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, 2004
Commission File Number 1-3880
National Fuel Gas Company
(Exact name of registrant as specified in its charter)
| New Jersey | 13-1086010 |
|---|---|
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
| 6363 Main Street | 14221 |
| Williamsville, New York | (Zip Code) |
(Address of principal executive offices)
(716) 857-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES X NO
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X NO
Indicate the number shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
Common stock, $1 par value, outstanding at April 30, 2004: 82,084,464 shares.
1
Company or Group of Companies for which Report is Filed:
| 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) (the name was changed to Horizon LFG, Inc. in April 2004) | |
| Horizon Power, Inc. (Horizon Power) |
INDEX
Part I. Financial Information2
• The Company has nothing to report under this item.
Reference to “the Company” in this report means the Registrant or the Registrant and its subsidiaries collectively, as appropriate in the context of the disclosure. All references to a certain year in this report are to the Company’s fiscal year ended September 30 of that year, unless otherwise noted.
This Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements should be read with the cautionary statements and important factors included in this Form 10-Q at Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A), under the heading “Safe Harbor for Forward-Looking Statements.” Forward-looking statements are all statements other than statements of historical fact, including, without limitation, those statements that are designated with an asterisk (“*”) following the statement, as well as those statements that are identified by the use of the words “anticipates,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” and similar expressions.
3
Part I. Financial Information
National Fuel Gas Company
Consolidated Statements of Income and Earnings
Reinvested in the Business
(Unaudited)
Three Months Ended
March 31,
(Thousands of Dollars, Except Per Common Share Amounts) 2004 2003
----------------- -----------------
INCOME
Operating Revenues $801,678 $809,065
- -------------------------------------------------------------------------------- ----------------- -----------------
Operating Expenses
Purchased Gas 445,909 451,416
Fuel Used in Heat and Electric Generation 24,053 23,124
Operation and Maintenance 119,683 104,084
Property, Franchise and Other Taxes 20,165 24,477
Depreciation, Depletion and Amortization 47,958 49,261
- -------------------------------------------------------------------------------- ----------------- -----------------
657,768 652,362
Adjustment of Loss on Sale of Oil and Gas Producing Properties 4,645 -
- -------------------------------------------------------------------------------- ----------------- -----------------
Operating Income 148,555 156,703
Other Income (Expense):
Income from Unconsolidated Subsidiaries 13 287
Other Income 987 2,552
Interest Expense on Long-Term Debt (21,303) (23,597)
Other Interest Expense (1,370) (3,317)
- -------------------------------------------------------------------------------- ----------------- -----------------
Income Before Income Taxes and
Minority Interest in Foreign Subsidiaries 126,882 132,628
Income Tax Expense 47,973 50,299
Minority Interest in Foreign Subsidiaries 1,854 1,791
- -------------------------------------------------------------------------------- ----------------- -----------------
Net Income Available for Common Stock 77,055 80,538
EARNINGS REINVESTED IN THE BUSINESS
Balance at December 31 669,894 566,557
- -------------------------------------------------------------------------------- ----------------- -----------------
746,949 647,095
Dividends on Common Stock
(2004 - $0.27; 2003 - $0.26) 22,094 20,934
- -------------------------------------------------------------------------------- ----------------- -----------------
Balance at March 31 $724,855 $626,161
================================================================================ ================= =================
Earnings Per Common Share:
Basic $0.94 $1.00
================================================================================ ================= =================
Diluted $0.93 $0.99
================================================================================ ================= =================
Weighted Average Common Shares Outstanding:
Used in Basic Calculation 81,796,698 80,588,927
================================================================================ ================= =================
Used in Diluted Calculation 82,985,451 80,999,321
================================================================================ ================= =================
See Notes to Consolidated Financial Statements
4
Item 1. Financial Statements (Cont.)
National Fuel Gas Company
Consolidated Statements of Income and Earnings
Reinvested in the Business
(Unaudited)
Six Months Ended
March 31,
(Dollars in Thousands, Except Per Common Share Amounts) 2004 2003
----------------- -----------------
INCOME
Operating Revenues $1,334,191 $1,288,771
- -------------------------------------------------------------------------------- ----------------- -----------------
Operating Expenses
Purchased Gas 696,686 657,170
Fuel Used in Heat and Electric Generation 45,109 42,151
Operation and Maintenance 219,865 194,856
Property, Franchise and Other Taxes 38,387 43,354
Depreciation, Depletion and Amortization 94,416 94,909
- -------------------------------------------------------------------------------- ----------------- -----------------
1,094,463 1,032,440
Adjustment of Loss on Sale of Oil and Gas Producing Properties 4,645 -
- -------------------------------------------------------------------------------- ----------------- -----------------
Operating Income 244,373 256,331
Other Income (Expense):
Income from Unconsolidated Subsidiaries 96 528
Other Income 3,018 4,378
Interest Expense on Long-Term Debt (44,272) (46,624)
Other Interest Expense (3,735) (6,500)
- -------------------------------------------------------------------------------- ----------------- -----------------
Income Before Income Taxes and
Minority Interest in Foreign Subsidiaries 199,480 208,113
Income Tax Expense 69,540 77,912
Minority Interest in Foreign Subsidiaries 3,671 2,730
- -------------------------------------------------------------------------------- ----------------- -----------------
Income Before Cumulative Effect of Changes in Accounting 126,269 127,471
Cumulative Effect of Changes in Accounting - (8,892)
- -------------------------------------------------------------------------------- ----------------- -----------------
Net Income Available for Common Stock 126,269 118,579
EARNINGS REINVESTED IN THE BUSINESS
Balance at October 1 642,690 549,397
- -------------------------------------------------------------------------------- ----------------- -----------------
768,959 667,976
Dividends on Common Stock
(2004 - $0.54; 2003 - $0.52) 44,104 41,815
- -------------------------------------------------------------------------------- ----------------- -----------------
Balance at March 31 $724,855 $626,161
================================================================================ ================= =================
Earnings Per Common Share:
Basic:
Income Before Cumulative Effect of Changes in Accounting $1.55 $1.58
Cumulative Effect of Changes in Accounting - (0.11)
- -------------------------------------------------------------------------------- ----------------- -----------------
Net Income Available for Common Stock $1.55 $1.47
================================================================================ ================= =================
Diluted:
Income Before Cumulative Effect of Changes in Accounting $1.53 $1.58
Cumulative Effect of Changes in Accounting - (0.11)
- -------------------------------------------------------------------------------- ----------------- -----------------
Net Income Available for Common Stock $1.53 $1.47
================================================================================ ================= =================
Weighted Average Common Shares Outstanding:
Used in Basic Calculation 81,683,750 80,495,496
================================================================================ ================= =================
Used in Diluted Calculation 82,612,639 80,895,211
================================================================================ ================= =================
See Notes to Consolidated Financial Statements
5
Item 1. Financial Statements (Cont.)
National Fuel Gas Company
Consolidated Balance Sheets
(Unaudited)
March 31, September 30,
2004 2003
-------------------- -------------------
(Thousands of Dollars)
ASSETS
Property, Plant and Equipment $4,765,192 $4,657,343
Less - Accumulated Depreciation, Depletion
and Amortization 1,753,825 1,658,256
- ---------------------------------------------------------------------------- -------------------- -------------------
3,011,367 2,999,087
- ---------------------------------------------------------------------------- -------------------- -------------------
Current Assets
Cash and Temporary Cash Investments 79,599 51,421
Receivables - Net of Allowance for Uncollectible Accounts of
$26,911 and $17,943, Respectively 287,871 136,532
Unbilled Utility Revenue 58,188 27,443
Gas Stored Underground 10,613 89,640
Materials and Supplies - at average cost 37,363 32,311
Unrecovered Purchased Gas Costs 7,493 28,692
Prepayments 45,444 43,225
Fair Value of Derivative Financial Instruments 1,457 1,698
- ---------------------------------------------------------------------------- -------------------- -------------------
528,028 410,962
- ---------------------------------------------------------------------------- -------------------- -------------------
Other Assets
Recoverable Future Taxes 84,818 84,818
Unamortized Debt Expense 20,646 22,119
Other Regulatory Assets 44,241 49,616
Deferred Charges 7,955 7,528
Other Investments 70,191 64,025
Investments in Unconsolidated Subsidiaries 15,780 16,425
Goodwill 5,476 5,476
Intangible Assets 48,428 49,664
Other 9,691 18,195
- ---------------------------------------------------------------------------- -------------------- -------------------
307,226 317,866
- ---------------------------------------------------------------------------- -------------------- -------------------
$3,846,621 $3,727,915
============================================================================ ==================== ===================
See Notes to Consolidated Financial Statements
6
Item 1. Financial Statements (Cont.)
National Fuel Gas Company
Consolidated Balance Sheets
(Unaudited)
March 31, September 30,
2004 2003
-------------------- -------------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
Capitalization:
Comprehensive Shareholders' Equity
Common Stock, $1 Par Value
Authorized - 200,000,000 Shares; Issued
And Outstanding - 81,931,866 Shares and
81,438,290 Shares, Respectively $ 81,932 $ 81,438
Paid in Capital 489,040 478,799
Earnings Reinvested in the Business 724,855 642,690
- ---------------------------------------------------------------------------- -------------------- -------------------
Total Common Shareholder Equity Before
Items of Other Comprehensive Loss 1,295,827 1,202,927
Accumulated Other Comprehensive Loss (71,313) (65,537)
- ---------------------------------------------------------------------------- -------------------- -------------------
Total Comprehensive Shareholders' Equity 1,224,514 1,137,390
Long-Term Debt, Net of Current Portion 1,140,218 1,147,779
- ---------------------------------------------------------------------------- -------------------- -------------------
Total Capitalization 2,364,732 2,285,169
- ---------------------------------------------------------------------------- -------------------- -------------------
Minority Interest in Foreign Subsidiaries 36,933 33,281
- ---------------------------------------------------------------------------- -------------------- -------------------
Current and Accrued Liabilities
Notes Payable to Banks and
Commercial Paper 112,800 118,200
Current Portion of Long-Term Debt 114,020 241,731
Accounts Payable 140,931 125,779
Amounts Payable to Customers 19,071 692
Other Accruals and Current Liabilities 219,981 52,851
Fair Value of Derivative Financial Instruments 41,392 17,928
- ---------------------------------------------------------------------------- -------------------- -------------------
648,195 557,181
- ---------------------------------------------------------------------------- -------------------- -------------------
Deferred Credits
Accumulated Deferred Income Taxes 402,481 423,282
Taxes Refundable to Customers 13,519 13,519
Unamortized Investment Tax Credit 7,848 8,199
Cost of Removal Regulatory Liability 87,708 84,821
Other Regulatory Liabilities 62,998 69,867
Pension Liability 145,662 154,871
Asset Retirement Obligation 26,881 27,493
Other Deferred Credits 49,664 70,232
- ---------------------------------------------------------------------------- -------------------- -------------------
796,761 852,284
- ---------------------------------------------------------------------------- -------------------- -------------------
Commitments and Contingencies - -
- ---------------------------------------------------------------------------- -------------------- -------------------
$3,846,621 $3,727,915
============================================================================ ==================== ===================
See Notes to Consolidated Financial Statements
7
Item 1. Financial Statements (Cont.)
