United States
Securities
and Exchange Commission
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2003
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 April 30, 2003: 80,790,460 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 InformationReference 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.
Part I. Financial Information
National Fuel Gas Company
Consolidated Statements of Income and Earnings
Reinvested in the Business
(Unaudited)
March 31,
(Thousands of Dollars, Except Per Common Share Amounts) 2003 2002
----------------- -----------------
INCOME
Operating Revenues $809,065 $477,436
- -------------------------------------------------------------------------------- ----------------- -----------------
Operating Expenses
Purchased Gas 451,416 173,216
Fuel Used in Heat and Electric Generation 23,124 16,929
Operation and Maintenance 104,084 100,933
Property, Franchise and Other Taxes 24,477 20,108
Depreciation, Depletion and Amortization 49,261 43,114
Income Taxes 50,299 33,808
- -------------------------------------------------------------------------------- ----------------- -----------------
702,661 388,108
- -------------------------------------------------------------------------------- ----------------- -----------------
Operating Income 106,404 89,328
Income (Loss) from Unconsolidated Subsidiaries 287 (193)
Other Income 2,552 1,092
- -------------------------------------------------------------------------------- ----------------- -----------------
Income Before Interest Charges and
Minority Interest in Foreign Subsidiaries 109,243 90,227
- -------------------------------------------------------------------------------- ----------------- -----------------
Interest Charges
Interest on Long-Term Debt 23,597 23,231
Other Interest 3,317 3,726
- -------------------------------------------------------------------------------- ----------------- -----------------
26,914 26,957
- -------------------------------------------------------------------------------- ----------------- -----------------
Minority Interest in Foreign Subsidiaries (1,791) (1,346)
- -------------------------------------------------------------------------------- ----------------- -----------------
Net Income Available for Common Stock 80,538 61,924
EARNINGS REINVESTED IN THE BUSINESS
Balance at December 31 566,557 526,634
- -------------------------------------------------------------------------------- ----------------- -----------------
647,095 588,558
Dividends on Common Stock
(2003 - $0.26; 2002 - $0.2525) 20,934 20,112
- -------------------------------------------------------------------------------- ----------------- -----------------
Balance at March 31 $626,161 $568,446
================================================================================ ================= =================
Earnings Per Common Share:
Basic $1.00 $0.78
================================================================================ ================= =================
Diluted $0.99 $0.77
================================================================================ ================= =================
Weighted Average Common Shares Outstanding:
Used in Basic Calculation 80,588,927 79,664,218
================================================================================ ================= =================
Used in Diluted Calculation 80,999,321 80,776,274
================================================================================ ================= =================
See Notes to Consolidated Financial Statements
National Fuel Gas Company
Consolidated Statements of Income and Earnings
Reinvested in the Business
(Unaudited)
March 31,
(Dollars in Thousands, Except Per Common Share Amounts) 2003 2002
----------------- -----------------
INCOME
Operating Revenues $1,288,771 $869,763
- -------------------------------------------------------------------------------- ----------------- -----------------
Operating Expenses
Purchased Gas 657,170 302,621
Fuel Used in Heat and Electric Generation 42,151 32,547
Operation and Maintenance 194,856 205,479
Property, Franchise and Other Taxes 43,354 37,313
Depreciation, Depletion and Amortization 94,909 87,159
Income Taxes 77,912 56,518
- -------------------------------------------------------------------------------- ----------------- -----------------
1,110,352 721,637
- -------------------------------------------------------------------------------- ----------------- -----------------
Operating Income 178,419 148,126
Income (Loss) from Unconsolidated Subsidiaries 528 (250)
Other Income 4,378 3,282
- -------------------------------------------------------------------------------- ----------------- -----------------
Income Before Interest Charges and
Minority Interest in Foreign Subsidiaries 183,325 151,158
- -------------------------------------------------------------------------------- ----------------- -----------------
Interest Charges
Interest on Long-Term Debt 46,624 45,152
Other Interest 6,500 8,907
- -------------------------------------------------------------------------------- ----------------- -----------------
53,124 54,059
- -------------------------------------------------------------------------------- ----------------- -----------------
Minority Interest in Foreign Subsidiaries (2,730) (1,969)
- -------------------------------------------------------------------------------- ----------------- -----------------
Income Before Cumulative Effect of Changes in Accounting 127,471 95,130
Cumulative Effect of Changes in Accounting (8,892) -
- -------------------------------------------------------------------------------- ----------------- -----------------
Net Income Available for Common Stock 118,579 95,130
EARNINGS REINVESTED IN THE BUSINESS
Balance at October 1 549,397 513,488
- -------------------------------------------------------------------------------- ----------------- -----------------
667,976 608,618
Dividends on Common Stock
(2003 - $0.52; 2002 - $0.505) 41,815 40,172
- -------------------------------------------------------------------------------- ----------------- -----------------
Balance at March 31 $626,161 $568,446
================================================================================ ================= =================
Earnings Per Common Share:
Basic:
Income Before Cumulative Effect of Changes in Accounting $1.58 $1.20
Cumulative Effect of Changes in Accounting (0.11) -
- -------------------------------------------------------------------------------- ----------------- -----------------
Net Income Available for Common Stock $1.47 $1.20
================================================================================ ================= =================
Diluted:
Income Before Cumulative Effect of Changes in Accounting $1.58 $1.18
Cumulative Effect of Changes in Accounting (0.11) -
- -------------------------------------------------------------------------------- ----------------- -----------------
Net Income Available for Common Stock $1.47 $1.18
================================================================================ ================= =================
Weighted Average Common Shares Outstanding:
Used in Basic Calculation 80,495,496 79,566,962
================================================================================ ================= =================
Used in Diluted Calculation 80,895,211 80,592,122
================================================================================ ================= =================
See Notes to Consolidated Financial Statements
National Fuel Gas Company
Consolidated Balance Sheets
March 31,
2003 September 30,
(Unaudited) 2002
-------------------- -------------------
(Thousands of Dollars)
ASSETS
Property, Plant and Equipment $4,871,120 $4,512,651
Less - Accumulated Depreciation, Depletion
and Amortization 1,776,248 1,667,906
- ---------------------------------------------------------------------------- -------------------- -------------------
3,094,872 2,844,745
- ---------------------------------------------------------------------------- -------------------- -------------------
Current Assets
Cash and Temporary Cash Investments 65,609 22,216
Receivables - Net 325,851 95,510
Unbilled Utility Revenue 62,587 21,918
Gas Stored Underground 7,037 77,250
Materials and Supplies - at average cost 31,979 31,582
Unrecovered Purchased Gas Costs - 12,431
Prepayments 34,845 41,354
Fair Value of Derivative Financial Instruments 778 3,807
- ---------------------------------------------------------------------------- -------------------- -------------------
528,686 306,068
- ---------------------------------------------------------------------------- -------------------- -------------------
Other Assets
Recoverable Future Taxes 86,797 82,385
Unamortized Debt Expense 23,427 20,635
Other Regulatory Assets 56,375 26,104
Deferred Charges 3,055 5,914
Other Investments 67,131 65,090
Investments in Unconsolidated Subsidiaries 16,662 16,753
Goodwill 5,652 8,255
Other 33,312 25,360
- ---------------------------------------------------------------------------- -------------------- -------------------
292,411 250,496
- ---------------------------------------------------------------------------- -------------------- -------------------
$3,915,969 $3,401,309
============================================================================ ==================== ===================
See Notes to Consolidated Financial Statements
National Fuel Gas Company
Consolidated Balance Sheets
March 31,
2003 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 - 80,656,450 Shares and
80,264,734 Shares, Respectively $ 80,656 $ 80,265
Paid in Capital 464,743 446,832
Earnings Reinvested in the Business 626,161 549,397
- ---------------------------------------------------------------------------- -------------------- -------------------
Total Common Shareholder Equity Before
Items of Other Comprehensive Loss 1,171,560 1,076,494
Accumulated Other Comprehensive Loss (47,770) (69,636)
- ---------------------------------------------------------------------------- -------------------- -------------------
Total Comprehensive Shareholders' Equity 1,123,790 1,006,858
Long-Term Debt, Net of Current Portion 1,259,546 1,145,341
- ---------------------------------------------------------------------------- -------------------- -------------------
Total Capitalization 2,383,336 2,152,199
- ---------------------------------------------------------------------------- -------------------- -------------------
Minority Interest in Foreign Subsidiaries 32,920 28,785
- ---------------------------------------------------------------------------- -------------------- -------------------
Current and Accrued Liabilities
Notes Payable to Banks and
Commercial Paper 307,700 265,386
Current Portion of Long-Term Debt 145,419 160,564
Accounts Payable 184,119 100,886
Amounts Payable to Customers 27,597 -
Other Accruals and Current Liabilities 225,980 121,518
Fair Value of Derivative Financial Instruments 37,990 31,204
- ---------------------------------------------------------------------------- -------------------- -------------------
928,805 679,558
- ---------------------------------------------------------------------------- -------------------- -------------------
Deferred Credits
Accumulated Deferred Income Taxes 358,074 356,220
