rates (subject to the debt to capitalization ratio constraints noted in the previous paragraph) in addition to being able to issue new indebtedness to replace maturing debt.
The Company’s indenture also contains certain cross-default provisions wherein the failure by the Company to pay the scheduled interest or principal on its outstanding short-term or long-term debt (if such failure is not cured) could trigger the obligation to re-pay the debt outstanding under said indenture. The Company believes that it has adequate committed credit facilities in place to protect against such defaults.*
The Company also has authorization from the SEC, under the Public Utility Holding Company Act of 1935, to issue long-term debt securities and equity securities in amounts not exceeding $1.5 billion at any one time outstanding during the order’s authorization period, which extends to December 31, 2005. In January 2003, the Company registered and has available $800 million of debt and equity securities under the Securities Act of 1933.
The Company has entered into certain off-balance sheet financing arrangements. These financing arrangements are primarily operating and capital leases. The Company’s consolidated subsidiaries have operating leases, the majority of which are with the Utility and the Pipeline and Storage segments, having a remaining lease commitment of approximately $30.4 million. These leases have been entered into for the use of vehicles, construction tools, meters, computer equipment and other items and are accounted for as operating leases. The Company’s unconsolidated subsidiaries, which are accounted for under the equity method, have capital leases of electric generating equipment having a remaining lease commitment of approximately $9.5 million. The Company has guaranteed 50% or $4.8 million of these capital lease commitments.
The following table summarizes the Company’s contractual financial commitments at December 31, 2002 and the twelve-month periods over which they occur:
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)
- -------------------------------------- -----------------------------------------------------------------------------------------
Payments by Expected Maturity Dates
-----------------------------------------------------------------------------------------
(Millions of Dollars) 2003 2004 2005 2006 2007 Thereafter Total
- -------------------------------------- ------------ ------------ ----------- ----------- ----------- -------------- ------------
Long-Term Debt 160.8 235.8 4.8 3.3 - 899.2 $1,303.9
Short-Term Bank Notes 152.3 - - - - - 152.3
Commercial Paper 119.8 - - - - - 119.8
Operating Lease Commitments 8.0 6.1 4.8 3.4 2.6 5.5 30.4
Capital Lease Commitments 0.6 0.6 0.8 0.7 0.6 1.5 4.8
- -------------------------------------- ------------ ------------ ----------- ----------- ----------- -------------- ------------
The amounts and timing of the issuance and sale of debt and/or equity securities will depend on market conditions, indenture requirements, regulatory authorizations, and the requirements of the Company.
The Company is involved in litigation arising in the normal course of business. Also in the normal course of business, the Company is involved in tax, regulatory and other governmental audits, inspections, investigations and other proceedings that involve state and federal taxes, safety, compliance with regulations, rate base, cost of service and purchased gas cost issues, among other things. While the resolution of such matters could have a material effect on earnings and cash flows in the year of resolution, none of these 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.
For a complete discussion of market risk sensitive instruments, refer to “Market Risk Sensitive Instruments” in Item 7 of the Company’s 2002 Form 10-K. There have been no subsequent material changes to the Company’s exposure to market risk sensitive instruments.
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.
On October 11, 2000, the NYPSC approved a settlement agreement (Agreement) between Distribution Corporation, Staff of the Department of Public Service, the New York State Consumer Protection Board and Multiple Intervenors (an advocate for large commercial and industrial customers) that establishes rates for a three-year period beginning October 1, 2000. For a complete discussion of this Agreement, refer to "Rate Matters" in Item 7 of the Company's 2002 Form 10-K. There have been no subsequent changes to that disclosure.
On September 20, 2001, the NYPSC issued an order under which Distribution Corporation was Ordered to Show Cause why an action for penalties up to $19 million should not be commenced against it for alleged violations of consumer protection requirements. According to the NYPSC, the alleged violations may have caused or contributed to the death of an individual in an unheated apartment. On December 3, 2001, Distribution Corporation filed its response (submitted under a seal of confidentiality imposed by the Supreme Court, Erie County designed to protect the personal privacy interests of the deceased individual) and requested that the NYPSC either close (dismiss) the Show Cause proceeding based on the evidence presented in Distribution’s response, or hold investigatory hearings “to demonstrate that a penalty action is unwarranted.” On July 25, 2002 the NYPSC issued an order granting Distribution Corporation’s request for hearings, and referred the matter to an administrative law judge for scheduling. The Company believes and will continue to vigorously assert that the NYPSC’s allegations lack merit.