National Fuel Gas Company
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
March 31,
(Thousands of Dollars) 2004 2003
------------------- ---------------------
OPERATING ACTIVITIES
Net Income Available for Common Stock $126,269 $118,579
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Adjustment of Loss on Sale of Oil and Gas Producing
Properties (4,645) -
Depreciation, Depletion and Amortization 94,416 94,909
Deferred Income Taxes (13,635) (5,008)
Cumulative Effect of Changes in Accounting - 8,892
Income from Unconsolidated Subsidiaries, Net of
Cash Distributions 645 91
Minority Interest in Foreign Subsidiaries 3,671 2,730
Other (1,931) (2,012)
Change in:
Receivables and Unbilled Utility Revenue (185,242) (265,546)
Gas Stored Underground and Materials and
Supplies 74,100 70,192
Unrecovered Purchased Gas Costs 21,199 12,431
Prepayments (2,199) 9,174
Accounts Payable 14,949 80,937
Amounts Payable to Customers 18,379 27,597
Other Accruals and Current Liabilities 167,706 106,280
Other Assets 6,911 (19,837)
Other Liabilities (33,849) 674
- ---------------------------------------------------------------------------- ------------------- ---------------------
Net Cash Provided by Operating Activities 286,744 240,083
- ---------------------------------------------------------------------------- ------------------- ---------------------
INVESTING ACTIVITIES
Capital Expenditures (88,888) (62,904)
Investment in Subsidiaries, Net of Cash Acquired - (181,152)
Net Proceeds from Sale of Oil and Gas Producing Properties 5,041 1,525
Other 2,063 1,369
- ---------------------------------------------------------------------------- ------------------- ---------------------
Net Cash Used in Investing Activities (81,784) (241,162)
- ---------------------------------------------------------------------------- ------------------- ---------------------
FINANCING ACTIVITIES
Change in Notes Payable to Banks and Commercial Paper (5,400) 42,103
Net Proceeds from Issuance of Long-Term Debt - 248,513
Reduction of Long-Term Debt (135,861) (210,109)
Dividends Paid on Common Stock (43,962) (41,711)
Proceeds from Issuance of Common Stock 8,076 5,178
- ---------------------------------------------------------------------------- ------------------- ---------------------
Net Cash Provided by (Used in) Financing Activities (177,147) 43,974
- ---------------------------------------------------------------------------- ------------------- ---------------------
Effect of Exchange Rates on Cash 365 498
- ---------------------------------------------------------------------------- ------------------- ---------------------
Net Increase in Cash and Temporary Cash Investments 28,178 43,393
Cash and Temporary Cash Investments at October 1 51,421 22,216
- ---------------------------------------------------------------------------- ------------------- ---------------------
Cash and Temporary Cash Investments at March 31 $79,599 $65,609
============================================================================ =================== =====================
See Notes to Consolidated Financial Statements
8
Item 1. Financial Statements (Cont.)
National Fuel Gas Company
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended
March 31,
(Thousands of Dollars) 2004 2003
------------------- ---------------------
Net Income Available for Common Stock $77,055 $80,538
- ---------------------------------------------------------------------------- ------------------- ---------------------
Other Comprehensive Income (Loss), Before Tax:
Foreign Currency Translation Adjustment (7,147) 18,878
Unrealized Gain on Securities Available for Sale Arising
During the Period 1,071 291
Unrealized Loss on Derivative Financial Instruments
Arising During the Period (24,696) (28,402)
Reclassification Adjustment for Realized Losses on
Derivative Financial Instruments in Net Income 11,058 31,738
- ---------------------------------------------------------------------------- ------------------- ---------------------
Other Comprehensive Income (Loss), Before Tax (19,714) 22,505
- ---------------------------------------------------------------------------- ------------------- ---------------------
Income Tax Expense Related to Unrealized Gain
on Securities Available for Sale Arising During the Period 375 102
Income Tax Benefit Related to Unrealized Loss on
Derivative Financial Instruments Arising During the Period (9,545) (10,320)
Reclassification Adjustment for Income Tax Benefit on
Realized Losses from Derivative Financial Instruments
In Net Income 4,105 12,174
- ---------------------------------------------------------------------------- ------------------- ---------------------
Income Taxes - Net (5,065) 1,956
- ---------------------------------------------------------------------------- ------------------- ---------------------
Other Comprehensive Income (Loss) (14,649) 20,549
- ---------------------------------------------------------------------------- ------------------- ---------------------
Comprehensive Income $62,406 $101,087
============================================================================ =================== =====================
Six Months Ended
March 31,
(Thousands of Dollars) 2004 2003
------------------- ---------------------
Net Income Available for Common Stock $126,269 $118,579
- ---------------------------------------------------------------------------- ------------------- ---------------------
Other Comprehensive Income (Loss), Before Tax:
Foreign Currency Translation Adjustment 8,799 23,104
Unrealized Gain on Securities Available for Sale Arising
During the Period 2,392 730
Unrealized Loss on Derivative Financial Instruments
Arising During the Period (42,312) (41,554)
Reclassification Adjustment for Realized Losses on
Derivative Financial Instruments in Net Income 16,795 39,369
- ---------------------------------------------------------------------------- ------------------- ---------------------
Other Comprehensive Income (Loss), Before Tax (14,326) 21,649
- ---------------------------------------------------------------------------- ------------------- ---------------------
Income Tax Expense Related to Unrealized Gain
on Securities Available for Sale Arising During the Period 837 255
Income Tax Benefit Related to Unrealized Loss
on Derivative Financial Instruments Arising During the Period (15,886) (15,909)
Reclassification Adjustment for Income Tax Benefit on
Realized Losses from Derivative Financial Instruments
In Net Income 6,499 15,437
- ---------------------------------------------------------------------------- ------------------- ---------------------
Income Taxes - Net (8,550) (217)
- ---------------------------------------------------------------------------- ------------------- ---------------------
Other Comprehensive Income (Loss) (5,776) 21,866
============================================================================ =================== =====================
Comprehensive Income $120,493 $140,445
============================================================================ =================== =====================
See Notes to Consolidated Financial Statements
9
Item 1. Financial Statements (Cont.)
National Fuel Gas Company
Notes to Consolidated Financial Statements
(Unaudited)
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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, 2003, 2002 and 2001 that are included in the Company’s 2003 Form 10-K. The 2004 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, 2004 should not be taken as a prediction of earnings for the entire fiscal year ending September 30, 2004. Most of the Utility segment’s business is seasonal in nature and is influenced by weather conditions. Due to 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.
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 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. SFAS 143 was applied retroactively to prior years to determine the cumulative effect through October 1, 2002. This cumulative effect reduced earnings for the quarter ended December 31, 2002 and the six months ended March 31, 2003 by $0.6 million, net of income tax.
In the Company’s Utility and Pipeline and Storage segment, costs of removal are collected from customers through depreciation expense. These removal costs are not a legal retirement obligation in accordance with SFAS 143. Rather, they represent a regulatory liability. However, SFAS 143 required that such costs of removal be reclassified from accumulated depreciation to other regulatory liabilities. Such costs are reflected on the Consolidated Balance Sheets as Cost of Removal Regulatory Liability.
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. As a result of the impairment test, the Company recognized an impairment of $8.3 million. In accordance with SFAS 142, this impairment was reported as a cumulative effect of change in accounting in the quarter ended December 31, 2002 and the six months ended March 31, 2003.
Consolidated Statement of Cash Flows. For purposes of the Consolidated Statement of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity of generally three months or less to be cash equivalents.
10
Item 1. Financial Statements (Cont.)
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), net of related tax effect, are as follows (in thousands):
At March 31, 2004 At September 30, 2003
Minimum Pension Liability Adjustment $(90,446) $(90,446)
Cumulative Foreign Currency
Translation Adjustment 38,849 30,050
Net Unrealized Loss on Derivative
Financial Instruments (23,002) (6,872)
Net Unrealized Gain on Securities
Available for Sale 3,286 1,731
--------- ---------
Accumulated Other Comprehensive Loss $(71,313) $(65,537)
========= =========
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 number of common shares outstanding shown on the Consolidated Statements of Income and Earnings Reinvested in the Business 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, 2004 and 2003, 2,324,100 and 11,414,830 stock options, respectively, were excluded as being antidilutive. For the six months ended March 31, 2004 and 2003, 4,466,722 and 11,414,830 stock options, respectively, were excluded as being antidilutive.
Stock-Based Compensation. The Company accounts for stock-based compensation using the intrinsic value method specified by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Under that method, no compensation expense was recognized for options granted under the Company’s stock option plans for the quarter and six months ended March 31, 2004 and 2003. Had compensation expense been determined based on fair value at the grant dates, which is the accounting treatment specified by SFAS No. 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:
Three Months Ended Six Months Ended
(Thousands of Dollars, Except Per March 31, March 31,
Common Share Amounts) 2004 2003 2004 2003
Net Income Available for
Common Stock as Reported $77,055 $80,538 $126,269 $118,579
Deduct:
Total Compensation
Expense Determined Based
on Fair Value at the Grant
Dates 479 882 1,031 2,163
-------- -------- --------- ---------
Pro Forma Net Income Available
For Common Stock $76,576 $79,656 $125,238 $116,416
======== ======== ========= =========
Earnings Per Common Share:
Basic - As Reported $0.94 $1.00 $1.55 $1.47
Basic - Pro Forma $0.94 $0.99 $1.53 $1.45
Diluted - As Reported $0.93 $0.99 $1.53 $1.47
Diluted - Pro Forma $0.92 $0.98 $1.52 $1.44
11
Item 1. Financial Statements (Cont.)
“Net Income Available for Common Stock as Reported” in the pro forma information shown above includes compensation expense related to restricted stock awards. Such compensation expense amounted to $0.2 million and $0.3 million for the quarters ended March 31, 2004 and March 31, 2003, respectively. For the six months ended March 31, 2004 and March 31, 2003, compensation expense amounted to $0.5 million and $0.5 million, respectively.
During the quarter ended March 31, 2004, the Company recorded a $4.6 million earnings benefit related to the Company’s 2003 sale of Canadian oil properties. When the Company closed that transaction in September 2003, the initial proceeds it received were subject to adjustment based on actual working capital and the resolution of certain income tax matters. During the quarter ended March 31, 2004, the Company resolved those items with the buyer and, as a result, received an additional $4.6 million (U. S. dollars) of sales proceeds, which it recorded in the Adjustment of Loss on Sale of Oil and Gas Producing Properties line on the income statement.
The components of federal and state income taxes included in the Consolidated Statements of Income are as follows (in thousands):
Six Months Ended
March 31,
2004 2003
------------------- --------------------
Operating Expenses:
Current Income Taxes
Federal $61,455 $63,237
State 16,696 15,595
Foreign 5,024 4,088
Deferred Income Taxes
Federal (10,068) (8,760)
State (2,094) (1,835)
Foreign (1,473) 5,587
- ---------------------------------------------------------------------------- ------------------- --------------------
69,540 77,912
Other Income:
Deferred Investment Tax Credit (348) (348)
Minority Interest in Foreign Subsidiaries (130) (1,192)
Cumulative Effect of Change in Accounting - (354)
- ---------------------------------------------------------------------------- ------------------- --------------------
Total Income Taxes $69,062 $76,018
============================================================================ =================== ====================
The U.S. and foreign components of income before income taxes are as follows (in thousands):
Six Months Ended
March 31,
2004 2003
------------------- --------------------
U.S. $164,635 $177,710
Foreign 30,696 16,888
- ---------------------------------------------------------------------------- ------------------- --------------------
$195,331 $194,598
============================================================================ =================== ====================
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):
12
Item 1. Financial Statements (Cont.)
Six Months Ended
March 31,
2004 2003
------------------- --------------------
Income tax expense, computed at
statutory rate of 35% $68,366 $68,109
Increase (reduction) in taxes resulting from:
State income taxes 9,491 8,895
Foreign tax differential (2,149) (86)
Foreign tax rate reduction (1) (5,174) -
Miscellaneous (1,472) (900)
- ---------------------------------------------------------------------------- ------------------- --------------------
Total Income Taxes $69,062 $76,018
============================================================================ =================== ====================
(1) During the quarter ended December 31, 2003, legislation was enacted in the Czech Republic which reduces the corporate statutory income tax rate from 31% to 24% over a three year period.