Taxes Refundable to Customers 15,596 15,596
Unamortized Investment Tax Credit 8,546 8,897
Other Regulatory Liabilities 75,360 82,676
Asset Retirement Obligation 38,170 -
Other Deferred Credits 75,162 77,378
- ---------------------------------------------------------------------------- -------------------- -------------------
570,908 540,767
- ---------------------------------------------------------------------------- -------------------- -------------------
Commitments and Contingencies - -
- ---------------------------------------------------------------------------- -------------------- -------------------
$3,915,969 $3,401,309
============================================================================ ==================== ===================
See Notes to Consolidated Financial Statements
National Fuel Gas Company
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
March 31,
(Thousands of Dollars) 2003 2002
------------------- ---------------------
OPERATING ACTIVITIES
Net Income Available for Common Stock $118,579 $95,130
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation, Depletion and Amortization 94,909 87,159
Deferred Income Taxes (5,008) 40,363
Cumulative Effect of Changes in Accounting 8,892 -
(Income) Loss from Unconsolidated Subsidiaries, Net of
Cash Distributions 91 641
Minority Interest in Foreign Subsidiaries 2,730 1,969
Other 8,283 1,454
Change in:
Receivables and Unbilled Utility Revenue (265,546) (69,827)
Gas Stored Underground and Materials and
Supplies 70,192 69,290
Unrecovered Purchased Gas Costs 12,431 (42,152)
Prepayments 9,174 2,837
Accounts Payable 80,937 (28,243)
Amounts Payable to Customers 27,597 (51,223)
Other Accruals and Current Liabilities 106,280 44,032
Other Assets (19,837) 10,330
Other Liabilities (9,621) 4,505
- ---------------------------------------------------------------------------- ------------------- ---------------------
Net Cash Provided by
Operating Activities 240,083 166,265
- ---------------------------------------------------------------------------- ------------------- ---------------------
INVESTING ACTIVITIES
Capital Expenditures (62,904) (109,288)
Investment in Subsidiaries, Net of Cash Acquired (181,152) -
Investment in Partnerships - (383)
Other 2,894 13,914
- ---------------------------------------------------------------------------- ------------------- ---------------------
Net Cash Used in Investing Activities (241,162) (95,757)
- ---------------------------------------------------------------------------- ------------------- ---------------------
FINANCING ACTIVITIES
Change in Notes Payable to Banks and Commercial Paper 42,103 (192,189)
Net Proceeds from Issuance of Long-Term Debt 248,513 148,977
Reduction of Long-Term Debt (210,109) (3,095)
Dividends Paid on Common Stock (41,711) (40,092)
Proceeds from Issuance of Common Stock 5,178 3,890
- ---------------------------------------------------------------------------- ------------------- ---------------------
Net Cash Provided by (Used in) Financing Activities 43,974 (82,509)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Effect of Exchange Rates on Cash 498 454
- ---------------------------------------------------------------------------- ------------------- ---------------------
Net Increase (Decrease) in Cash and Temporary Cash
Investments 43,393 (11,547)
Cash and Temporary Cash Investments at October 1 22,216 36,227
- ---------------------------------------------------------------------------- ------------------- ---------------------
Cash and Temporary Cash Investments at March 31 $65,609 $24,680
============================================================================ =================== =====================
See Notes to Consolidated Financial Statements
National Fuel Gas Company
Consolidated Statement of Comprehensive Income
(Unaudited)
March 31,
(Thousands of Dollars) 2003 2002
------------------- ---------------------
Net Income Available for Common Stock $80,538 $61,924
- ---------------------------------------------------------------------------- ------------------- ---------------------
Other Comprehensive Income (Loss), Before Tax:
Foreign Currency Translation Adjustment 18,878 306
Unrealized Gain on Securities Available for Sale Arising
During the Period 291 272
Unrealized Loss on Derivative Financial Instruments
Arising During the Period (28,402) (45,459)
Reclassification Adjustment for Realized (Gains) Losses on
Derivative Financial Instruments in Net Income 31,738 (10,582)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Other Comprehensive Income (Loss), Before Tax 22,505 (55,463)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Income Tax Expense Related to Unrealized Gain
on Securities Available for Sale Arising During the Period 102 95
Income Tax Benefit Related to Unrealized Loss on
Derivative Financial Instruments Arising During the Period (10,320) (18,898)
Reclassification Adjustment for Income Tax (Expense) Benefit on
Realized (Gains) Losses from Derivative Financial Instruments
In Net Income 12,174 (4,261)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Income Taxes - Net 1,956 (23,064)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Other Comprehensive Income (Loss) 20,549 (32,399)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Comprehensive Income $101,087 $29,525
============================================================================ =================== =====================
Six Months Ended
March 31,
(Thousands of Dollars) 2003 2002
------------------- ---------------------
Net Income Available for Common Stock $118,579 $95,130
- ---------------------------------------------------------------------------- ------------------- ---------------------
Other Comprehensive Income (Loss), Before Tax:
Foreign Currency Translation Adjustment 23,104 3,215
Unrealized Gain on Securities Available for Sale Arising
During the Period 730 738
Unrealized Loss on Derivative Financial Instruments
Arising During the Period (41,554) (24,366)
Reclassification Adjustment for Realized (Gains) Losses on
Derivative Financial Instruments in Net Income 39,369 (21,404)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Other Comprehensive Income (Loss), Before Tax 21,649 (41,817)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Income Tax Expense Related to Unrealized Gain
on Securities Available for Sale Arising During the Period 255 258
Income Tax Benefit Related to Unrealized Loss
on Derivative Financial Instruments Arising During the Period (15,909) (11,053)
Reclassification Adjustment for Income Tax (Expense) Benefit on
Realized (Gains) Losses from Derivative Financial Instruments
In Net Income 15,437 (8,515)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Income Taxes - Net (217) (19,310)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Other Comprehensive Income (Loss) 21,866 (22,507)
============================================================================ =================== =====================
Comprehensive Income $140,445 $72,623
============================================================================ =================== =====================
See Notes to Consolidated Financial Statements
National Fuel Gas Company
Notes to Consolidated Financial Statements
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 six months ended March 31, 2003 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 Changes in Accounting. Effective October 1, 2002, the Company adopted the Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards (SFAS) 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 estimated cost of retiring the asset as part of 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 determine the cumulative effect through October 1, 2002. This cumulative effect reduced earnings for the quarter ended December 31, 2002 and the six months ended March 31, 2003 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 and six months ended March 31, 2002, there would not have been a material change to net income available for common stock for the quarter and six months ended March 31, 2002.
Item 1. Financial Statements (Cont.)Effective October 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). In accordance with SFAS 142, the Company stopped amortization of goodwill and tested it for impairment as of October 1, 2002. The Company’s goodwill balance as of October 1, 2002 totaled $8.3 million and is related to the Company’s investments in the Czech Republic, which are included in the International segment. As a result of the impairment test, the Company recognized an impairment of $8.3 million, or $0.10 per diluted share. The Company used discounted cash flows to estimate the fair value of its goodwill and determined that the goodwill had no remaining value. Based on projected restructuring in the Czech electricity market, the Company cannot be assured that the level of future cash flows from the Company’s investments in the Czech Republic will attain the level that was originally forecasted. In accordance with SFAS 142, this impairment has been reported as a cumulative effect of change in accounting retroactive to the quarter ended December 31, 2002. As such, the Company’s reported earnings for the quarter ended December 31, 2002 have been reduced from $46.3 million ($0.57 per basic and diluted share) to $38.0 million ($0.47 per basic and diluted share). While the quarter and six months ended March 31, 2003 did not have any amortization expense associated with goodwill, the quarter and six months ended March 31, 2002 had $138,867 and $277,734, respectively, 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 an original 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 March 31, 2003 At September 30, 2002
----------------- ---------------------
Minimum Pension Liability Adjustment $(34,435) $(34,435)
Cumulative Foreign Currency
Translation Adjustment 8,289 (14,815)
Net Unrealized Loss on Derivative
Financial Instruments (22,258) (20,545)
Net Unrealized Gain on Securities
Available for Sale 634 159
-------- --------
Accumulated Other Comprehensive Loss $(47,770) $(69,636)
======== ========
Stock Option and Stock Award Plans. The Company has various stock option and stock award plans which provide or provided for the issuance of one or more of the following to key employees: incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, performance units or performance shares. Stock options under all plans have exercise prices equal to the average market price of Company common stock on the date of grant, and generally no option is exercisable less than one year or more than ten years after the date of each grant.
For the quarter and six months ended March 31, 2003 and March 31, 2002, no compensation expense was recognized for options granted under these plans since the Company accounts for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Had compensation expense for stock options granted under the Company’s stock option and stock award plans been determined based on fair value at the grant dates, which is the accounting treatment specified by SFAS 123, “Accounting for Stock-Based Compensation,” the Company’s net income and earnings per share would have been reduced to the pro forma amounts below:
Item 1. Financial Statements (Cont.)