Distribution Corporation currently does not have a rate case on file with the Pennsylvania Public Utility Commission (PaPUC). On January 27, 2003, Distribution Corporation petitioned the PaPUC for a waiver of a rate case filing requirement relating to use of historic information for the purpose of establishing new rates. The purpose of the filing is to permit Distribution Corporation to file a rate case on or before April 1, 2003 using projections based on the fiscal year ended September 30, 2002. The outcome of Distribution Corporation's effort cannot be ascertained at this time.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)Supply Corporation currently does not have a rate case on file with the FERC. Management will continue to monitor Supply Corporation’s financial position to determine the necessity of filing a rate case in the future.
Environmental Matters. The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. The Company has established procedures for the ongoing evaluation of its operations to identify potential environmental exposures and comply with regulatory policies and procedures. It is the Company’s policy to accrue estimated environmental clean-up costs (investigation and remediation) when such amounts can reasonably be estimated and it is probable that the Company will be required to incur such costs. At December 31, 2002, the Company has estimated its remaining clean-up costs related to former manufactured gas plant sites and third party waste disposal sites will be in the range of $5.1 million to $6.1 million.* The minimum liability of $5.1 million has been recorded on the Consolidated Balance Sheet at December 31, 2002. Other than discussed in Note H of the 2002 Form 10-K (referred to below), the Company is currently not aware of any material additional exposure to environmental liabilities. However, adverse changes in environmental regulations or other factors could impact the Company.*
For further discussion refer to Note H - Commitments and Contingencies under the heading “Environmental Matters” in Item 8 of the Company’s 2002 Form 10-K.
Safe Harbor for Forward-Looking Statements. The Company is including the following cautionary statement in this Form 10-Q to make applicable and take advantage of the safe harbor provisions of 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 an asterisk (“*”), are forward-looking statements and accordingly involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. The forward-looking statements contained herein are based on various assumptions, many of which are based, in turn, upon further assumptions. The Company’s expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including, without limitation, management’s examination of historical operating trends, data contained in the Company’s records and other data available from third parties, but there can be no assurance that management’s expectations, beliefs or projections will result or be achieved or accomplished. In addition to other factors and matters discussed elsewhere herein, the following are important factors that, in the view of the Company, could cause actual results to differ materially from those discussed in the forward-looking statements:
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 RiskRefer to the “Market Risk Sensitive Instruments” section in Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 4. Controls and ProceduresThe following information includes the evaluation of disclosure controls and procedures by the Company’s Chief Executive Officer and Treasurer, along with any significant changes in internal controls of the Company.
Evaluation of disclosure controls and proceduresThe term “disclosure controls and procedures” is defined in Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934 (Exchange Act.) These rules refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. The Company’s Chief Executive Officer and Treasurer have evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days before the filing of this Quarterly Report on Form 10-Q (Evaluation Date), and, they have concluded that, as of the Evaluation Date, such controls and procedures were effective to accomplish those tasks
Changes in internal controlsThe Company maintains a system of internal accounting controls that are designed to provide reasonable assurance that the Company’s transactions are properly authorized, the Company’s assets are safeguarded against unauthorized or improper use, and the Company’s transactions are properly recorded and reported to permit preparation of the Company’s financial statements in conformity with generally accepted accounting principles in the United States. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s internal controls subsequent to the Evaluation Date, nor were there any significant deficiencies or material weaknesses in the Company’s internal controls.
Part II. Other InformationIn an action instituted in the New York State Supreme Court, Chautauqua County on January 31, 2000 against Seneca Resources Corporation (“Seneca”), National Fuel Resources, Inc., and “National Fuel Gas Corporation,” Donald J. and Margaret Ortel and Brian and Judith Rapp, “individually and on behalf of all those similarly situated,” allege, in an amended complaint which adds National Fuel Gas Company as a party defendant (a) that Seneca underpaid royalties due under leases operated by it, and (b) that Seneca’s co-defendants (i) fraudulenty participated in nd concealed such alleged underpayment, and (ii)
Part II. Other Information (Cont.)induced Seneca’s alleged breach of such leases. Plaintiffs seek an accounting, declaratory and related injunctive relief, and compensatory and exemplary damages. Defendants have denied each of plaintiffs’ material substantive allegations and set up twenty-five affirmative defenses in separate verified answers.