Significant components of the Company’s deferred tax liabilities (assets) were as follows (in thousands):
At March 31, 2004 At September 30, 2003
--------------------------------- ----------------------------
Deferred Tax Liabilities:
Property, Plant and Equipment $533,761 $519,578
Other 18,844 21,532
- ------------------------------------------------------ --------------------------------- ----------------------------
Total Deferred Tax Liabilities 552,605 541,110
- ------------------------------------------------------ --------------------------------- ----------------------------
Deferred Tax Assets:
Minimum Pension Liability Adjustment (67,243) (48,701)
Capital Loss Carryover (16,948) (18,607)
Other (70,631) (56,877)
- ------------------------------------------------------ --------------------------------- ----------------------------
(154,822) (124,185)
Valuation Allowance 4,698 6,357
- ------------------------------------------------------ --------------------------------- ----------------------------
Total Deferred Tax Assets (150,124) (117,828)
- ------------------------------------------------------ --------------------------------- ----------------------------
Total Net Deferred Income Taxes $402,481 $423,282
====================================================== ================================= ============================
A capital loss carryover of $48.0 million existed at March 31, 2004, which expires if not utilized by September 30, 2008. Although realization is not assured, management estimates that a portion of the deferred tax asset associated with this carryover will be realized during the carryover period, and a valuation allowance is recorded for the remaining portion. Adjustments to the valuation allowance may be necessary in the future if estimates of capital gain income are revised.
Common Stock. During the six months ended March 31, 2004, the Company issued 493,576 shares of common stock under the Company’s stock and benefit plans.
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, 2004, 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 $9.4 million to $10.4 million. The minimum liability of $9.4 million has been
13
Item 1. Financial Statements (Cont.)
recorded on the Consolidated Balance Sheet at March 31, 2004. Other than as discussed in Note G of the Company’s 2003 Form 10-K (referred to below), the Company is currently not aware of any material additional exposure to environmental liabilities. However, changes in environmental regulations or other factors could impact the Company.
For further discussion, refer to Note G — Commitments and Contingencies under the heading “Environmental Matters” in Item 8 of the Company’s 2003 Form 10-K.
Other. The Company is involved in litigation arising in the normal course of business. Also in the normal course of business, the Company is involved in tax, regulatory and other governmental audits, inspections, investigations and other proceedings that involve state and federal taxes, safety, compliance with regulations, rate base, cost of service and purchased gas cost issues, among other things. While the resolution of such litigation or regulatory matters could have a material effect on earnings and cash flows in the quarterly and annual period of resolution, none of this litigation, and none of these regulatory matters, are expected to change materially the Company’s present liquidity position, nor have a material adverse effect on the financial condition of the Company.
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 Company’s 2003 Form 10-K. There have been no material changes in the amount of assets for any operating segment from the amounts disclosed in the Company’s 2003 Form 10-K.
14
Item 1. Financial Statements (Cont.)
Quarter Ended March 31, 2004 (Thousands)
- --------------------------------------------------------------------------------------------------------------------------------------------
Corporate
Exploration Total and
Pipeline and Energy Reportable Intersegment Total
Utility and Storage Production International Marketing Timber Segments All Other Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------------------------
Revenue from
External
Customers $502,440 $35,120 $79,750 $48,453 $116,403 $15,222 $797,388 $4,290 $ - $801,678
Intersegment
Revenues $ 5,914 $22,459 $ - $ - $ - $ - $ 28,373 $1,257 $(29,630) $ -
Segment Profit:
Net Income $ 33,123 $13,676 $18,735 $ 6,555 $ 3,541 $ 1,463 $ 77,093 $ 405 $ (443) $ 77,055
Six Months Ended March 31, 2004 (Thousands)
- --------------------------------------------------------------------------------------------------------------------------------------------
Corporate
Exploration Total and
Pipeline and Energy Reportable Intersegment Total
Utility and Storage Production International Marketing Timber Segments All Other Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------------------------
Revenue from
External
Customers $823,146 $62,866 $148,602 $90,600 $173,356 $28,553 $1,327,123 $7,068 $ - $1,334,191
Intersegment
Revenues $10,428 $44,731 $ - $ - $ - $ - $ 55,159 $1,257 $(56,416) $ -
Segment Profit:
Income Before
Cumulative
Effect of
Changes in
Accounting $49,604 $24,170 $ 29,243 $14,593 $ 4,347 $ 3,220 $ 125,177 $ 957 $ 135 $ 126,269
Quarter Ended March 31, 2003 (Thousands)
- --------------------------------------------------------------------------------------------------------------------------------------------
Corporate
Exploration Total 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)
- --------------------------------------------------------------------------------------------------------------------------------------------
Corporate
Exploration Total 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
Changes in
Accounting $59,008 $23,299 $ 23,026 $ 8,362 $ 6,198 $ 7,741 $ 127,634 $ 53 $ (216) $ 127,471
15
Item 1. Financial Statements (Cont.)
The components of the Company’s intangible assets were as follows (in thousands):
At March 31, 2004 At September 30, 2003
--------------------------------- ---------------------
Gross Net Net
Carrying Accumulated Carrying Carrying
At March 31, 2004 (Thousands) Amount Amortization Amount Amount
Intangible Assets Subject to Amortization
Long-Term Transportation Contracts $ 8,580 $(1,247) $ 7,333 $ 7,867
Long-Term Gas Purchase Contracts 31,864 (1,044) 30,820 31,522
Intangible Assets Not Subject to Amortization
Retirement Plan Intangible Asset 10,275 - 10,275 10,275
-------- -------- -------- --------
$50,719 $(2,291) $48,428 $49,664
======== ======== ======== ========
Aggregate Amortization Expense (Thousands)
Three Months Ended March 31, 2004 $ 666
Six Months Ended March 31, 2004 $ 1,236
Amortization expense for the long-term transportation contracts is estimated to be $0.5 million for the remainder of 2004 and $1.1 million annually for 2005, 2006, 2007 and 2008. Amortization in 2009 is estimated to be $0.5 million.
Amortization expense for the long-term gas purchase contracts is estimated to be $0.8 million for the remainder of 2004 and $1.6 million annually for 2005, 2006, 2007, 2008 and 2009.
Three months ended March 31,
Retirement Plan Other Post-Retirement Benefits
2004 2003 2004 2003
Service Cost $3,649 $3,261 $ 1,649 $1,461
Interest Cost 10,141 10,242 6,885 6,531
Expected Return on Plan Assets (12,070) (11,815) (3,453) (3,067)
Amortization of Prior Service Cost 276 294 1 1
Amortization of Transition Amount - (929) 1,782 1,782
Amortization of Losses 2,360 558 5,381 3,716
Net Amortization and Deferral
for Regulatory Purposes (Including
Volumetric Adjustments) (1) 3,893 2,489 952 (938)
-------- -------- -------- --------
Net Periodic Benefit Cost $8,249 $4,100 $13,197 $9,486
======== ======== ======== ========
16
Item 1. Financial Statements (Concl.)
Six months ended March 31,
Retirement Plan Other Post-Retirement Benefits
2004 2003 2004 2003
Service Cost $7,299 $6,522 $ 3,298 $ 2,922
Interest Cost 20,282 20,484 13,770 13,062
Expected Return on Plan Assets (24,141) (23,630) (6,906) (6,134)
Amortization of Prior Service Cost 552 588 2 2
Amortization of Transition Amount - (1,858) 3,564 3,564
Amortization of Losses 4,719 1,116 10,763 7,432
Net Amortization and Deferral
for Regulatory Purposes (Including
Volumetric Adjustments) (1) 614 3,326 (2,386) (6,349)
-------- -------- -------- --------
Net Periodic Benefit Cost $9,325 $6,548 $22,105 $14,499
======== ======== ======== ========
(1) The Company's policy is to record retirement plan and other post-retirement benefit costs in the Utility segment on a volumetric basis to reflect the seasonality of the Utility segment's business.
In 2004, the Company expects to contribute to its retirement plan and post-retirement benefit plan approximately $35.0 million and approximately $41.0 million, respectively. During the six months ended March 31, 2004, the Company has contributed to its retirement plan and post-retirement benefit plan $20.5 million and $28.4 million, respectively.
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The provisions of the Act provide for a federal subsidy for plans that provide prescription drug benefits and meet certain qualifications. The Company’s Net Periodic Benefit Cost for other post-retirement benefits recorded in the three months and six months ended March 31, 2004 does not reflect the effects of the Act. Specific authoritative guidance on the accounting for the federal subsidy is pending and when that guidance is issued, it could require the Company to change information related to its actuarially determined Benefit Obligation and Net Periodic Benefit Cost for other post-retirement benefits.
In January 2004, a participant of the Company’s nonqualified defined benefit plan received a $23.0 million lump sum payment under a provision of an agreement previously entered into between the Company and the participant. Under GAAP, this payment was considered to be a partial settlement of the projected benefit obligation of the plan. Accordingly, GAAP required that the pro rata portion of the plan’s unrecognized actuarial losses resulting from experience different from that assumed and from changes in assumptions be currently recognized. Therefore, $9.9 million before tax ($6.4 million, after tax) was recognized as a settlement expense (included in Operation and Maintenance Expense on the income statement) during the quarter ended March 31, 2004.
17
For a complete discussion of critical accounting policies, refer to “Critical Accounting Policies” in Item 7 of the Company’s 2003 Form 10-K. There have been no subsequent changes to that disclosure.
The Company’s earnings were $77.1 million for the quarter ended March 31, 2004 compared to earnings of $80.5 million for the quarter ended March 31, 2003. The decrease in earnings of $3.4 million is the result of lower earnings in the Utility, Timber and Energy Marketing segments, partially offset by higher earnings in the Exploration and Production, Pipeline and Storage, and International segments, as shown in the table below. Earnings for the quarter ended March 31, 2004 included $6.4 million (after tax) of expense, allocated among all segments, associated with the settlement of a pension obligation. Refer to further discussion in Capital Resources and Liquidity under Operating Cash Flow. Also, the Exploration and Production segment’s earnings included a $4.6 million (after tax) benefit related to the Company’s September 2003 sale of Canadian oil properties.
The Company’s earnings were $126.3 million for the six months ended March 31, 2004 compared to earnings of $118.6 million for the six months ended March 31, 2003. The increase in earnings of $7.7 million was primarily the result of higher earnings in the International, Exploration and Production, and Pipeline and Storage segments, offset by lower earnings in the Utility, Timber, and Energy Marketing segments, as shown in the table below. Earnings in the International segment for the six months ended March 31, 2004 included a $5.2 million reduction to deferred income tax expense resulting from a change in the statutory income tax rate in the Czech Republic. Also, International segment 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. As mentioned above, earnings for the six months ended March 31, 2004 also included $6.4 million (after tax) of expense associated with the settlement of a pension obligation and a $4.6 million (after tax) benefit to earnings related to the Company’s September 2003 sale of Canadian oil properties.
Additional discussion of earnings in each of the business segments can be found in the business segment information that follows.