Three Months Ended Six Months Ended
(Thousands of Dollars, Except Per March 31, March 31,
Common Share Amounts) 2003 2002 2003 2002
---- ---- ---- ----
Net Income Available for
Common Stock as Reported $80,538 $61,924 $118,579 $95,130
Deduct: Total Compensation
Expense Determined Based
on Fair Value at the Grant
Dates 882 605 2,163 1,763
---------- ---------- ----------- -----------
Pro Forma Net Income Available
For Common Stock $79,656 $61,319 $116,416 $93,367
======= ======= ======== =======
Earnings Per Common Share:
Basic - As Reported $1.00 $0.78 $1.47 $1.20
Basic - Pro Forma $0.99 $0.77 $1.45 $1.17
Diluted - As Reported $0.99 $0.77 $1.47 $1.18
Diluted - Pro Forma $0.98 $0.76 $1.44 $1.16
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 common shares outstanding shown on the Consolidated Statements of Income reflects the potential dilution as a result of these stock options as determined using the Treasury Stock Method. Stock options that are antidilutive are excluded from the calculation of diluted earnings per common share. For the quarters ended March 31, 2003 and 2002, 11,414,830 and 3,106,200 stock options, respectively, were excluded as being antidilutive. For the six months ended March 31, 2003 and 2002, 11,414,830 and 2,929,782 stock options, respectively, were excluded as being antidilutive.
The components of federal and state income taxes included in the Consolidated Statement of Income are as follows (in thousands):
Item 1. Financial Statements (Cont.)
Six Months Ended
March 31,
----------------------------------------
2003 2002
------------------- --------------------
Operating Expenses:
Current Income Taxes
Federal $63,237 $8,270
State 15,595 4,192
Foreign 4,088 3,693
Deferred Income Taxes
Federal (8,760) 33,732
State (1,835) 4,897
Foreign 5,587 1,734
- ---------------------------------------------------------------------------- ------------------- --------------------
77,912 56,518
Other Income:
Deferred Investment Tax Credit (348) (348)
Minority Interest in Foreign Subsidiaries (1,192) (672)
Cumulative Effect of Change in Accounting (SFAS 143) (354) -
- ---------------------------------------------------------------------------- ------------------- --------------------
Total Income Taxes $76,018 $55,498
============================================================================ =================== ====================
The U.S. and foreign components of income before income taxes are as follows (in thousands):
Six Months Ended
March 31,
2003 2002
------------------- --------------------
U.S. $177,710 $131,746
Foreign 16,888 18,882
- ---------------------------------------------------------------------------- ------------------- --------------------
$194,598 $150,628
============================================================================ =================== ====================
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.)
Six Months Ended
March 31,
----------------------------------------
2003 2002
------------------- --------------------
Income tax expense, computed at
statutory rate of 35% $68,109 $52,720
Increase (reduction) in taxes resulting from:
State income taxes 8,895 5,898
Foreign tax differential (86) (1,853)
Miscellaneous (900) (1,267)
- ---------------------------------------------------------------------------- ------------------- --------------------
Total Income Taxes $76,018 $55,498
============================================================================ =================== ====================
Significant components of the Company's deferred tax liabilities (assets) were as follows (in thousands):
At March 31, 2003 At September 30, 2002
--------------------------------- ----------------------------
Deferred Tax Liabilities:
Property, Plant and Equipment $441,269 $417,673
Other 14,560 27,930
- ------------------------------------------------------ --------------------------------- ----------------------------
Total Deferred Tax Liabilities 455,829 445,603
- ------------------------------------------------------ --------------------------------- ----------------------------
Deferred Tax Assets:
Other (97,755) (89,383)
- ------------------------------------------------------ --------------------------------- ----------------------------
Total Deferred Tax Assets (97,755) (89,383)
- ------------------------------------------------------ --------------------------------- ----------------------------
Total Net Deferred Income Taxes $358,074 $356,220
====================================================== ================================= ============================
Common Stock. During the six months ended March 31, 2003, the Company issued 395,160 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 March 31, 2003, 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 $4.0 million to $5.0 million. The minimum liability of $4.0 million has been recorded on the Consolidated Balance Sheet at March 31, 2003. Other than as discussed in Note H of the 2002 Form 10-K (referred to below), the Company is currently not aware of any material
Item 1. Financial Statements (Cont.)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.
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, except for the Pipeline and Storage segment. In February 2003, the Pipeline and Storage segment’s acquisition of the Empire State Pipeline (Empire) increased assets by $257.6 million. See further discussion of this acquisition in Note 6 Acquisition.
Quarter Ended March 31, 2003 (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 $504,625 $28,736 $84,513 $46,981 $125,900 $18,080 $808,835 $ 230 $ - $809,065
Intersegment
Revenues $ 7,616 $23,054 $ - $ - $ - $ - $ 30,670 $ - $(30,670) $ -
Segment Profit:
Net Income $ 39,731 $12,565 $14,216 $ 5,591 $ 4,612 $ 4,020 $ 80,735 $(126) $ (71) $ 80,538
Six Months Ended March 31, 2003 (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 $794,697 $50,172 $157,983 $84,772 $168,576 $31,869 $1,288,069 $702 $ - $1,288,771
Intersegment
Revenues $ 12,359 $44,731 $ - $ - $ - $ - $ 57,090 $ - $(57,090) $ -
Segment Profit:
Income Before
Cumulative Effect
of Change in
Accounting $ 59,008 $23,299 $ 23,026 $ 8,362 $ 6,198 $ 7,741 $ 127,634 $ 53 $ (216) $ 127,471
Quarter Ended March 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 $285,025 $19,918 $73,205 $34,645 $52,136 $11,899 $476,828 $ 608 $ - $477,436
Intersegment
Revenues $ 6,995 $22,170 $ - $ - $ - $ - $ 29,165 $5,496 $(34,661) $ -
Segment Profit:
Net Income $ 35,703 $ 9,800 $ 8,708 $ 3,774 $ 2,518 $ 1,700 $ 62,203 $ (467) $ 188 $ 61,924
Six Months Ended March 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
Storage
- --------------------------------------------------------------------------------------------------------------------------------------------
Revenue from
External Customers $507,381 $40,712 $148,205 $65,183 $84,921 $22,230 $868,632 $1,131 $ - $869,763
Intersegment
Revenues $12,628 $44,321 $ - $ - $ - $ - $ 56,949 $7,341 $(64,290) $ -
Segment Profit:
Net Income $53,744 $19,815 $ 10,149 $ 4,766 $ 4,466 $ 3,238 $ 96,178 $ (462) $ (586) $ 95,130
Item 1. Financial Statements (Concl.)Note 6 - Acquisition. On February 6, 2003, the Company acquired Empire from a subsidiary of Duke Energy Corporation for $189.2 million in cash plus $57.8 million of project debt. The acquisition, which was made through Highland (a direct subsidiary of the Company having timber property and sawmill operations in New York and Pennsylvania), consisted of acquiring 100% of two companies. Each of these companies have 50% ownership of Empire, which is a joint venture. Empire's results of operations were incorporated into the Company's consolidated financial statements for the period subsequent to the completion of the acquisition on February 6, 2003. 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. Empire delivers natural gas supplies to major industrial companies, utilities (including the Company's Utility segment), and power producers. Empire better positions the Company to bring Canadian gas supplies into the East Coast markets of the United States as demand for natural gas along the East Coast increases. Details of the acquisition are as follows:
Assets Acquired (see Condensed Balance Sheet below) $257,573
Liabilities Assumed (see Condensed Balance Sheet below) (68,368)
Cash Acquired at Acquisition (8,053)
---------
Cash Paid, Net of Cash Acquired $181,152
========
Condensed Balance Sheet:
Property, Plant and Equipment $220,792
Current Assets 14,984
Goodwill 5,652
Other Assets 16,145
--------
Total Assets $257,573
========
Equity $189,205
Long-Term Debt, Net of Current Portion 48,433
--------
Total Capitalization 237,638
Current Liabilities 15,441
Other Liabilities 4,494
---------
Total Capitalization and Liabilities $257,573
========
For 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.
In addition to financial measures calculated in accordance with generally accepted accounting principles in the United States of America (GAAP), this report contains non-GAAP financial measures that exclude certain profit and loss items described in this report. The Company believes that such non-GAAP financial measures are useful to investors because they provide an alternative method for assessing the Company’s operating results in a manner that is focused on the performance of the Company’s ongoing operations. The Company’s management uses these non-GAAP financial measures for the same purpose, and for planning and forecasting purposes. The presentation of these additional measures is not meant to be considered a substitute for financial measures prepared in accordance with GAAP.
The Company’s earnings were $80.5 million, or $1.00 per common share ($0.99 per common share on a diluted basis), for the quarter ended March 31, 2003. This compares with earnings of $61.9 million, or $0.78 per common share ($0.77 per common share on a diluted basis), for the quarter ended March 31, 2002. The increase in earnings is spread among all segments, as shown in the table below.