A motion was made by plaintiffs on July 15, 2002 to certify a class comprising all persons presently and formerly entitled to receive royalties on the sale of natural gas produced and sold from wells operated in New York by Seneca (and its predecessor Empire Exploration, Inc). On December 23, 2002, the court granted certification of the proposed class, as modified to exclude those leaseholders whose leases provide for calculation of royalties based upon a flat fee, or flat fee per cubic foot of gas produced. The court’s order states that there are approximately 749 potential class members.
The Company believes, based on the information presently known, that the ultimate resolution of this matter will not be material to the consolidated financial condition, results of operations, or cash flow of the Company.* No assurances can be given, however, as to the ultimate outcome of this matter, and it is possible that the outcome could be material to results of operations or cash flow for a particular quarter or annual period.
For a discussion of various environmental and other matters, refer to Part I, Item 1 at Note 4 and Part I, Item 2 – MD&A of this report under the heading “Other Matters.”
The Company is involved in litigation arising in the normal course of business. Also in the normal course of business, the Company is involved in tax, regulatory and other governmental audits, inspections, investigations and other proceedings that involve state and federal taxes, safety, compliance with regulations, rate base, cost of service and purchased gas cost issues, among other things. While the resolution of such matters could have a material effect on earnings and cash flows in the period of resolution, none of these 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.
Item 2. Changes in SecuritiesOn October 1, 2002, the Company issued a total of 2,160 unregistered shares of Company common stock to the nine non-employee directors of the Company, 240 shares to each such director. These shares were issued as partial consideration for the directors’ services during the quarter ended December 31, 2002, pursuant to the Company’s Retainer Policy for Non-Employee Directors. These transactions were exempt from registration by Section 4(2) of the Securities Act of 1933 as transactions not involving a public offering.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3(ii)) National Fuel Gas Company By-Laws as amended on December 12, 2002
(12) Statements regarding Computation of Ratios:
Ratio of Earnings to Fixed Charges for the Twelve Months Ended December 31, 2002 and the Fiscal Years Ended
September 30, 1998 through 2002.
Item 6. Exhibits and Reports on Form 8-K (Cont.)
(99) Additional Exhibits:
99.1 National Fuel Gas Company Consolidated Statement of Income for the Twelve
Months Ended December 31, 2002 and 2001.
99.2 Written statements of Chief Executive Officer and Principal Financial Officer
furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
A report on Form 8-K dated September 12, 2002 was filed on October 3, 2002 to file an exhibit for
an Underwriting Agreement among the Company, Goldman Sachs and Co. and Edward D. Jones & Co.,
L.P. This report also presented an exhibit for an Officer's Certificate establishing 6.50% notes
due 2022. These exhibits were filed under Item 7, "Financial Statements and Exhibits."
A report on Form 8-K dated October 3, 2002 was filed on October 4, 2002 regarding a press release
issued by the Company regarding its agreement to acquire the Empire State Pipeline from a
subsidiary of Duke Energy Corporation. This information was filed under Item 5, "Other Events."
Exhibits were filed under Item 7, "Financial Statements and Exhibits."
A report on Form 8-K dated October 24, 2002 was filed on October 28, 2002 regarding a press
release issued by the Company, concerning earnings for the fiscal year ended September 30, 2002 as
disclosed in a conference call on October 25, 2002. This Information was filed under Item 5,
"Other Events." Exhibits were filed under Item 7, "Financial Statements and Exhibits."
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, Principal Financial Officer
and Principal Accounting Officer
Date: February 11, 2003
I, Philip C. Ackerman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Fuel Gas Company;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: February 11, 2003
/s/ Philip C. Ackerman
Philip C. AckermanI, Joseph P. Pawlowski, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Fuel Gas Company;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: February 11, 2003
/s/ Joseph P. Pawlowski
Joseph P. Pawlowski EXHIBIT INDEX
(Form 10-Q)
Exhibit 3 National Fuel Gas Company By Laws
Exhibit 12 Statements regarding Computation of Ratios:
Ratio of Earnings to Fixed Charges for the Twelve
Months Ended December 31, 2002 and the Fiscal Years Ended
September 30, 1998 through 2002.
Exhibit 99.1 National Fuel Gas Company Consolidated Statement of
Income for the Twelve Months Ended December 31, 2002
and 2001.
Exhibit 99.2 National Fuel Gas Company Statement Furnished Pursuant to Section 906
of Sarbanes-Oxley Act of 2002.