Earnings (Loss) by Segment
- ------------------------------------ ------------------------------------------- -------------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ------------------------------------ ------------------------------------------- -------------------------------------------
Increase/ Increase/
(Thousands) 2004 2003 (Decrease) 2004 2003 (Decrease)
- ------------------------------------ ------------- ------------- --------------- ------------- ------------- ---------------
Utility $33,123 $39,731 $(6,608) $49,604 $59,008 $(9,404)
Pipeline and Storage 13,676 12,565 1,111 24,170 23,299 871
Exploration and Production 18,735 14,216 4,519 29,243 22,389 6,854
International 6,555 5,591 964 14,593 107 14,486
Energy Marketing 3,541 4,612 (1,071) 4,347 6,198 (1,851)
Timber 1,463 4,020 (2,557) 3,220 7,741 (4,521)
- ------------------------------------ ------------- ------------- --------------- ------------- ------------- ---------------
Total Reportable Segments 77,093 80,735 (3,642) 125,177 118,742 6,435
All Other 405 (126) 531 957 53 904
Corporate (443) (71) (372) 135 (216) 351
- ------------------------------------ ------------- ------------- --------------- ------------- ------------- ---------------
Total Consolidated $77,055 $80,538 $(3,483) $126,269 $118,579 $7,690
- ------------------------------------ ------------- ------------- --------------- ------------- ------------- ---------------
18
Utility
Utility Operating Revenues
- ------------------------------- ------------------------------------------- ------------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ------------------------------- ------------------------------------------- ------------------------------------------
Increase/ Increase/
(Thousands) 2004 2003 (Decrease) 2004 2003 (Decrease)
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
Retail Sales Revenues:
Residential $377,241 $373,160 $4,081 $603,472 $581,145 $22,327
Commercial 68,946 69,259 (313) 106,284 104,099 2,185
Industrial 5,705 6,238 (533) 10,000 13,072 (3,072)
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
451,892 448,657 3,235 719,756 698,316 21,440
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
Off-System Sales 28,298 31,767 (3,469) 63,202 58,075 5,127
Transportation 30,164 33,721 (3,557) 50,480 56,232 (5,752)
Other (2,000) (1,904) (96) 136 (5,567) 5,703
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
$508,354 $512,241 $(3,887) $833,574 $807,056 $26,518
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
Utility Throughput
- ------------------------------- ------------------------------------------- ------------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ------------------------------- ------------------------------------------- ------------------------------------------
Increase/ Increase/
(million cubic feet - MMcf) 2004 2003 (Decrease) 2004 2003 (Decrease)
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
Retail Sales:
Residential 34,459 36,688 (2,229) 54,893 59,568 (4,675)
Commercial 6,607 7,203 (596) 10,207 11,298 (1,091)
Industrial 658 936 (278) 1,253 2,246 (993)
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
41,724 44,827 (3,103) 66,353 73,112 (6,759)
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
Off-System Sales 4,190 4,342 (152) 10,104 9,609 495
Transportation 23,075 24,463 (1,388) 37,674 40,986 (3,312)
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
68,989 73,632 (4,643) 114,131 123,707 (9,576)
- ------------------------------- ------------- -------------- -------------- ------------ -------------- --------------
Degree Days
- ---------------------------------- -------------- -------------- -------------------- --------------------------------
Percent
Colder (Warmer) Than
Three Months Ended --------------------------------
March 31 Normal 2004 2003 Normal Prior Year
- ---------------------------------- -------------- -------------- -------------------- ----------------- --------------
Buffalo 3,364 3,463 3,619 2.9 (4.3)
Erie 3,176 3,283 3,459 3.4 (5.1)
- ---------------------------------- -------------- -------------- -------------------- ----------------- --------------
Six Months Ended
March 31
- ---------------------------------- -------------- -------------- -------------------- ----------------- --------------
Buffalo 5,624 5,590 6,002 (0.6) (6.9)
Erie 5,257 5,205 5,686 (1.0) (8.5)
- ---------------------------------- -------------- -------------- -------------------- ----------------- --------------
Operating revenues for the Utility segment decreased $3.9 million for the quarter ended March 31, 2004 as compared with the quarter ended March 31, 2003. The decrease is attributable primarily to lower transportation revenues and lower off-system sales revenues. Transportation revenues decreased because of lower volumes being transported as a result of warmer weather. Off-system sales revenues decreased because of lower prices and volumes. However, due to profit sharing with retail customers, any margins resulting from off-system sales are minimal. Partially offsetting these decreases, retail gas sales revenues increased largely due to the recovery of higher gas costs (gas costs are recovered dollar for dollar in revenues), which more than offset the decrease in retail gas sales revenues resulting from lower volumes (due to warmer weather, as shown in
19
the degree day table above). Also, on January 15, 2004, Distribution Corporation implemented the October 16, 2003 Settlement Agreement with the Pennsylvania Public Utility Commission (PaPUC), which among other things, provided for a $3.5 million annual base rate increase in revenues. For the quarter ended March 31, 2004, the base rate adjustment contributed $1.1 million to the increase. Other revenues did not change significantly. The quarter ended March 31, 2003 included a reduction to revenues associated with an estimated refund provision amounting to $2.6 million, which did not recur in the quarter ended March 31, 2004. However, this benefit to other operating revenues was largely offset by regulatory revenue adjustments which reduced revenues by $1.5 million. The refund provision related to a three-year rate settlement approved by the State of New York Public Service Commission (NYPSC), which extended from October 1, 2000 to September 30, 2003. In accordance with the settlement, the Utility segment was required to share with customers 50% of earnings above a predetermined level. As discussed further in the “Rate Matters” section of this Item, the settlement with the NYPSC was extended for a one-year period commencing October 1, 2003.
Operating revenues for the Utility segment increased $26.5 million for the six months ended March 31, 2004 as compared with the six months ended March 31, 2003. The increase is primarily attributable to higher retail gas sales revenues. The increase in retail gas sales revenues was largely a function of the recovery of higher gas costs, which more than offset lower retail sales volumes, as shown above. Warmer weather was the major factor in the decrease in retail sales volumes. The base rate increase in Pennsylvania, as discussed above, also contributed to the revenue increase. Greater off-system sales volumes and higher gas prices for such sales contributed to an increase in off-system sales revenues. However, as mentioned above, margins resulting from off-system sales are minimal. Partially offsetting these increases, transportation revenues decreased because of lower volumes being transported as a result of warmer weather. Other revenues increased primarily because the six months ended March 31, 2003 included a reduction to revenues associated with an estimated refund provision amounting to $8.1 million, which did not recur in the six months ended March 31, 2004. Regulatory revenue adjustments of $1.8 million partially offset the positive impact to revenues of not recording a refund provision during the six months ended March 31, 2004. The estimated refund provision related to the three-year rate settlement discussed above.
The Utility segment’s earnings for the quarter ended March 31, 2004 were $33.1 million, a decrease of $6.6 million when compared with the quarter ended March 31, 2003. In the New York jurisdiction, earnings decreased by $4.6 million principally due to a $2.8 million (after tax) decrease in margin on retail sales and transportation services and a $4.2 million (after tax) increase in operation and maintenance expense. Approximately, $1.7 million (after tax) of the decrease in margin was caused by out-of-period regulatory revenue and gas cost adjustments. The remainder of the margin decrease ($1.1 million after tax) is consistent with the Company’s expectation of a decline in usage due to customer conservation efforts. The rise in operation and maintenance expense was driven mostly by pension and post retirement expense, which increased as the result of the one-year settlement extension (referred to above), which requires the Company to record an additional $8.0 million (before tax) of pension and post retirement expense for the year ended September 30, 2004 without a corresponding increase in revenues. The rise in operation and maintenance expense also includes $1.2 million (after tax) of expense associated with the settlement of a pension obligation. Somewhat offsetting the impact of the above items was lower interest expense ($0.7 million after tax) and the fact that earnings for the quarter ended March 31, 2003 included a $1.7 million (after tax) refund provision recorded under the previously mentioned earnings sharing mechanism. No such refund provision was required for the quarter ended March 31, 2004. For the Pennsylvania Division, earnings decreased by $2.0 million mostly due to weather, which was 5.1% warmer than the prior year. The impact of weather variations on earnings in the New York jurisdiction is mitigated by that jurisdiction’s weather normalization clause (WNC). The WNC in New York, which covers the eight-month period from October through May, has had a stabilizing effect on earnings for the New York rate jurisdiction. For the quarters ended March 31, 2004 and 2003, the WNC reduced earnings by approximately $0.5 million and $3.1 million, respectively, since those quarters were colder than normal. Pennsylvania earnings were also negatively impacted by $1.0 million (after tax) of expense associated with the settlement of a pension obligation.
The Utility segment’s earnings for the six months ended March 31, 2004 were $49.6 million, a decrease of $9.4 million when compared with the earnings of $59.0 million for the six months ended March 31, 2003. In
20
the New York jurisdiction, earnings decreased by $6.1 million principally due to an $8.1 million (after tax) increase in operation and maintenance expense and a $4.6 million (after tax) decrease in margin on retail sales and transportation services. Approximately $1.2 million (after tax) of the increase in operation and maintenance expense was related to the settlement of a pension obligation, as discussed above. The remainder of the increase in operation and maintenance expense was driven mostly by an increase in pension and post retirement expense, as discussed above, combined with higher bad debt expense. The decrease in margin was largely due to out-of-period regulatory revenue and gas cost adjustments amounting to $2.3 million (after tax) combined with a decline in usage amounting to $1.8 million (after tax). Partially offsetting these decreases was lower interest expense of $0.9 million (after tax) and the fact that earnings for the six months ended March 31, 2003 included a $5.3 million (after tax) refund provision recorded under the previously mentioned earnings sharing mechanism. No such refund provision was required for the six months ended March 31, 2004. For the Pennsylvania jurisdiction, earnings decreased by $3.3 million mostly due to weather, which was 8.5% warmer than the prior year. The impact of weather variations on earnings in the New York jurisdiction is mitigated by that jurisdiction’s WNC. For the six months ended March 31, 2004, the WNC did not have a significant impact on earnings as the weather was close to normal. For the six months ended March 31, 2003, the WNC reduced earnings by $3.9 million since it was colder than normal. Pennsylvania earnings were also negatively impacted by $1.0 million (after tax) of expense associated with the settlement of a pension obligation.
Pipeline and Storage
Pipeline and Storage Operating Revenues
- ------------------------------------ ---------------------------------------- -------------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ------------------------------------ ---------------------------------------- -------------------------------------------
Increase/ Increase/
(Thousands) 2004 2003 (Decrease) 2004 2003 (Decrease)
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
Firm Transportation $32,773 $28,383 $4,390 $63,264 $50,196 $13,068
Interruptible Transportation 733 1,155 (422) 1,538 1,502 36
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
33,506 29,538 3,968 64,802 51,698 13,104
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
Firm Storage Service 16,074 15,859 215 31,831 31,628 203
Other 7,999 6,393 1,606 10,964 11,577 (613)
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
$57,579 $51,790 $5,789 $107,597 $94,903 $12,694
- ------------------------------------ ------------ ------------ -------------- --------------- ------------ --------------
Pipeline and Storage Throughput
- ---------------------------------- ---------------------------------------- ---------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ---------------------------------- ---------------------------------------- ---------------------------------------
Increase/ Increase/
(million cubic feet - MMcf) 2004 2003 (Decrease) 2004 2003 (Decrease)
- ---------------------------------- ------------ ------------ -------------- ----------- ----------- ---------------
Firm Transportation 129,444 130,453 (1,009) 218,211 215,148 3,063
Interruptible Transportation 1,861 3,524 (1,663) 3,896 4,314 (418)
- ---------------------------------- ------------ ------------ -------------- ----------- ----------- ---------------
131,305 133,977 (2,672) 222,107 219,462 2,645
- ---------------------------------- ------------ ------------ -------------- ----------- ----------- ---------------
Operating revenues for the Pipeline and Storage segment increased $5.8 million and $12.7 million, respectively, for the quarter and six months ended March 31, 2004 as compared with the quarter and six months ended March 31, 2003. The acquisition of Empire State Pipeline (Empire) from Duke Energy Corporation on February 6, 2003 was a significant factor in these revenue increases. For the quarter and six months ended March 31, 2004, Empire recorded transportation revenues of $9.9 million and $18.1 million, respectively. From February 6, 2003 to March 31, 2003, Empire recorded transportation revenues of $5.8 million. Additionally, revenues from unbundled pipeline sales and open access transportation, which are reported as part of other revenues in the table above, increased $3.6 million and $1.8 million, respectively, for the quarter and six months ended March 31, 2004. Partially offsetting these increases, cashout revenues decreased $1.2 million and $1.0 million,
21
respectively, for the quarter and six months ended March 31, 2004. Cashout revenues are included in other revenues in the table above. Cashout revenues represent a cash resolution of a gas imbalance whereby a customer pays Supply Corporation for gas the customer receives in excess of amounts delivered into Supply Corporation’s system by the customer’s shipper. Cashout revenues are offset by purchased gas expense.