The Company’s earnings were $118.6 million, or $1.47 per common share (on a basic and diluted basis), for the six months ended March 31, 2003. This compares with earnings of $95.1 million, or $1.20 per common share ($1.18 per common share on a diluted basis), for the six months ended March 31, 2002. The increase in earnings of $23.4 million was spread among all segments other than the International segment, as shown in the table below. However, earnings for the six months ended March 31, 2003 included a reduction to earnings in the amount of $8.3 million ($0.10 per common share on a basic and diluted basis), representing the cumulative effect of a change in accounting for goodwill in the Company’s International segment. Earnings for the six months ended March 31, 2003 also 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 six months ended March 31, 2003 before the cumulative effect of these changes in accounting were $127.5 million, an increase of $32.4 million over earnings for the six months ended March 31, 2002.
Additional discussion of earnings in each of the business segments can be found in the business segment information that follows.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)
Earnings by Segment
- ------------------------------------ ------------------------------------------- -------------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ------------------------------------ ------------- ------------- --------------- ------------- ------------- ---------------
Increase/ Increase/
(Thousands) 2003 2002 (Decrease) 2003 2002 (Decrease)
- ------------------------------------ ------------- ------------- --------------- ------------- ------------- ---------------
Utility $39,731 $35,703 $4,028 $59,008 $53,744 $5,264
Pipeline and Storage 12,565 9,800 2,765 23,299 19,815 3,484
Exploration and Production(1) 14,216 8,708 5,508 22,389 10,149 12,240
International(1) 5,591 3,774 1,817 107 4,766 (4,659)
Energy Marketing 4,612 2,518 2,094 6,198 4,466 1,732
Timber 4,020 1,700 2,320 7,741 3,238 4,503
- ------------------------------------ ------------- ------------- --------------- ------------- ------------- ---------------
Total Reportable Segments 80,735 62,203 18,532 118,742 96,178 22,564
All Other (126) (467) 341 53 (462) 515
Corporate (71) 188 (259) (216) (586) 370
- ------------------------------------ ------------- ------------- --------------- ------------- ------------- ---------------
Total Consolidated(1) $80,538 $61,924 $18,614 $118,579 $95,130 $23,449
- ------------------------------------ ------------- ------------- --------------- ------------- ------------- ---------------
(1) Exclusive of the Cumulative Effect of Changes in Accounting, earnings for the six months ended March 31, 2003
for the Exploration and Production segment and International segment would have been $23,026 and $8,362, respectively.
Total consolidated earnings would have been $127,471.
Utility
Utility Operating Revenues
- ------------------------------- ------------------------------------------- ------------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
Increase/ Increase/
(Thousands) 2003 2002 (Decrease) 2003 2002 (Decrease)
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
Retail Sales Revenues:
Residential $373,160 $200,844 $172,316 $581,145 $365,680 $215,465
Commercial 69,259 34,905 34,354 104,099 60,900 43,199
Industrial 6,238 4,927 1,311 13,072 8,093 4,979
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
448,657 240,676 207,981 698,316 434,673 263,643
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
Off-System Sales 31,767 21,507 10,260 58,075 32,851 25,224
Transportation 33,721 30,487 3,234 56,232 52,981 3,251
Other (1,904) (650) (1,254) (5,567) (496) (5,071)
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
$512,241 $292,020 $220,221 $807,056 $520,009 $287,047
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
Utility Throughput
- ------------------------------- ------------------------------------------- ------------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
Increase/ Increase/
(MMcf) 2003 2002 (Decrease) 2003 2002 (Decrease)
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
Retail Sales:
Residential 36,688 29,678 7,010 59,568 47,591 11,977
Commercial 7,203 5,479 1,724 11,298 8,595 2,703
Industrial 936 894 42 2,246 1,593 653
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
44,827 36,051 8,776 73,112 57,779 15,333
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
Off-System Sales 4,342 7,651 (3,309) 9,609 11,600 (1,991)
Transportation 24,463 21,274 3,189 40,986 36,509 4,477
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
73,632 64,976 8,656 123,707 105,888 17,819
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)
Operating revenues for the Utility segment increased $220.2 million and $287.0 million, respectively, for the quarter and six months ended March 31, 2003 as compared with the quarter and six months ended March 31, 2002. These increases were primarily the result of increases in the average cost of purchased gas ($7.86 and $4.49 per thousand cubic feet (Mcf) during the quarters ended March 31, 2003 and 2002, respectively; $6.82 and $4.67per Mcf for the six months ended March 31, 2003 and 2002, respectively) and higher retail sales volumes and transportation volumes. Colder weather, as shown in the table below, was the major factor for the increase in retail sales volumes and transportation volumes. The increases in off-system sales revenues were largely due to higher gas prices which more than offset lower volumes. Due to profit sharing with retail customers, the margins resulting from off-system sales are minimal. The decreases to other revenues primarily reflect an estimated refund provision of $2.6 million and $8.1 million, respectively, recorded in the Utility’s New York jurisdiction in the quarter and six months ended March 31, 2003 that relates to a 50% sharing with customers of earnings over a predetermined amount. This earnings sharing mechanism is in accordance with the New York Rate Settlement that went into effect October 1, 2000. Refund provisions of $1.8 million and $3.4 million, respectively, were recorded in the quarter and six months ended March 31, 2002. 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 March 31, 2003 were $39.7 million, an increase of $4.0 million when compared with the quarter ended March 31, 2002. The major factor for this increase was the impact of weather, which in the Pennsylvania jurisdiction was approximately 28% colder than the quarter ended March 31, 2002. The impact of weather variations in the New York jurisdiction is mitigated by that jurisdiction’s weather normalization clause (WNC). The WNC in New York, which covers the eight month period from October through May, has had a stabilizing effect on earnings. In periods of colder than normal weather, the WNC benefits Distribution Corporation’s New York customers. For the quarter ended March 31, 2003, the WNC reduced New York ratepayers’ bills by approximately $4.8 million because it was colder than normal. For the quarter ended March 31, 2002, the WNC increased New York ratepayers’ bills by approximately $8.7 million because it was warmer than normal.
The Utility’s segment’s earnings for the six months ended March 31, 2003 were $59.0 million, an increase of $5.3 million when compared with the earnings of $53.7 million for the six months ended March 31, 2002. The major factor for this increase was the impact of weather, which in the Pennsylvania jurisdiction was approximately 31% colder than the six months ended March 31, 2002. As discussed above, the impact of weather variations in the New York jurisdiction is mitigated by that jurisdiction’s WNC. For the six months ended March 31, 2003, the WNC reduced New York ratepayers’ bills by approximately $6.1 million because it was colder that normal. For the six months ended March 31, 2002, the WNC increased New York ratepayers’ bills by approximately $15.7 million because 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 during the quarter ended December 31, 2002. As mentioned above, the final refund will not be known until the end of 2003.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)
Degree Days
- ---------------------------------- -------------- -------------- -------------------- --------------------------------
Percent
Three Months Ended Colder Than
--------------------------------
March 31 Normal 2003 2002 Normal Prior Year
- ---------------------------------- -------------- -------------- -------------------- ----------------- --------------
Buffalo 3,350 3,619 2,915 8.0 24.2
Erie 3,153 3,459 2,698 9.7 28.2
- ---------------------------------- -------------- -------------- -------------------- ----------------- --------------
Six Months Ended
March 31
- ---------------------------------- -------------- -------------- -------------------- ----------------- --------------
Buffalo 5,661 6,002 4,714 6.0 27.3
Erie 5,169 5,686 4,357 10.0 30.5
- ---------------------------------- -------------- -------------- -------------------- ----------------- --------------
Pipeline and Storage
Pipeline and Storage Operating Revenues
- ------------------------------------ ---------------------------------------- -------------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
Increase/ Increase/
(Thousands) 2003 2002 (Decrease) 2003 2002 (Decrease)
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
Firm Transportation $28,383 $22,710 $5,673 $50,196 $45,093 $5,103
Interruptible Transportation 1,155 728 427 1,502 1,508 (6)
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
29,538 23,438 6,100 51,698 46,601 5,097
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
Firm Storage Service 15,834 15,643 191 31,603 31,016 587
Interruptible Storage Service 25 6 19 25 7 18
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
15,859 15,649 210 31,628 31,023 605
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
Other 6,393 3,001 3,392 11,577 7,409 4,168
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
$51,790 $42,088 $9,702 $94,903 $85,033 $9,870
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
Pipeline and Storage Throughput
- ---------------------------------- ---------------------------------------- ---------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ---------------------------------- ------------ ------------ -------------- ----------- ----------- ---------------
Increase/ Increase/
(MMcf) 2003 2002 (Decrease) 2003 2002 (Decrease)
- ---------------------------------- ------------ ------------ -------------- ----------- ----------- ---------------
Firm Transportation 130,453 99,387 31,066 215,148 171,438 43,710
Interruptible Transportation 3,524 1,878 1,646 4,314 3,867 447
- ---------------------------------- ------------ ------------ -------------- ----------- ----------- ---------------
133,977 101,265 32,712 219,462 175,305 44,157
- ---------------------------------- ------------ ------------ -------------- ----------- ----------- ---------------
Operating revenues for the Pipeline and Storage segment increased $9.7 million and $9.9 million, respectively, for the quarter and six months ended March 31, 2003 as compared with the quarter and six months ended March 31, 2002. The acquisition of Empire State Pipeline (Empire) from Duke Energy Corporation on February 6, 2003 was a significant factor in these revenue increases. From February 6, 2003 to March 31, 2003, Empire recorded operating revenues of $5.8 million ($5.1 million in firm transportation revenues, $0.6 million in interruptible transportation revenues, and $0.1 million in other revenues). Supply Corporation’s revenue from unbundled pipeline sales and open access transportation (included in other revenues) was the other major factor in the revenue increase in the quarter and six month periods. For the quarter and six months ended March 31,
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)2003, revenue from unbundled pipeline sales and open access transportation increased $2.1 million and $2.9 million, respectively.
The Pipeline and Storage segment’s earnings for the quarter ended March 31, 2003 were $12.6 million, an increase of $2.8 million when compared with earnings of $9.8 million for the quarter ended March 31, 2002. As discussed above, higher revenues from unbundled pipeline sales and open access transportation and a $1.2 million earnings contribution from Empire were the main factors in this increase.
The Pipeline and Storage segment’s earnings for the six months ended March 31, 2003 were $23.3 million, an increase of $3.5 million when compared with earnings of $19.8 million for the six months ended March 31, 2002. This increase can be attributed primarily to an increase in revenues from unbundled pipeline sales and open access transportation as well as the earnings contribution from Empire discussed above.
Exploration and Production
Exploration and Production Operating Revenues
- ----------------------------------- ---------------------------------------- -----------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ----------------------------------- ------------ ------------ -------------- ------------- ------------ --------------
Increase/ Increase/
(Thousands) 2003 2002 (Decrease) 2003 2002 (Decrease)
- ----------------------------------- ------------ ------------ -------------- ------------- ------------ --------------
Gas (after Hedging) $41,986 $36,804 $5,182 $77,748 $71,909 $5,839
Oil (after Hedging) 40,867 35,472 5,395 77,496 68,809 8,687
Gas Processing Plant 8,011 3,344 4,667 14,572 7,562 7,010
Other 141 536 (395) (321) 5,978 (6,299)
Intrasegment Elimination * (6,492) (2,951) (3,541) (11,512) (6,053) (5,459)
- ----------------------------------- ------------ ------------ -------------- ------------- ------------ --------------
$84,513 $73,205 $11,308 $157,983 $148,205 $9,778
- ----------------------------------- ------------ ------------ -------------- ------------- ------------ --------------
* Represents the elimination of certain West Coast gas production revenue included in "Gas (after Hedging)" in the table above
that was sold to the gas processing plant shown in the table above. An elimination for the same dollar amount was made to reduce
the gas processing plant's Purchased Gas expense.
- ----------------------------------------- -------------------------------------- --------------------------------------
Production Volumes Three Months Ended Six Months Ended
March 31, March 31,
- ------------------------------------------ ---------- ----------- --------------- ----------- ----------- --------------
Increase/ Increase/
2003 2002 (Decrease) 2003 2002 (Decrease)
- ----------------------------------------- ---------- ----------- --------------- ----------- ----------- --------------
Gas Production (MMcf)
Gulf Coast 5,201 5,609 (408) 10,559 12,797 (2,238)
West Coast 1,104 1,196 (92) 2,301 2,442 (141)
Appalachia 1,300 1,144 156 2,388 2,202 186
Canada 1,525 1,810 (285) 3,031 3,641 (610)
- ----------------------------------------- ---------- ----------- --------------- ----------- ----------- --------------
9,130 9,759 (629) 18,279 21,082 (2,803)
- ----------------------------------------- ---------- ----------- --------------- ----------- ----------- --------------
Oil Production (thousands of barrels)
Gulf Coast 401 438 (37) 791 892 (101)
West Coast 731 747 (16) 1,467 1,496 (29)
Appalachia 2 1 1 4 3 1
Canada 604 733 (129) 1,244 1,488 (244)
- ----------------------------------------- ---------- ----------- --------------- ----------- ----------- --------------
1,738 1,919 (181) 3,506 3,879 (373)
- ----------------------------------------- ---------- ----------- --------------- ----------- ----------- --------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)
Average Prices
- ----------------------------------------- --------------------------------------- ----------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ----------------------------------------- ----------- ----------- --------------- ------------ ------------ --------------
Increase/ Increase/
2003 2002 (Decrease) 2003 2002 (Decrease)
- ----------------------------------------- ----------- ----------- --------------- ------------ ------------ --------------
Average Gas Price/Mcf
Gulf Coast $6.60 $2.41 $4.19 $5.38 $2.41 $2.97
West Coast $5.75 $2.35 $3.40 $4.87 $2.35 $2.52
Appalachia $4.83 $3.82 $1.01 $4.28 $3.74 $0.54
Canada $5.41 $1.99 $3.42 $4.50 $2.03 $2.47
Weighted Average $6.04 $2.49 $3.55 $5.02 $2.48 $2.54
Weighted Average After Hedging $4.60 $3.77 $0.83 $4.25 $3.41 $0.84
Average Oil Price/bbl
Gulf Coast $32.41 $20.16 $12.25 $29.74 $19.65 $10.09
West Coast $29.98 $17.15 $12.83 $26.87 $16.25 $10.62
Appalachia $27.73 $19.19 $8.54 $27.61 $22.80 $4.81
Canada $30.32 $17.51 $12.81 $26.57 $15.93 $10.64
Weighted Average $30.65 $17.98 $12.67 $27.41 $16.92 $10.49
Weighted Average After Hedging $23.51 $18.48 $5.03 $22.11 $17.74 $4.37
- ----------------------------------------- ----------- ----------- --------------- ------------ ------------ --------------
Operating revenues for the Exploration and Production segment increased $11.3 million for the quarter ended March 31, 2003 as compared with the quarter ended March 31, 2002. Oil production revenue after hedging increased $5.4 million due primarily to an increase in the weighted average price of oil after hedging ($5.03 per bbl). The revenue increase resulting from higher weighted average oil prices after hedging helped offset the revenue decrease associated with a 181,000 barrel decline in oil production. Gas production revenue after hedging increased $5.2 million due primarily to an increase in the weighted average price of gas after hedging ($0.83 per Mcf). The revenue increase resulting from higher weighted average gas prices after hedging helped offset the revenue decrease associated with a 0.6 billion cubic feet (Bcf) decline in gas production. Most of this production decline occurred in the Gulf Coast of Mexico (a 0.4 Bcf decline). The Company had anticipated some of this decline in production due to its plan to phase out of that region. However, as a result of Hurricane Lili, some wells have not returned to pre-hurricane production.
Operating revenues for the Exploration and Production segment increased $9.8 million for the six months ended March 31, 2003 as compared with the six months ended March 31, 2002. Oil production revenue after hedging increased $8.7 million due to a $4.37 per bbl increase in the weighted average price of oil after hedging. Increases in the weighted average price of oil after hedging ($4.37 per bbl) more than offset an overall decrease in oil production. Gas production revenue after hedging increased $5.8 million. Increases in the weighted average price of gas after hedging ($0.84 per Mcf) more than offset an overall decrease in gas production. As discussed above, most of the decrease in gas production occurred in the Gulf Coast of Mexico (a 2.2 Bcf decline). The plan to phase out of this region contributed to the decrease. However, the production decline was amplified by the shutting-in of production during Hurricane Lili and the fact that some of those wells have not returned to pre-hurricane production levels.
The Exploration and Production segment’s earnings for the quarter ended March 31, 2003 were $14.2 million, an increase of $5.5 million when compared with earnings of $8.7 million for the quarter ended March 31, 2002. However, earnings for the quarter ended March 31, 2002 included a non-cash $1.1 million (after tax) reversal of a reserve for the Company’s exposure to Enron Corp. (“Enron”). Exclusive of the $1.1 million
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)reversal, earnings in the Exploration and Production segment for the quarter ended March 31, 2002 were $7.6 million. The increase in earnings of $6.6 million (exclusive of the Enron reserve reversal) was largely due to higher oil and gas prices, as discussed above. An increase in depreciation, depletion and amortization expense (mostly related to Seneca’s Canadian properties) and a slight increase in operating expenses partially offset the favorable impact of higher commodity prices.
The Exploration and Production segment’s earnings for the six months ended March 31, 2003 were $22.4 million, an increase of $12.3 million when compared with earnings of $10.1 million for the six months ended March 31, 2002. However, as discussed above, earnings for the six months ended March 31, 2003 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 six months ended March 31, 2003 were $23.0 million. In the six months ended March 31, 2002, this segment recorded a net $2.2 million non-cash charge (after tax) to reserve for the Company’s exposure to Enron. This reserve, which originally amounted to $3.3 million, was established during the quarter ended December 31, 2001, and was reversed over the ensuing nine month period. Exclusive of this non-cash charge, earnings in the Exploration and Production segment for the six months ended March 31, 2002 were $12.3 million. The increase in earnings of $10.7 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, as discussed above.