The Pipeline and Storage segment’s earnings for the quarter ended March 31, 2004 were $13.7 million, an increase of $1.1 million when compared with earnings of $12.6 million for the quarter ended March 31, 2003. As discussed above, the earnings impact of higher revenues from unbundled pipeline sales and open access transportation of $2.3 million (after tax) and $0.9 million of increased earnings from Empire were the main factors in this increase. Offsetting that increase was $2.0 million (after tax) of expense associated with the settlement of a pension obligation.
The Pipeline and Storage segment’s earnings for the six months ended March 31, 2004 were $24.2 million, an increase of $0.9 million when compared with earnings of $23.3 million for the six months ended March 31, 2003. This increase can be attributed primarily to the earnings impact of an increase in revenues from unbundled pipeline sales and open access transportation of $1.2 million (after tax) as well as the increased earnings contribution from Empire of $2.3 million. Offsetting that increase was $2.0 million (after tax) of expense associated with the settlement of a pension obligation.
Exploration and Production
Exploration and Production Operating Revenues
- ----------------------------------- ---------------------------------------- -----------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ----------------------------------- ---------------------------------------- -----------------------------------------
Increase/ Increase/
(Thousands) 2004 2003 (Decrease) 2004 2003 (Decrease)
- ----------------------------------- ------------ ------------ -------------- ------------- ------------ --------------
Gas (after Hedging) $46,487 $41,986 $ 4,501 $ 86,292 $ 77,748 $ 8,544
Oil (after Hedging) 30,936 40,867 (9,931) 58,655 77,496 (18,841)
Gas Processing Plant 7,286 8,011 (725) 13,629 14,572 (943)
Other 600 141 459 766 (321) 1,087
Intrasegment Elimination * (5,559) (6,492) 933 (10,740) (11,512) 772
- ----------------------------------- ------------ ------------ -------------- ------------- ------------ --------------
$79,750 $84,513 $(4,763) $148,602 $157,983 $(9,381)
- ----------------------------------- ------------ ------------ -------------- ------------- ------------ --------------
* 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/
2004 2003 (Decrease) 2004 2003 (Decrease)
- ----------------------------------------- ---------- ----------- --------------- ----------- ----------- --------------
Gas Production (million cubic feet
- -MMcf)
Gulf Coast 4,823 5,201 (378) 9,487 10,559 (1,072)
West Coast 1,004 1,104 (100) 2,000 2,301 (301)
Appalachia 1,335 1,300 35 2,685 2,388 297
Canada 1,613 1,525 88 3,296 3,031 265
- ----------------------------------------- ---------- ----------- --------------- ----------- ----------- --------------
8,775 9,130 (355) 17,468 18,279 (811)
- ----------------------------------------- ---------- ----------- --------------- ----------- ----------- --------------
Oil Production (thousands of barrels)
Gulf Coast 412 401 11 789 791 (2)
West Coast 680 731 (51) 1,362 1,467 (105)
Appalachia 4 2 2 11 4 7
Canada 81 604 (523) 164 1,244 (1,080)
- ----------------------------------------- ---------- ----------- --------------- ----------- ----------- --------------
1,177 1,738 (561) 2,326 3,506 (1,180)
- ----------------------------------------- ---------- ----------- --------------- ----------- ----------- --------------
22
Average Prices
- ----------------------------------------- --------------------------------------- ----------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ----------------------------------------- --------------------------------------- ----------------------------------------
Increase/ Increase/
2004 2003 (Decrease) 2004 2003 (Decrease)
- ----------------------------------------- ----------- ----------- --------------- ------------ ------------ --------------
Average Gas Price/Mcf
Gulf Coast $5.76 $6.60 $(0.84) $5.26 $5.38 $(0.12)
West Coast $5.42 $5.75 $(0.33) $5.22 $4.87 $ 0.35
Appalachia $6.27 $4.83 $1.44 $5.71 $4.28 $1.43
Canada $4.99 $5.41 $(0.42) $4.78 $4.50 $0.28
Weighted Average $5.66 $6.04 $(0.38) $5.24 $5.02 $0.22
Weighted Average After Hedging $5.30 $4.60 $0.70 $4.94 $4.25 $0.69
Average Oil Price/bbl
Gulf Coast $33.81 $32.41 $1.40 $31.75 $29.74 $2.01
West Coast $30.80 $29.98 $0.82 $28.68 $26.87 $1.81
Appalachia $30.21 $27.73 $2.48 $28.32 $27.61 $0.71
Canada $29.84 $30.32 $(0.48) $28.01 $26.57 $1.44
Weighted Average $31.79 $30.65 $1.14 $29.67 $27.41 $2.26
Weighted Average After Hedging $26.30 $23.51 $2.79 $25.22 $22.11 $3.11
- ----------------------------------------- ----------- ----------- --------------- ------------ ------------ --------------
Operating revenues for the Exploration and Production segment decreased $4.8 million for the quarter ended March 31, 2004 as compared with the quarter ended March 31, 2003. Oil production revenue after hedging decreased $9.9 million due to a 561,000 barrel decline in production offset partly by higher weighted average prices after hedging ($2.79 per barrel). Canadian oil production decreased by approximately 523,000 barrels, which was mostly the result of the September 2003 sale of the Company’s Southeast Saskatchewan oil properties. Gas production revenue after hedging increased $4.5 million. Increases in the weighted average price of gas after hedging ($0.70 per Mcf) more than offset an overall decrease in gas production. Most of the decrease in gas production occurred in the Gulf Coast of Mexico (a 378 MMcf decline), which is consistent with the expected decline rates in the region.
Operating revenues for the Exploration and Production segment decreased $9.4 million for the six months ended March 31, 2004 as compared with the six months ended March 31, 2003. Oil production revenue after hedging decreased $18.8 million due to a 1,180,000 barrel decline in production offset partly by higher weighted average prices after hedging ($3.11 per barrel). Canadian oil production decreased by approximately 1,080,000 barrels, which was mostly the result of the September 2003 sale of the Company’s Southeast Saskatchewan oil properties. Gas production revenue after hedging increased $8.5 million. Increases in the weighted average price of gas after hedging ($0.69 per Mcf) more than offset an overall decrease in gas production. Most of the decrease in gas production occurred in the Gulf Coast of Mexico (a 1,072 MMcf decline), which is consistent with the expected decline rates in the region.
The Exploration and Production segment’s earnings for the quarter ended March 31, 2004 were $18.7 million, an increase of $4.5 million when compared with earnings of $14.2 million for the quarter ended March 31, 2003. The increase includes a $4.6 million earnings benefit related to the Company’s September 2003 sale of Canadian oil properties located in Southeast Saskatchewan. When the transaction closed, the initial proceeds received were subject to an adjustment based on actual working capital and the resolution of certain income tax matters. During the quarter ended March 31, 2004, those items were resolved with the buyer and, as a result, the Company received an additional $4.6 million (U.S. dollars) of sales proceeds, which is recorded in the Adjustment of Loss on Sale of Oil and Gas Producing Properties line on the income statement. Additionally, the increase in earnings reflects decreases in depletion and lease operating expense of $1.9 million (after tax) and $3.9 million (after tax), respectively. A $3.5 million (after tax) decrease in oil and gas revenues, discussed above, and a $2.3 million increase in income tax expense due to a higher effective tax rate partially offset the favorable earnings impact of the additional sales proceeds, lower depletion and lower lease operating
23
expenses. The decreases in depletion and lease operating expenses were principally the result of the September 2003 sale of the Company’s Southeast Saskatchewan oil properties. The higher effective rate resulted from the elimination of cross-border intercompany loans as a result of the sale of the Company’s Southeast Saskatchewan oil properties.
The Exploration and Production segment’s earnings for the six months ended March 31, 2004 were $29.2 million, an increase of $6.8 million when compared with earnings of $22.4 million for the quarter ended March 31, 2003. The increase includes a $4.6 million earnings benefit related to the Company’s fiscal 2003 sale of Canadian oil properties, as discussed above. Additionally, decreases in depletion, lease operating, and interest expense of $3.9 million (after tax), $6.6 million (after tax), and $1.2 million (after tax), respectively, more than offset a $6.7 million (after tax) decrease in oil and gas revenues, discussed above, and a $3.6 million increase in income tax expense due to a higher effective tax rate. The decrease in depletion and lease operating expenses was principally the result of the September 2003 sale of the Company’s Southeast Saskatchewan oil properties. The decrease in interest expense was the result of lower debt balances. The higher effective tax rate resulted from the elimination of cross-border intercompany loans, as discussed above. Also contributing to the increase was the fact that 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 that did not recur in the six months ended March 31, 2004.
International
International Operating Revenues
- -------------------------------------- ------------------------------------------- -------------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- -------------------------------------- ------------------------------------------- -------------------------------------------
Increase/ Increase/
(Thousands) 2004 2003 (Decrease) 2004 2003 (Decrease)
- -------------------------------------- ------------- ------------- --------------- ------------- ------------- ---------------
Heating $38,129 $36,718 $1,411 $69,310 $64,873 $4,437
Electricity 9,102 9,103 (1) 19,163 18,032 1,131
Other 1,222 1,160 62 2,127 1,867 260
- -------------------------------------- ------------- ------------- --------------- ------------- ------------- ---------------
$48,453 $46,981 $1,472 $90,600 $84,772 $5,828
- -------------------------------------- ------------- ------------- --------------- ------------- ------------- ---------------
International Heating and Electric Volumes
- -------------------------------------- ------------------------------------------- -------------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- -------------------------------------- ------------------------------------------- -------------------------------------------
2004 2003 (Decrease) 2004 2003 (Decrease)
- -------------------------------------- ------------- ------------- --------------- ------------- ------------- ---------------
Heating Sales (Gigajoules) (1) 3,673,873 3,824,337 (150,464) 6,744,185 7,059,200 (315,015)
Electricity Sales
(megawatt hours) 266,169 312,959 (46,790) 581,921 597,048 (15,127)
- -------------------------------------- ------------- ------------- --------------- ------------- ------------- ---------------
(1) Gigajoules = one billion joules. A joule is a unit of energy.
Operating revenues for the International segment increased $1.5 million and $5.8 million for the quarter and six months ended March 31, 2004 as compared with the quarter and six months ended March 31, 2003. Heating and electric volumes were down as a result of warmer weather, which was approximately 3% warmer than the prior year. Overall, although revenues in Czech korunas (CZK) were lower compared with the prior year, an increase in the value of the CZK as compared to the U.S. dollar caused operating revenues denominated in U.S. dollars to increase.
The International segment's earnings for the quarter ended March 31, 2004 were $6.6 million, an increase of $1.0 million when compared with earnings of $5.6 million for the quarter ended March 31, 2003. The
24
increase can be attributed to slightly higher margins, mostly due to an increase in the value of the CZK as compared to the U.S. dollar. Also contributing to the increase were lower operation and maintenance and interest expenses.