International
International Operating Revenues
- -------------------------------------- ------------------------------------------- -------------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- -------------------------------------- ------------- ------------- --------------- ------------- ------------- ---------------
Increase/ Increase/
(Thousands) 2003 2002 (Decrease) 2003 2002 (Decrease)
- -------------------------------------- ------------- ------------- -------------- ------------- ------------- ---------------
Heating $36,718 $26,417 $10,301 $64,873 $49,090 $15,783
Electricity 9,103 7,550 1,553 18,032 14,649 3,383
Other 1,160 678 482 1,867 1,444 423
- -------------------------------------- ------------- ------------- --------------- ------------- ------------- ---------------
$46,981 $34,645 $12,336 $84,772 $65,183 $19,589
- -------------------------------------- ------------- ------------- --------------- ------------- ------------- ---------------
International Heating and Electric Volumes
- -------------------------------------- ------------------------------------------- -------------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- -------------------------------------- ------------- ------------- --------------- ------------- ------------- ---------------
Increase/ Increase/
2003 2002 (Decrease) 2003 2002 (Decrease)
- -------------------------------------- ------------- ------------- --------------- ------------- ------------- ---------------
Heating Sales (Gigajoules) (1) 3,824,337 3,533,914 290,423 7,059,200 6,765,606 293,594
Electricity Sales
(megawatt hours) 312,959 288,904 24,055 597,048 550,585 46,463
- -------------------------------------- ------------- ------------- --------------- ------------- ------------- ---------------
(1) Gigajoules = one billion joules. A joule is a unit of energy.
Operating revenues for the International segment increased $12.3 million and $19.6 million, respectively, for the quarter and six months ended March 31, 2003 as compared with the quarter and six months ended March 31, 2002. Colder weather was the main reason for the revenue increase in both periods. Operating revenues for the
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)International segment also benefited from an increase in the value of the Czech Koruna (CZK) compared to the U.S. dollar.
The International segment’s earnings for the quarter ended March 31, 2003 were $5.6 million, an increase of $1.8 million when compared with earnings of $3.8 million for the quarter ended March 31, 2002. The increase can be attributed primarily to colder weather in the Czech Republic service territory and higher rates for heating service. An increase in the value of the CZK compared to the U.S. dollar was also a factor in the earnings increase.
The International segment’s earnings for the six months ended March 31, 2003 were $0.1 million, a decrease of $4.7 million when compared with earnings of $4.8 million for the six months ended March 31, 2002. However, earnings for the six months ended March 31, 2003 included a reduction to earnings in the amount of $8.3 million, representing the cumulative effect of a change in accounting for goodwill. The Company’s goodwill balance as of October 1, 2002 totaled $8.3 million and was related to the Company’s investments in the Czech Republic, which are included in the International segment. In accordance with SFAS 142, the Company stopped amortization of goodwill and tested its goodwill for impairment as of October 1, 2002. The Company completed this impairment test during the quarter ended March 31, 2003, and as a result of this test, recognized an impairment of $8.3 million. In accordance with SFAS 142, this impairment was reported as a cumulative effect of change in accounting retroactive to the quarter ended December 31, 2002. Exclusive of this cumulative effect, earnings in the International segment for the six months ended March 31, 2003 were $8.4 million. The increase in earnings of $3.6 million (exclusive of the cumulative effect of change in accounting) can be attributed to colder weather, higher heating service rates, improved electricity sales, and an increase in the value of the CZK compared to the U.S. dollar.
Energy Marketing
Energy Marketing Operating Revenues
- ----------------------------------- -------------------------------------------- -----------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ----------------------------------- ------------- -------------- --------------- ------------ ------------- --------------
Increase/ Increase/
(Thousands) 2003 2002 (Decrease) 2003 2002 (Decrease)
- ----------------------------------- ------------- -------------- --------------- ------------ ------------- --------------
Natural Gas (after Hedging) $125,860 $52,213 $73,647 $168,534 $85,016 $83,518
Electricity - - - - - -
Other 40 (77) 117 42 (95) 137
- ----------------------------------- ------------- -------------- --------------- ------------ ------------- --------------
$125,900 $52,136 $73,764 $168,576 $84,921 $83,655
- ----------------------------------- ------------- -------------- --------------- ------------ ------------- --------------
Energy Marketing Volumes
- ----------------------------------- -------------------------------------------- ----------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ----------------------------------- ------------- -------------- --------------- ----------- ------------- --------------
Increase/ Increase/
2003 2002 (Decrease) 2003 2002 (Decrease)
- ----------------------------------- ------------- -------------- --------------- ----------- ------------- --------------
Natural Gas - (MMcf) 18,987 11,785 7,202 26,662 18,975 7,687
- ----------------------------------- ------------- -------------- --------------- ----------- ------------- --------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)
Operating revenues for the Energy Marketing segment increased $73.8 million and $83.7 million, respectively, for the quarter and six months ended March 31, 2003, as compared with the quarter and six months ended March 31, 2002. These increases primarily reflect higher gas sales revenue due to the increased price of natural gas. The increase also reflects an increase in volumes as a result of the addition of several high volume customers and colder weather in western New York and northwestern Pennsylvania.
Earnings in the Energy Marketing segment increased $2.1 million and $1.7 million, respectively for the quarter and six months ended March 31, 2003 as compared with the quarter and six months ended March 31, 2002. These increases primarily reflect higher margins on gas sales and lower operating expenses.
Timber
Timber Operating Revenues
- ------------------------------- ------------------------------------------- ---------------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
Increase/ Increase/
(Thousands) 2003 2002 (Decrease) 2003 2002 (Decrease)
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
Log Sales $10,730 $ 5,625 $5,105 $18,449 $11,002 $7,447
Green Lumber Sales 1,980 1,995 (15) 3,561 3,639 (78)
Kiln Dry Lumber Sales 5,095 4,056 1,039 9,310 7,138 2,172
Other 275 223 52 549 451 98
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
Operating Revenues $18,080 $11,899 $6,181 $31,869 $22,230 $9,639
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
Timber Board Feet
- ------------------------------- ------------------------------------------- ---------------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
Increase/ Increase/
(Thousands) 2003 2002 (Decrease) 2003 2002 (Decrease)
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
Log Sales 3,161 2,304 857 5,737 4,428 1,309
Green Lumber Sales 3,853 3,657 196 7,017 6,667 350
Kiln Dry Lumber Sales 3,307 2,959 348 6,081 4,930 1,151
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
10,321 8,920 1,401 18,835 16,025 2,810
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
Operating revenues for the Timber segment increased $6.2 million and $9.6 million, respectively, for the quarter and six months ended March 31, 2003, as compared with the quarter and six months ended March 31, 2002. Higher sales of cherry logs and lumber, which command the highest prices, accounted for this increase.
Earnings in the Timber segment increased $2.3 million and $4.5 million, respectively for the quarter and six months ended March 31, 2003, as compared with the quarter and six months ended March 31, 2002. The increase is primarily due to higher margins resulting from higher sales of cherry logs and lumber. The planned sale of approximately 70,000 acres of timber property is discussed below under “Capital Resources and Liquidity - Investing Cash Flow - Timber.”
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)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.
Income from unconsolidated subsidiaries increased $0.5 million and $0.8 million, respectively, for the quarter and six months ended March 31, 2003 as compared with the quarter and six months ended March 31, 2002. These increases are largely due to increases in income from the Company’s investments in Seneca Energy and Model City.
Interest on long-term debt increased $0.4 million and $1.5 million, respectively, for the quarter and six months ended March 31, 2003 as compared with the quarter and six months ended March 31, 2002. These increases can be attributed primarily to higher average amounts of long-term debt outstanding.
Other interest charges decreased $0.4 million and $2.4 million, respectively, for the quarter and six months ended March 31, 2003 as compared with the quarter and six months ended March 31, 2002. These decreases resulted mainly from a decrease in the average amount of short-term debt outstanding and lower weighted average interest rates.
The Company’s primary sources of cash during the six-month period ended March 31, 2002 consisted of cash provided by operating activities and long-term debt. These sources were supplemented by issuances of common stock under the Company’s stock and benefit plans.
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 changes 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 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 year, and receivables historically increase during these periods from what was receivable at September 30.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)The storage gas inventory normally declines during the first and second quarters of the year and is replenished during the third and fourth quarters. For storage gas inventory accounted for under the last-in, first-out (LIFO) method, the current cost of replacing gas withdrawn from storage is recorded in the Consolidated Statements of Income and a reserve for gas replacement is recorded in the Consolidated Balance Sheets and is included under the caption “Other Accruals and Current Liabilities.” Such reserve is reduced as the inventory is replenished.
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, no cost collars and options in an attempt to manage this energy commodity price risk.
Net cash provided by operating activities totaled $240.1 million for the six months ended March 31, 2003, an increase of $73.8 million compared with $166.3 million provided by operating activities for the six months ended March 31, 2002. Higher cash receipts from the sale of oil and gas in the Exploration and Production segment combined with lower working capital requirements in the Utility and International segments were the main contributors to this increase.
Expenditures for long-lived assets include additions to property, plant and equipment (capital expenditures) and investments in corporations (stock acquisitions) or partnerships, net of any cash acquired.
The Company’s expenditures for long-lived assets totaled $244.1 million during the six months ended March 31, 2003. The table below presents these expenditures:
------------------------------------------------------------- ----------------------- -----------------------
Six Months Ended March 31, 2003
(in millions of dollars)
-------------------------------------- ---------------------- ----------------------- -----------------------
Investments in Total
Capital Corporations or Expenditures for
Expenditures Partnerships Long-Lived Assets
-------------------------------------- ---------------------- ----------------------- -----------------------
Utility $23.7 $ - $23.7
Pipeline and Storage 10.1 181.2 (1) 191.3
Exploration and Production 27.4 - 27.4
International 0.6 - 0.6
Timber 1.0 - 1.0
Energy Marketing 0.1 - 0.1
All Other - - -
-------------------------------------- ---------------------- ----------------------- -----------------------
$62.9 $181.2 $244.1
-------------------------------------- ---------------------- ----------------------- -----------------------
(1) Investment amount is net of $8.0 million of cash acquired.
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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)On February 6, 2003, the Company acquired the Empire State Pipeline (Empire) from a subsidiary of Duke Energy Corporation for $189.2 million in cash plus $57.8 million of project debt. The acquisition, which was made through Highland (a direct subsidiary having timber property and sawmill operations in New York and Pennsylvania), consisted of acquiring 100% of two companies. Each of these companies have 50% ownership of Empire, which is a joint venture. Empire's results of operations were incorporated into the Company's consolidated financial statements for the period subsequent to the completion of the acquisition on February 6, 2003. 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. Empire delivers natural gas supplies to major industrial companies, utilities (including the Company's Utility segment) and power producers. Empire better positions the Company to bring Canadian gas supplies into the East Coast markets of the United States as demand for natural gas along the East Coast increases.* The initial financing of the acquisition was accomplished through short-term borrowings. However, it is anticipated that proceeds from the planned sales of 70,000 acres of timber property will be used to repay the short-term borrowings.* The planned sale of this timber property is discussed below under "Timber."
The Company also continues to explore various opportunities to expand its capabilities to transport gas to the East Coast, either through the Supply Corporation or Empire systems 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 six months ended March 31, 2003. 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 six months ended March 31, 2003 included approximately $25.9 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 $25.9 million amount, $15.7 million was spent on the Exploration and Production segment's Canadian properties. The Exploration and Production segment's capital expenditures also included approximately $1.5 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 land and timber for Seneca's timber operations, as well as equipment for Highland's sawmill and kiln operations.
As discussed above, the Company announced in March 2003, that its timber subsidiary, Highland, signed a purchase agreement to sell approximately 70,000 acres of its timber property located in Venango, Elk, Jefferson, McKean and Potter Counties in Pennsylvania and Allegany County in New York. Closing of the sale, and the sale price of about $190.0 million, are both contingent upon the results of a timber verification cruise and environmental review of the properties.* The sale does not require any regulatory approvals and is expected to close by July 31, 2003.* The Company intends to use the proceeds from this sale to repay short-term borrowings incurred in connection with the Empire acquisition.* Most of the timber sold has a very low historical
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)cost. As a result, upon closing of the transaction, the Company expects to record a gain on the sale in the range of $95 million to $100 million.*
The Company continuously evaluates capital expenditures and investments in corporations and partnerships. The amounts are subject to modification for opportunities such as the acquisition of attractive oil and gas properties, timber or storage facilities and the expansion of transmission line capacities. While the majority of capital expenditures in the Utility segment are necessitated by the continued need for replacement and upgrading of mains and service lines, the magnitude of future capital expenditures or other investments in the Company's other business segments depends, to a large degree, upon market conditions.*
Financing Cash Flow.In February 2003, the Company issued $250.0 million of 5.25% long-term notes due in March 2013. After deducting underwriting discounts and commissions, the net proceeds to the Company amounted to approximately $248.5 million. The proceeds of this debt issuance were used to refund $150.0 million of 7.30% medium-term notes which matured in February 2003. The remaining proceeds were used to reduce short-term borrowings.
In March 2003, the Company redeemed $50.0 million of 8.48% medium-term notes at a redemption price of $52.5 million. The Company also redeemed $2.3 million of 6.214% medium-term notes in March 2003 at a redemption price of $2.25 million. The Company used short-term borrowings to redeem this debt.
Consolidated short-term debt increased $42.3 million during the six months ended March 31, 2003. The temporary use of short-term debt to finance the acquisition of Empire was the main reason for this increase. As discussed above, the Company intends to use the proceeds from the sale of timber properties to repay short-term debt incurred in connection therewith.* 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 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 has agreed 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. At March 31, 2003, the Company's debt to capitalization ratio was .60. Given the constraints specified in the committed credit facility, the issuance of an additional $131.0 million in short-term and/or long-term debt would bring the Company's debt to capitalization ratio to .65. 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 any of the Company's credit ratings were to occur, access to the commercial paper markets might not be possible.* However, the Company expects that it could borrow under its uncommitted bank lines of credit or seek other liquidity sources, including cash provided by operations.* At March 31, 2003, the Company had outstanding short-term notes payable to banks and commercial paper of $163.7 million and $144.0 million, respectively.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)The Company's present liquidity position is believed to be adequate to satisfy known demands.* Under the Company's existing indenture covenants, at March 31, 2003, the Company would have been permitted to issue up to a maximum of $259.0 million in additional long-term unsecured indebtedness at then current market interest rates (further limited by the debt to capitalization ratio constraints noted in the previous paragraph) in addition to being able to issue new indebtedness to replace maturing debt.
The Company's 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 $800 million of debt and equity securities under the Securities Act of 1933. After the February 2003 debt issuance discussed above, the Company has available capacity to issue an additional $550 million of debt and equity securities registered under the Securities Act of 1933. The Company may sell all or a portion of the remaining registered securities if warranted by market conditions and the Company's capital requirements. Any offer and sale of the above mentioned securities will be made only by means of a prospectus meeting the requirements of the Securities Act of 1933 and the rules and regulations thereunder.
The 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 $32.0 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 minority owned entities, which are accounted for under the equity method, have capital leases of electric generating equipment having a remaining lease commitment of approximately $9.2 million. The Company has guaranteed 50% or $4.6 million of these capital lease commitments.
The following table summarizes the Company's expected future contractual cash obligations as of March 31, 2003, and the twelve-month periods over which they occur:
- -------------------------------------- -----------------------------------------------------------------------------------------
Payments by Expected Maturity Dates
-----------------------------------------------------------------------------------------
(Millions of Dollars) 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 Thereafter Total
- -------------------------------------- ------------ ------------ ----------- ----------- ----------- -------------- ------------
Long-Term Debt $145.4 $109.5 $4.9 $2.2 $ - $1,143.0 $1,405.0
Short-Term Bank Notes 163.7 - - - - - 163.7
Commercial Paper 144.0 - - - - - 144.0
Operating Lease Commitments 8.1 6.6 5.2 3.8 3.1 5.2 32.0
Capital Lease Commitments 0.6 0.6 0.8 0.7 0.6 1.3 4.6
- -------------------------------------- ------------ ------------ ----------- ----------- ----------- -------------- ------------
The Company has made certain guarantees on behalf of its subsidiaries. The guarantees relate primarily to: (i) obligations under derivative financial instruments, which are included on the consolidated balance sheet in accordance with SFAS 133 (see Item 2, MD&A under the headings “Critical Accounting Policies” and “Accounting for Derivative Financial Instruments”); (ii) Utility segment obligations to purchase gas to be resold in its regulated business in accordance with established regulatory mechanisms to pass through the cost of that gas to its retail customers; (iii) NFR obligations to purchase gas or to purchase gas transportation/storage services where the amounts actually due on those obligations each month are included
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont.)on the consolidated balance sheet as a current liability; and (iv) other obligations which are reflected on the consolidated balance sheet. The Company believes that the probability that it would be required to make payments under the guarantees is slight, and therefore has not included them in the table above.*
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 capital 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. The Company, Staff of the Department of Public Service and other parties have begun discussions regarding Distribution Corporation’s rates and services subsequent to the expiration of the Agreement on September 30, 2003.
On September 20, 2001, the NYPSC issued an order under which Distribution Corporation was Ordered to Show Cause why an action for penalties of $19 million should not be commenced against it for alleged violations of consumer protection requirements. According to the NYPSC and intervenors, 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 and other matters. The Company believes and will continue to vigorously assert that the NYPSC’s allegations lack merit.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)On April 16, 2003, Distribution Corporation filed a request with the Pennsylvania Public Utility Commission (PaPUC) to increase annual operating revenues by $16.5 million to cover increases in the cost of providing service, to be effective June 15, 2003. Distribution Corporation filed this request for several reasons including increases in the costs associated with Distribution Corporation’s ongoing construction program as well as increases in uncollectible accounts and personnel expenses.
Supply Corporation currently does not have a rate case on file with the Federal Energy Regulatory Commission (FERC). Management will continue to monitor Supply Corporation’s financial position to determine the necessity of filing a rate case in the future.