The International segment’s earnings for the six months ended March 31, 2004 were $14.6 million, an increase of $14.5 million when compared with earnings of $0.1 million for the six months ended March 31, 2003. The increase can partly be attributed to a $5.2 million benefit to deferred income tax expense resulting from a change in the statutory income tax rate in the Czech Republic. During the quarter ended December 31, 2003, the government in the Czech Republic enacted legislation that gradually reduces the corporate statutory income tax from 31% to 24% (the reduction will be phased in over a three-year period). In accordance with accounting principles generally accepted in the United States of America (GAAP), the full $5.2 million benefit resulting from the change in the income tax rate was reflected as a reduction to deferred income tax expense in December 2003. Also contributing to the earnings increase, the six months ended March 31, 2003 included a non-recurring $8.3 million impairment charge resulting from the Company’s change in accounting for goodwill. The remaining earnings increase can be attributed to lower interest expense 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) 2004 2003 (Decrease) 2004 2003 (Decrease)
- ----------------------------------- ------------- -------------- --------------- ------------ ------------- --------------
Natural Gas (after Hedging) $116,399 $125,860 $(9,461) $173,327 $168,534 $4,793
Other 4 40 (36) 29 42 (13)
- ----------------------------------- ------------- -------------- --------------- ------------ ------------- --------------
$116,403 $125,900 $(9,497) $173,356 $168,576 $4,780
- ----------------------------------- ------------- -------------- --------------- ------------ ------------- --------------
Energy Marketing Volumes
- ----------------------------------- -------------------------------------------- ----------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ----------------------------------- -------------------------------------------- ----------------------------------------
Increase/ Increase/
2004 2003 (Decrease) 2004 2003 (Decrease)
- ----------------------------------- ------------- -------------- --------------- ----------- ------------- --------------
Natural Gas - (MMcf) 16,429 18,987 (2,558) 25,990 26,471 (481)
- ----------------------------------- ------------- -------------- --------------- ----------- ------------- --------------
Operating revenues for the Energy Marketing segment decreased $9.5 million and increased $4.8 million, respectively, for the quarter and six months ended March 31, 2004, as compared with the quarter and six months ended March 31, 2003. The decrease for the quarter ended March 31, 2004 primarily reflects lower gas sales revenue due to lower throughput, which was the result of warmer weather and the loss of several large volume customers. The increase for the six months ended March 31, 2004 reflects higher gas sales revenue due to an increase in the price of natural gas. As mentioned above, warmer weather and the loss of several large volume customers partially offset this increase.
Earnings in the Energy Marketing segment decreased $1.1 million and $1.9 million, respectively, for the quarter and six months ended March 31, 2004 as compared with the quarter and six months ended March 31, 2003. These decreases primarily reflect lower margins on gas sales caused by warmer weather, the loss of several large volume customers and the current high commodity pricing environment.
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Timber
Timber Operating Revenues
- ------------------------------- ------------------------------------------- ---------------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ------------------------------- ------------------------------------------- ---------------------------------------------
Increase/ Increase/
(Thousands) 2004 2003 (Decrease) 2004 2003 (Decrease)
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
Log Sales $6,225 $ 10,730 $(4,505) $12,399 $18,449 $(6,050)
Green Lumber Sales 1,508 1,980 (472) 3,119 3,561 (442)
Kiln Dry Lumber Sales 7,164 5,095 2,069 12,532 9,310 3,222
Other 325 275 50 503 549 (46)
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
Operating Revenues $15,222 $18,080 $(2,858) $28,553 $31,869 $(3,316)
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
Timber Board Feet
- ------------------------------- ------------------------------------------- ---------------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
- ------------------------------- ------------------------------------------- ---------------------------------------------
Increase/ Increase/
(Thousands) 2004 2003 (Decrease) 2004 2003 (Decrease)
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
Log Sales 1,992 3,161 (1,169) 3,816 5,737 (1,921)
Green Lumber Sales 2,528 3,853 (1,325) 5,198 7,017 (1,819)
Kiln Dry Lumber Sales 3,976 3,307 669 7,085 6,081 1,004
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
8,496 10,321 (1,825) 16,099 18,835 (2,736)
- ------------------------------- -------------- ------------- -------------- --------------- ------------- ---------------
Operating revenues for the Timber segment decreased $2.9 million and $3.3 million, respectively, for the quarter and six months ended March 31, 2004, as compared with the quarter and six months ended March 31, 2003. The decrease in log sales was principally due to the Company’s August 2003 sale of approximately 70,000 acres of low cost basis timber property. Partially offsetting this decrease was a $2.1 million and $3.2 million increase for the quarter and six months ended March 31, 2004, respectively, in the sale of kiln dry lumber, which was caused by an increase in activity at the Company’s mill operations. As a result of the sale discussed above, a larger percentage of timber processed in the Company’s facilities is now purchased from third parties.
Earnings in the Timber segment decreased $2.6 million and $4.5 million, respectively, for the quarter and six months ended March 31, 2004, as compared with the quarter and six months ended March 31, 2003. The decrease was principally due to the sale of 70,000 acres of timber property as mentioned above. Sales of cherry logs, which command the highest margins, decreased by approximately 986,000 board feet or 47% from the prior quarter and 1.3 million board feet or 37% from the prior six months ended March 31, 2003. While kiln dry lumber sales increased, this benefit was largely offset by an increase in costs associated with purchased timber.
The Company’s unconsolidated subsidiaries consist of equity method investments that Horizon Power has made 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 interest 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. Seneca Energy, Model City, and ESNE sell electricity into the New York power grid.
26
Income from unconsolidated subsidiaries decreased $0.3 million and $0.4 million, respectively, for the quarter and six months ended March 31, 2004 as compared with the quarter and six months ended March 31, 2003. For the quarter, these decreases are due to decreases in income from the Company’s investments in Seneca Energy, ESNE, and Model City of approximately $0.1 million each. For the six month period, the $0.4 million decrease is largely attributable to the decrease in Seneca Energy’s income.
Interest on long-term debt decreased $2.3 million and $2.4 million, respectively, for the quarter and six months ended March 31, 2004 as compared with the quarter and six months ended March 31, 2003. For the quarter, the decrease can be attributed primarily to lower average amounts of long-term debt outstanding. For the six month period, the decrease can be attributed primarily to lower weighted average interest rates.
Other interest charges decreased $1.9 million and $2.8 million, respectively, for the quarter and six months ended March 31, 2004 as compared with the quarter and six months ended March 31, 2003. These decreases resulted mainly from a decrease in the average amount of short-term debt outstanding.
The Company’s primary sources of cash during the six-month period ended March 31, 2004 consisted of cash provided by operating activities. This source of cash was supplemented by issuances of common stock under the Company’s stock and benefit plans.
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, adjustment of loss on sale of oil and gas producing properties, and minority interest in foreign subsidiaries.
Cash provided by operating activities in the Utility and the Pipeline and Storage segments may vary from period to period because of the impact of rate cases. In the Utility segment, supplier refunds, over- or under-recovered purchased gas costs and weather may also significantly impact cash flow. The impact of weather on cash flow is tempered in the Utility segment’s New York rate jurisdiction by its WNC and in the Pipeline and Storage segment by Supply Corporation’s straight fixed-variable rate design.
Because of the seasonal nature of the heating business in the Utility, Energy Marketing and International segments, revenues in these segments are relatively high during the heating season, primarily the first and second quarters of the fiscal year, and receivables historically increase during these periods from what was receivable at September 30.
The storage gas inventory normally declines during the first and second quarters of the year and is replenished during the third and fourth quarters. For storage gas inventory accounted for under the last-in, first-out (LIFO) method, the current cost of replacing gas withdrawn from storage is recorded in the Consolidated Statements of Income and a reserve for gas replacement is recorded in the Consolidated Balance Sheets and is included under the caption “Other Accruals and Current Liabilities.” The reserve is reduced as the inventory is replenished.
Cash provided by operating activities in the Exploration and Production segment may vary from period to period as a result of changes in the commodity prices of natural gas and crude oil. The Company uses various derivative financial instruments, including price swap agreements and no cost collars in an attempt to manage this energy commodity price risk.
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Net cash provided by operating activities totaled $286.7 million for the six months ended March 31, 2004, an increase of $46.6 million compared with $240.1 million provided by operating activities for the six months ended March 31, 2003. Lower working capital requirements in the Utility segment was the main reason for this increase. Partially offsetting this increase, the Corporate operation experienced a significant cash outflow in January 2004 due to a $23.0 million lump sum payment to a participant of the Company’s nonqualified defined benefit plan under a provision of an agreement previously entered into between the Company and the participant. Under GAAP, this payment was considered to be a partial settlement of the projected benefit obligation of the plan. Accordingly, GAAP required that the pro rata portion of the plan’s unrecognized actuarial losses resulting from experience different from that assumed and from changes in assumptions ($9.9 million before tax; $6.4 million after tax) be recognized as a settlement expense during the quarter ended March 31, 2004, as discussed above in Results of Operations.
Expenditures for Long-Lived Assets. Expenditures for long-lived assets include additions to property, plant and equipment.
The Company’s expenditures for long-lived assets totaled $88.9 million during the six months ended March 31, 2004. The table below presents these expenditures:
------------------------------------------------------------- ----------------------- -----------------------
Six Months Ended March 31, 2004
(in millions of dollars)
-------------------------------------- ---------------------- ----------------------- -----------------------
Total
Expenditures for
Long-Lived Assets
-------------------------------------- ---------------------- ----------------------- -----------------------
Utility $26.0
Pipeline and Storage 8.6
Exploration and Production 45.1
International 2.7
Timber 1.9
All Other and Corporate 4.6
-------------------------------------- ---------------------- ----------------------- -----------------------
$88.9
-------------------------------------- ---------------------- ----------------------- -----------------------
Utility
The majority of the Utility capital expenditures for the six months ended March 31, 2004 were made for replacement of mains and main extensions, as well as for the replacement of service lines.
Pipeline and Storage
The majority of the Pipeline and Storage capital expenditures were made for additions, improvements, and replacements to this segment’s transmission and storage systems.
In February 2004, the Company announced plans to expand its natural gas pipeline operations to serve new markets in New York and the Northeast by extending the Empire State Pipeline.* This proposed extension project will provide an upstream supply link for the Millennium Phase I Pipeline and will transport natural gas supplies to downstream customers, including KeySpan Energy Corp., which plans to be a major shipper.* The pipeline extension will be designed to move at least 250 MMCF of natural gas per day.* The preliminary cost for developing the project is estimated at $140 million and the targeted in-service date for this pipeline expansion is late in calendar 2006.*
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Exploration and Production
The Exploration and Production segment capital expenditures for the six months ended March 31, 2004 included approximately $19.2 million (U.S. Dollar equivalent) for Canada, $13.3 million for the Gulf Coast region ($13.0 million for the off-shore program in the Gulf of Mexico), $8.1 million for the West Coast region and $4.5 million for the Appalachian region. These amounts included approximately $4.4 million spent to develop proved undeveloped reserves.
International
The majority of the International segment capital expenditures for the six months ended March 31, 2004 were concentrated on improvements and replacements within the district heating and power generation plants in the Czech Republic.
Timber
The majority of the Timber segment capital expenditures for the six months ended March 31, 2004 were made for purchases of equipment for Highland’s sawmill and kiln operations.
The Company continuously evaluates capital expenditures and possible investments in corporations and other entities. The amounts are subject to modification for opportunities such as the acquisition of attractive oil and gas properties, timber or storage facilities and the expansion of transmission line capacities. While the majority of capital expenditures in the Utility segment are necessitated by the continued need for replacement and upgrading of mains and service lines, the magnitude of future capital expenditures or other investments in the Company’s other business segments depends, to a large degree, upon market conditions.*
Consolidated short-term debt decreased $5.4 million during the six months ended March 31, 2004. The Company continues to consider short-term debt (consisting of short-term notes payable to banks and commercial paper) an important source of cash for temporarily financing capital expenditures and investments in corporations and/or partnerships, gas-in-storage inventory, unrecovered purchased gas costs, exploration and development expenditures and other working capital needs. Fluctuations in these items can have a significant impact on the amount and timing of short-term debt. At March 31, 2004, the Company had outstanding short-term notes payable to banks and commercial paper of $64.6 million and $48.2 million, respectively. The Company has Securities and Exchange Commission (SEC) authorization under the Public Utility Holding Company Act of 1935, as amended (Holding Company Act), to borrow and have outstanding as much as $750.0 million of short-term debt at any time through December 31, 2005. As for bank loans, the Company maintains a number of individual (bi-lateral) uncommitted or discretionary lines of credit with certain financial institutions for general corporate purposes. Borrowings under these lines of credit are made at competitive market rates. Each of these credit lines, which aggregate to $400.0 million, is revocable at the option of the financial institution and is reviewed on an annual basis. The Company anticipates that these lines of credit will continue to be renewed.* The total amount available to be issued under the Company’s commercial paper program is $200.0 million. The commercial paper program is backed by a committed credit facility totaling $220.0 million. Of that amount, $110.0 million is committed to the Company through September 26, 2004 and $110.0 million is committed to the Company through September 30, 2005.
Under the Company’s committed credit facility, the Company has agreed that its debt to capitalization ratio will not, at the last day of any fiscal quarter, exceed .625 from October 1, 2003 through September 30, 2004 and .60 from October 1, 2004 and thereafter. At March 31, 2004, the Company’s debt to capitalization ratio (as calculated under the facility) was .53. The constraints specified in the committed credit facility would permit an additional $252.7 million in short-term and/or long-term debt to be outstanding before the Company’s debt to capitalization ratio would exceed .625. If a downgrade in any of the Company’s credit ratings were to occur,
29
access to the commercial paper markets might not be possible.* However, the Company expects that it could borrow under its uncommitted bank lines of credit or rely upon other liquidity sources, including cash provided by operations.*
Under the Company’s existing indenture covenants, at March 31, 2004, the Company would have been permitted to issue up to a maximum of $555.0 million in additional long-term unsecured indebtedness at then-current market interest rates (further limited by the debt to capitalization ratio constraints noted in the previous paragraph) in addition to being able to issue new indebtedness to replace maturing debt. The Company’s present liquidity position is believed to be adequate to satisfy known demands.*
The Company’s indenture pursuant to which $499.0 million (or 40%) of the Company’s long-term debt (as of March 31, 2004) was issued contains a cross-default provision whereby the failure by the Company to perform certain obligations under other borrowing arrangements could trigger an obligation to repay the debt outstanding under the indenture. In particular, a repayment obligation could be triggered if the Company fails (i) to pay any scheduled principal or interest on any debt under any other indenture or agreement or (ii) to perform any other term in any other such indenture or agreement, and the effect of the failure causes, or would permit the holders of the debt to cause, the debt to become due prior to its stated maturity, unless cured or waived.
The Company’s $220.0 million committed credit facility also contains a cross-default provision whereby the failure by the Company or its significant subsidiaries to make payments under other borrowing arrangements, or the occurrence of certain events affecting those other borrowing arrangements, could trigger an obligation to repay any amounts outstanding under the committed credit facility and would restrict the Company’s ability to borrow under the committed credit facility. In particular, a repayment obligation could be triggered if (i) the Company or its significant subsidiaries fail to make a payment when due of any principal or interest on any other indebtedness aggregating $20.0 million or more or (ii) an event occurs that causes, or would permit the holders of such indebtedness to cause, such indebtedness to become due prior to its stated maturity. As of March 31, 2004, the Company had no debt outstanding under the committed credit facility.
The Company also has authorization from the SEC, under the Holding Company Act, to issue long-term debt securities and equity securities in an aggregate amount of up to $1.5 billion during the order’s authorization period, which commenced in November 2002 and extends to December 31, 2005. The Company has an effective registration statement on file with the SEC under which it has available capacity to issue an additional $550.0 million of debt and equity securities under the Securities Act of 1933. The Company may sell all or a portion of the remaining registered securities if warranted by market conditions and the Company’s capital requirements (subject to the debt to capitalization ratio constraints noted above). Any offer and sale of the above mentioned $550.0 million of debt and equity securities will be made only by means of a prospectus meeting the requirements of the Securities Act of 1933 and the rules and regulations thereunder.
The amounts and timing of the issuance and sale of debt or equity securities will depend on market conditions, credit facility requirements, indenture requirements, regulatory authorizations and the capital requirements of the Company.
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 $25.4 million. These leases have been entered into for the use of vehicles, construction tools, meters, computer equipment and other items and are accounted for as operating leases. The Company’s unconsolidated subsidiaries, which are accounted for under the equity method, have capital leases of electric generating equipment having a remaining lease commitment of approximately $10.8 million. The Company has guaranteed 50%, or $5.4 million of these capital lease commitments.
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The following table summarizes the Company’s contractual financial commitments at March 31, 2004 and the twelve-month periods over which they occur:
- -------------------------------------- -----------------------------------------------------------------------------------------
Payments by Expected Maturity Dates
-----------------------------------------------------------------------------------------
(Millions of Dollars) 2004- 2005- 2006- 2007- 2008-
2005 2006 2007 2008 2009 Thereafter Total
- -------------------------------------- ----------- ----------- ----------- ----------- ----------- --------------- -------------
Long-Term Debt 114.0 14.0 11.7 9.3 308.8 796.4 $1,254.2
Short-Term Bank Notes 64.6 - - - - - 64.6
Commercial Paper 48.2 - - - - - 48.2
Operating Lease Commitments 6.7 5.3 3.9 3.2 2.7 3.6 25.4
Capital Lease Commitments 0.8 1.0 1.0 0.7 0.7 1.2 5.4
- -------------------------------------- ----------- ----------- ----------- ----------- ----------- --------------- -------------
The Company is involved in litigation arising in the normal course of business. Also in the normal course of business, the Company is involved in tax, regulatory and other governmental audits, inspections, investigations and other proceedings that involve state and federal taxes, safety, compliance with regulations, rate base, cost of service and purchased gas cost issues, among other things. While the resolution of such litigation or regulatory matters could have a material effect on earnings and cash flows in the quarterly and annual period of resolution, none of this litigation, and none of these regulatory matters, are expected to change materially the Company’s present liquidity position, nor have a material adverse effect on the financial condition of the Company.
For a complete discussion of market risk sensitive instruments, refer to “Market Risk Sensitive Instruments” in Item 7 of the Company’s 2003 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) (collectively, “Parties”) that established rates for the three-year period ending September 30, 2003. For a complete discussion of this Agreement, refer to “Rate Matters” in Item 7 of the Company’s 2002 Form 10-K. On July 25, 2003, the Parties and other interests executed a settlement agreement (Settlement) to extend the terms of the Agreement and Distribution Corporation’s restructuring plan one year commencing October 1, 2003. The Settlement was approved by the NYPSC in an order issued on September 18, 2003. As approved, the Settlement continued existing base rates, but reduced the level above which earnings are shared 50/50 with customers from the previous 11.5% return on equity to 11.0%. In addition, the Settlement increased the combined pension and other post employment benefit expense by $8.0 million, without a corresponding increase in revenues. Most other features of Distribution Corporation’s service remained largely unchanged. Distribution Corporation is
31
engaging in confidential settlement negotiations with the NYPSC and other parties concerning, among other things, its revenue requirement for the year ending September 30, 2005.
On September 20, 2001, the NYPSC issued an order under which Distribution Corporation was directed to show cause why an action for penalties of $19.0 million should not be commenced against it for alleged violations of consumer protection requirements. On December 3, 2001, Distribution Corporation filed its response which vigorously asserted that the allegations lack merit. Distribution continues to so believe. The adoption of a procedural schedule has been adjourned because the major parties to the proceeding are involved in settlement discussions which are confidential pursuant to NYPSC rules. A settlement proposal, to which the Commission is a necessary party, is before the Commission for consideration. For a discussion of related legal matters, refer to Part II, Item 1, “Legal Proceedings.”
On April 16, 2003, Distribution Corporation filed a request with the 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. The PaPUC suspended the effective date to January 15, 2004. 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. On October 16, 2003, the parties reached a settlement of all issues. The settlement was submitted to the Administrative Law Judge, who, on November 17, 2003 issued a decision recommending adoption of the settlement. The settlement provides for a base rate increase of $3.5 million and authorizes deferral accounting for pension and other post-employment benefit expenses. The settlement was approved by the PaPUC on December 18, 2003, and rates became effective January 15, 2004.
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 November 25, 2003, the FERC issued Order 2004 “Standards of Conduct for Transmission Providers”, which it clarified in Order 2004-A on April 16, 2004. Order 2004 regulates the conduct of transmission providers (such as Supply Corporation) with their energy affiliates. The FERC broadened the definition of “energy affiliates” to include any affiliate of a transmission provider if that affiliate engages in or is involved in transmission (gas or electric) transactions, or manages or controls transmission capacity, or buys, sells, trades or administers natural gas or electric energy or engages in financial transactions relating to the sale or transmission of natural gas or electricity. Order 2004 provides that companies may request waivers. It also provides an exemption for local distribution corporations that are affiliated with interstate pipelines (such as Distribution Corporation), but the exemption is limited, with very minor exceptions, to local distribution corporations that do not make any off-system sales. Distribution Corporation currently does make such off-system sales and would like to continue doing so, whether by waiver, amendment or further clarification of the new rule. Until there is further clarification from the FERC on the scope of these exemptions, the Company is unable to predict the impact Order 2004 will have on the Company.
Empire currently does not have a rate case on file with the NYPSC. Management will continue to monitor its financial position in the New York jurisdiction to determine the necessity of filing a rate case in the future.
Environmental Matters. The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. The Company has established procedures for the ongoing evaluation of its operations to identify potential environmental exposures and comply with regulatory policies and
32
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont.)
procedures. It is the Company’s policy to accrue estimated environmental clean-up costs (investigation and remediation) when such amounts can reasonably be estimated and it is probable that the Company will be required to incur such costs. At March 31, 2004, 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 $9.4 million to $10.4 million.* The minimum liability of $9.4 million has been recorded on the Consolidated Balance Sheet at March 31, 2004. Other than discussed in Note G of the Company’s 2003 Form 10-K (referred to below), the Company is currently not aware of any material additional exposure to environmental liabilities. However, changes in environmental regulations or other factors could adversely impact the Company.*
For further discussion refer to Note G — Commitments and Contingencies under the heading “Environmental Matters” in Item 8 of the Company’s 2003 Form 10-K, and to Part II, Item 1, “Legal Proceedings.”