On May 7, 2003, Supply Corporation entered into a Stipulation and Consent Agreement with the FERC Office of Market Oversight and Investigations to resolve the FERC investigation described in “Rate Matters” in Item 7 of the Company’s 2002 Form 10-K. FERC has approved the Stipulation and Consent Agreement. The settlement provides, among other things, that:
(i) Supply Corporation does not admit any violations of applicable laws or regulations;
(ii) Supply Corporation asserts that neither Supply nor any of its affiliates were unjustly enriched by, received a competitive
advantage, or otherwise profited from the alleged activities described in the Stipulation and
Consent Agreement, and that there was no ascertainable harm to any shipper, potential shipper or
the public;
(iii) Supply Corporation will implement fully and follow the three-year "Compliance Plan" attached to the Stipulation and
Agreement, which plan requires the establishment of various internal procedures, and various
training, reviewing and reporting; and
(iv) Supply Corporation will pay to the U.S. Treasury $0.3 million to cover the costs of the audit and investigation.
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 March 31, 2003, 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 $4.0 million to $5.0 million.* The minimum liability of $4.0 million has been recorded on the Consolidated Balance Sheet at March 31, 2003. Other than discussed in Note H of the 2002 Form 10-K (referred to below), the Company is currently not aware of any material
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)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 Section 21E of the Securities Exchange Act of 1934 for any forward-looking statements made by, or on behalf of, the Company. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements which are other than statements of historical facts. From time to time, the Company may publish or otherwise make available forward-looking statements of this nature. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of the Company, are also expressly qualified by these cautionary statements. Certain statements contained herein, including without limitation those which are designated with 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.
Refer to the “Market Risk Sensitive Instruments” section in Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The 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 procedures
The 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
Item 4. Controls and Procedures (Concl.)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 controls
The 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 GAAP. 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, NFR and “National Fuel Gas Corporation,” Donald J. and Margaret Ortel and Brian and Judith Rapp, “individually and on behalf of all those similarly situated,” allege, in an amended complaint which adds National Fuel Gas Company as a party defendant (a) that Seneca underpaid royalties due under leases operated by it, and (b) that Seneca’s co-defendants (i) fraudulently participated in and concealed such alleged underpayment, and (ii) induced Seneca’s alleged breach of such leases. Plaintiffs seek an accounting, declaratory and related injunctive relief, and compensatory and exemplary damages. Defendants have denied each of plaintiffs’ material substantive allegations and set up twenty-five affirmative defenses in separate verified answers.
A motion was made by plaintiffs on July 15, 2002 to certify a class comprising all persons presently and formerly entitled to receive royalties on the sale of natural gas produced and sold from wells operated in New York by Seneca (and its predecessor Empire Exploration, Inc). On December 23, 2002, the court granted certification of the proposed class, as modified to exclude those leaseholders whose leases provide for calculation of royalties based upon a flat fee, or flat fee per cubic foot of gas produced. The court’s order states that there are approximately 749 potential class members.
In an action instituted in the New York State Supreme Court, Kings County on February 18, 2003 against Distribution Corporation and Paul J. Hissin, an unaffiliated third party, plaintiff Donna Fordham-Coleman, as administratrix of the estate of Velma Arlene Fordham, alleges that Distribution Corporation’s denial of natural gas service in November 2000 to the plaintiff’s decedent, Velma Arlene Fordham, caused decedent’s death in February 2001. Plaintiff seeks damages for wrongful death and pain and suffering, plus punitive damages. Distribution Corporation has denied plaintiff’s material allegations, set up seven affirmative defenses in separate verified answers and filed a cross-claim against the co-defendant. Distribution Corporation believes and will vigorously assert that plaintiff’s allegations lack merit. For a discussion of a related matter before the NYPSC, refer to Part I, Item 2 - MD&A of this report under the heading “Regulatory Matters.”
The Company believes, based on the information presently known, that the ultimate resolution of these matters, individually or in the aggregate, will not be material to the consolidated financial condition, results of
Item 1. Legal Proceedings (Concl.)operations, or cash flow of the Company.* No assurances can be given, however, as to the ultimate outcomes of these matters, and it is possible that the outcomes, individually or in the aggregate, could be material to results of operations or cash flow for a particular quarter or annual period.*
For a discussion of various environmental matters, refer to Part I, Item 1 at Note 4 and Part I, Item 2 – MD&A of this report under the heading “Environmental Matters.”
The Company is involved in litigation arising in the normal course of business. Also in the normal course of business, the Company is involved in tax, regulatory and other governmental audits, inspections, investigations and other proceedings that involve state and federal taxes, safety, compliance with regulations, rate base, cost of service and purchased gas cost issues, among other things. While the resolution of such 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.*
As of January 2, 2003, the Company issued a total of 2,440 unregistered shares of Company common stock to the nine non-employee directors of the Company then serving on the Board of Directors, 170 shares to each of two directors who retired from the Board on February 20, 2003, and 300 shares to each of the other seven directors. As of March 7, 2003, the Company issued 133 unregistered shares of Company common stock to R. Don Cash, who was elected to the Board on February 20, 2003. All of these shares were issued as partial consideration for those directors’ services during the quarter ended March 31, 2003, 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.
The Annual Meeting of Shareholders of National Fuel Gas Company was held on February 20, 2003. At that meeting, the shareholders elected directors, appointed independent accountants, rejected a shareholder proposal to limit certain executive compensation plans, and rejected a shareholder proposal to create a committee to address alleged discrimination in employment.
The total votes were as follows:
Against Broker
For Or Withheld Abstain Non- Votes
--- ----------- ------- ----------
(i) Election of directors to
serve for a three-year
term:
- R. Don Cash 69,306,960 1,342,643 - -
- George L. Mazanec 66,086,293 4,563,310 - -
- John F. Riordan 65,797,138 4,852,465 - -
Election of director to
serve for a two-year
term:
- Rolland E. Kidder 66,627,659 4,021,944 - -
Item 4. Submission of Matters to a Vote of Security Holders (Concl.)
Directors whose term of office continued after the meeting:
Term expiring in 2004: Philip C. Ackerman, James V. Glynn and Bernard J. Lee.
Term expiring in 2005: Robert T. Brady and Bernard J. Kennedy.
Against Broker
For Or Withheld Abstain Non- Votes
--- ----------- ------- ----------
(ii) Appointment of
PricewaterhouseCoopers
LLP as independent
accountants 65,680,081 4,702,111 267,411 -
(iii) Adoption of shareholder
proposal to limit certain
executive compensation
plans 6,528,091 44,765,721 1,460,097 17,895,694
(iv) Adoption of shareholder
proposal to create
committee to address
alleged discrimination
in employment 3,461,839 46,062,183 3,229,892 17,895,689
At the Annual Meeting of Shareholders held on February 20, 2003, the Company’s shareholders elected R. Don Cash as a new director of the Company. Also on February 20, 2003, William J. Hill and Eugene T. Mann retired from the Board of Directors.
On February 20, 2003, the Board of Directors elected Ronald J. Tanski as Controller of the Company. Mr. Tanski is Controller and Senior Vice President of Distribution Corporation and Secretary and Treasurer of Horizon. On February 1, 2003, Gerald T. Wehrlin retired as Controller of the Company, President and Treasurer of NFR, and as an officer of certain other subsidiaries of the Company.
(a) Exhibits
Exhibit
Number Description of Exhibit
(4) Officer's Certificate Establishing 5.25% Notes due 2013, dated February 18,
2003.
Item 6. Exhibits and Reports on Form 8-K (Concl.)
(10)(iii) Consulting and Confidentiality Agreement, effective February 2, 2003, between the Company and
Gerald T. Wehrlin.
(12) Statements regarding Computation of Ratios:
Ratio of Earnings to Fixed Charges for the Twelve Months Ended March 31, 2003 and the Fiscal Years
Ended September 30, 1998 through 2002.
(99) Additional Exhibits:
99.1 National Fuel Gas Company Consolidated Statements of Income for the Twelve Months Ended March 31,
2003 and 2002.
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 January 27, 2003 was filed on January 29, 2003 regarding a press
release issued by the Company concerning earnings for the quarter ended December 31, 2002 and a
conference call on January 28, 2003. This information was filed under Item 5, "Other Events." An
exhibit was filed under Item 7, "Financial Statements and Exhibits."
A report on Form 8-K dated and filed on February 7, 2003 regarding a press release issued by the
Company concerning its acquisition of the Empire State Pipeline from a subsidiary of Duke Energy
Corporation. This information was filed under Item 5, "Other Events." An exhibit was 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: May 15, 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: May 15, 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: May 15, 2003
/s/ Joseph P. Pawlowski
Joseph P. Pawlowski EXHIBIT INDEX
(Form 10-Q)
Exhibit 4 Officer's Certificate Establishing 5.25% Notes due 2013
dated February 18, 2003
Exhibit 10(iii) Consulting and Confidentiality Agreement, effective February 2,
2003, between the Company and Gerald T. Wehrlin
Exhibit 12 Statements regarding Computation of Ratios:
Ratio of Earnings to Fixed Charges for the Twelve
Months Ended March 31, 2003 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 March 31, 2003
and 2002
Exhibit 99.2 Written statements of Chief Executive Officer and Principal
Financial Officer furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002