The Company is including the following cautionary statement in this Form 10-Q to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of, the Company. Forward-looking statements include statements concerning plans, objectives, goals, projections, strategies, future events or performance, and underlying assumptions and other statements which are other than statements of historical facts. From time to time, the Company may publish or otherwise make available forward-looking statements of this nature. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of the Company, are also expressly qualified by these cautionary statements. Certain statements contained in this report, including, without limitation, those which are designated with an asterisk (“*”) and those which are identified by the use of the words “anticipates,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” and similar expressions, are “forward-looking” statements as defined in the Private Securities Litigation Reform Act of 1995 and accordingly involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. The forward-looking statements contained herein are based on various assumptions, many of which are based, in turn, upon further assumptions. The Company’s expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including, without limitation, management’s examination of historical operating trends, data contained in the Company’s records and other data available from third parties, but there can be no assurance that management’s expectations, beliefs or projections will result or be achieved or accomplished. In addition to other factors and matters discussed elsewhere herein, the following are important factors that, in the view of the Company, could cause actual results to differ materially from those discussed in the forward-looking statements:
| 1. | Changes in economic conditions, including economic disruptions caused by terrorist activities or acts of war; |
| 2. | Changes in demographic patterns and weather conditions, including the occurrence of severe weather; |
| 3. | Changes in the availability and/or price of natural gas, oil and coal; |
| 4. | Inability to obtain new customers or retain existing ones; |
| 5. | Significant changes in competitive factors affecting the Company; |
| 6. | Governmental/regulatory actions, initiatives and proceedings, including those affecting acquisitions, financings, allowed rates of return, industry and rate structure, franchise renewal, and environmental/safety requirements; |
| 7. | Unanticipated impacts of restructuring initiatives in the natural gas and electric industries; |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Concl.)
| 8. | Significant changes from expectations in actual capital expenditures and operating expenses and unanticipated project delays or changes in project costs; |
| 9. | The nature and projected profitability of pending and potential projects and other investments; |
| 10. | Occurrences affecting the Company’s ability to obtain funds from operations, debt or equity to finance needed capital expenditures and other investments; |
| 11. | Uncertainty of oil and gas reserve estimates; |
| 12. | Ability to successfully identify and finance acquisitions and ability to operate and integrate existing and any subsequently acquired business or properties; |
| 13. | Ability to successfully identify, drill for and produce economically viable natural gas and oil reserves; |
| 14. | Significant changes from expectations in the Company’s actual production levels for natural gas or oil; |
| 15. | Changes in the availability and/or price of derivative financial instruments; |
| 16. | Changes in the price of natural gas or oil and the effect of such changes on the accounting treatment or valuation of financial instruments or the Company’s natural gas and oil reserves; |
| 17. | Inability of the various counterparties to meet their obligations with respect to the Company’s financial instruments; |
| 18. | Regarding foreign operations, changes in trade and monetary policies, inflation and exchange rates, taxes, operating conditions, laws and regulations related to foreign operations, and political and governmental changes; |
| 19. | Significant changes in tax rates or policies or in rates of inflation or interest; |
| 20. | Significant changes in the Company’s relationship with its employees or contractors and the potential adverse effects if labor disputes, grievances or shortages were to occur; |
| 21. | Changes in accounting principles or the application of such principles to the Company; |
| 22. | Changes in laws and regulations to which the Company is subject, including tax, environmental, safety and employment laws and regulations; or |
| 23. | The cost and effects of legal and administrative claims against the Company. |
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 Principal Financial Officer, along with any significant changes in internal controls of the Company.
34
Item 4. Controls and Procedures (Concl.)
Evaluation of disclosure controls and procedures
The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (Exchange Act). These rules refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. The Company’s management, including the Chief Executive Officer and Principal Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in internal controls over financial reporting
The Company maintains a system of internal control over financial reporting that is designed to provide reasonable assurance that the Company’s transactions are properly authorized, the Company’s assets are safeguarded against unauthorized or improper use, and the Company’s transactions are properly recorded and reported to permit preparation of the Company’s financial statements in conformity with generally accepted accounting principles in the United States of America. There were no changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II. Other Information
In an action instituted in the New York State Supreme Court, Chautauqua County on January 31, 2000 against Seneca, NFR and “National Fuel Gas Corporation,” Donald J. and Margaret Ortel and Brian and Judith Rapp, “individually and on behalf of all those similarly situated,” allege, in an amended complaint which adds National Fuel Gas Company as a party defendant that (a) Seneca underpaid royalties due under leases operated by it, and (b) Seneca’s co-defendants (i) fraudulently participated in and concealed such alleged underpayment, and (ii) induced Seneca’s alleged breach of such leases. Plaintiffs seek an accounting, declaratory and related injunctive relief, and compensatory and exemplary damages. Defendants have denied each of plaintiffs’ material substantive allegations and set up twenty-five affirmative defenses in separate verified answers.
A motion was made by plaintiffs on July 15, 2002 to certify a class comprising all persons presently and formerly entitled to receive royalties on the sale of natural gas produced and sold from wells operated in New York by Seneca (and its predecessor Empire Exploration, Inc). On December 23, 2002, the court granted certification of the proposed class, as modified to exclude those leaseholders whose leases provide for calculation of royalties based upon a flat fee, or flat fee per cubic foot of gas produced. The court’s order states that there are approximately 749 potential class members. Discovery has begun on the merits of the claims and the case will eventually be tried or settled.
In an action instituted in the New York State Supreme Court, Kings County on February 18, 2003 against Distribution Corporation and Paul J. Hissin, an unaffiliated third party, plaintiff Donna Fordham-Coleman, as administratrix of the estate of Velma Arlene Fordham, alleges that Distribution Corporation’s denial of natural gas service in November 2000 to the plaintiff’s decedent, Velma Arlene Fordham, caused decedent’s death in February 2001. Plaintiff seeks damages for wrongful death and pain and suffering, plus punitive damages. Distribution Corporation has denied plaintiff’s material allegations, set up seven affirmative defenses in separate verified answers and filed a cross-claim against the co-defendant. Distribution Corporation believes and will vigorously assert that plaintiff’s allegations lack merit. The Court changed venue of the action to New York State Supreme Court, Erie County. The litigation is in the early stages of discovery. For a discussion of a related matter before the NYPSC, refer to Part I, Item 2 — MD&A of this report under the heading “Rate Matters.”
35
Item 1. Legal Proceedings (Concl.)
On December 22, 2003, the Pennsylvania Department of Environmental Protection (DEP) issued an order to Seneca to halt its timber harvesting operations on 21,000 acres in Cameron, Elk and McKean counties in Pennsylvania. The order asserts certain violations of DEP regulations concerning erosion, sedimentation and stream crossings. The order requires Seneca to apply for certain permits, control erosion, submit plans for removal of water encroachments not included in permit applications, notify the DEP of additional current or planned timber harvesting operations, and grant the DEP access to timber acreage. On January 9, 2004, Seneca filed with the Pennsylvania Environmental Hearing Board (Hearing Board) a notice of appeal, objecting to each finding and order contained in the order, and asserting that the DEP’s findings are factually incorrect, an arbitrary exercise of the DEP’s functions and duties, and contrary to law. Also on January 9, 2004, Seneca filed with the Hearing Board a petition requesting a stay of operation of portions of the order. On January 20, 2004, the parties settled Seneca’s request for a stay. Seneca has resumed its timber harvesting operations pursuant to the terms of the settlement. The settlement preserves various issues raised by the DEP’s order for a hearing on the merits of Seneca’s notice of appeal.
The Company believes, based on the information presently known, that the ultimate resolution of these matters, individually or in the aggregate, will not be material to the consolidated financial condition, results of operations, or cash flow of the Company.* No assurances can be given, however, as to the ultimate outcomes of these matters, and it is possible that the outcomes, individually or in the aggregate, could be material to 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 litigation or regulatory matters could have a material effect on earnings and cash flows in the quarterly and annual period of resolution, none of this litigation, and none of these regulatory matters, are expected to change materially the Company’s present liquidity position, nor have a material adverse effect on the financial condition of the Company.*
On January 2, 2004, the Company issued a total of 2,130 unregistered shares of Company common stock to the eight non-employee directors of the Company then serving on the Board of Directors: 165 shares to each of two directors who retired from the Board on February 19, 2004, and 300 shares to each of the other six directors. All of these shares were issued as partial consideration for the directors’ services during the quarter ended March 31, 2004, pursuant to the Company’s Retainer Policy for Non-Employee Directors. These transactions were exempt from registration by Section 4(2) of the Securities Act of 1933 as transactions not involving a public offering.
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Issuer Purchases of Equity Securities
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Total Number of
Shares Purchased as Maximum Number of
Part of Publicly Shares that May
Total Number of Announced Share Yet Be Purchased
Shares Average Price Repurchase Plans or Under Share Repurchase
Period Purchased(a) Paid Per Share Programs Plans or Programs
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Jan. 1 - 31, 2004 21,282 $25.12 - -
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Feb. 1 - 29, 2004 46,730 $25.89 - -
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Mar. 1 - 31, 2004 24,537 $24.68 - -
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Total 92,549 $25.39 - -
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
(a) Represents shares of common stock of the Company purchased by the Company in connection with employee award and option plans, pursuant to which option holders and/or holders of restricted stock tendered shares of common stock for the payment of option exercise prices and/or applicable withholding taxes.
The Annual Meeting of Shareholders of National Fuel Gas Company was held on February 19, 2004. At that meeting, the shareholders elected directors, appointed independent accountants, and rejected a shareholder proposal to limit all Company executive compensation plans.
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:
- Philip C. Ackerman 69,064,843 1,580,225 - -
- Bernard J. Lee 56,858,689 13,786,379 - -
Directors whose term of office continued after the meeting:
Term expiring in 2005: Robert T. Brady and Rolland E. Kidder.
Term expiring in 2006: R. Don Cash, George L. Mazanec, and John F. Riordan.
Against Broker
For Or Withheld Abstain Non- Votes
(ii) Appointment of
PricewaterhouseCoopers
LLP as independent
accountants 54,872,552 15,483,384 289,132 -
(iii) Adoption of shareholder
proposal to limit all
executive compensation
plans 6,340,089 44,590,884 1,715,725 17,998,370
37
On February 19, 2004, Bernard J. Kennedy and James V. Glynn retired from the Board of Directors.
Also on February 19, 2004, the Company’s Board of Directors adopted Corporate Governance Guidelines that include procedures set forth in Article I, Section 7 of the Company’s By-Laws by which shareholders may nominate persons for election to the Board.
Effective April 1, 2004, J. P. Pawlowski retired from the positions of Treasurer, Principal Financial Officer and Principal Accounting Officer of the Company. As of the same date, R. J. Tanski was elected Treasurer and Principal Financial Officer of the Company and K. M. Camiolo was elected Controller and Principal Accounting Officer of the Company.
(a) Exhibits
Exhibit
Number Description of Exhibit
10(iii) Amendment to Retirement Supplement Agreement dated March 11, 2004, between the Company and Joseph
P. Pawlowski.
12 Statements regarding Computation of Ratios:
Ratio of Earnings to Fixed Charges for the Twelve Months Ended March 31, 2004 and the Fiscal Years
Ended September 30, 1999 through 2003.
31.1 Written statements of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under
the Securities Exchange Act of 1934.
31.2 Written statements of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)
under the Securities Exchange Act of 1934.
32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99 National Fuel Gas Company Consolidated Statement of Income for the Twelve Months Ended March 31,
2004 and 2003.
(b) Reports on Form 8-K
A report on Form 8-K dated January 29, 2004 was furnished to the SEC on January 30, 2004 regarding
a press release issued by the Company concerning earnings for the quarter ended December 31,
2003. The report was furnished under Item 12, "Results of Operations and Financial Condition."
38
A report on Form 8-K dated January 30, 2004 was furnished to the SEC on January 30, 2004 regarding
a press release correcting a technical error in the balance sheet that was included in the
Company's January 29, 2003 earning
results news release. The report was furnished under Item 12, "Results of Operations and
Financial Condition."
A report on Form 8-K dated March 8, 2004 was furnished to the SEC on March 8, 2004 in connection
with the Company's financial analyst conference held on March 4, 2004. The Company provided
hedging summaries for its Exploration and Production segment for fiscal years 2004 and 2005. The
report was furnished under Item 9, "Regulation FD Disclosure."
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NATIONAL FUEL GAS COMPANY
(Registrant)
/s/R. J. Tanski
R. J. Tanski
Treasurer and Principal Financial Officer
/s/K. M. Camiolo
K. M. Camiolo
Controller and Principal Accounting Officer
Date: May 13, 2004
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EXHIBIT INDEX
(Form 10-Q)
Exhibit 10(iii) Amendment to Retirement Supplement Agreement dated March 11, 2004
between the Company and Joseph P. Pawlowski.
Exhibit 12 Statements regarding Computation of Ratios:
Ratio of Earnings to Fixed Charges for the Twelve
Months Ended March 31, 2004 and the Fiscal Years Ended
September 30, 1999 through 2003
Exhibit 31.1 Written statements of Chief Executive Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) under the Securities Exchange Act of 1934.
Exhibit 31.2 Written statements of Principal Financial Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) under the Securities Exchange Act of 1934.
Exhibit 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99 National Fuel Gas Company Consolidated Statement of
Income for the Twelve Months Ended March 31, 2004
and 2003