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 June 30, 2001
Commission File Number 1-3880
National Fuel Gas Company
(Exact name of registrant as specified in its charter)
New Jersey | 13-1086010 |
---|---|
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
10 Lafayette Square | 14203 |
Buffalo, New York | (Zip Code) |
(Address of principal executive offices)
(716) 857-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES X NO
Indicate 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 July 31, 2001: 39,665,995 shares.
NATIONAL FUEL GAS COMPANY (Company or Registrant)
DIRECT SUBSIDIARIES: | National Fuel Gas Distribution Corporation (Distribution Corporation) |
National Fuel Gas Supply Corporation (Supply Corporation) | |
Seneca Resources Corporation (Seneca) | |
Highland Forest Resources, Inc. (Highland) | |
Leidy Hub, Inc. (Leidy Hub) | |
Data-Track Account Services, Inc. (Data-Track) | |
National Fuel Resources, Inc. (NFR) | |
Horizon Energy Development, Inc. (Horizon) | |
Upstate Energy Inc. (Upstate) | |
Horizon Power, Inc. (Horizon Power) | |
Niagara Independence Marketing Company (NIM) | |
Seneca Independence Pipeline Company (SIP) |
INDEX
Part I. Financial Information Page ----------------------------- ---- Item 1. Financial Statements a. Consolidated Statements of Income and Earnings Reinvested in the Business - Three and Nine Months Ended June 30, 2001 and 2000 4 - 5 b. Consolidated Balance Sheets - June 30, 2001 and September 30, 2000 6 - 7 c. Consolidated Statement of Cash Flows - Nine Months Ended June 30, 2001 and 2000 8 d. Consolidated Statement of Comprehensive Income - Three and Nine Months Ended June 30, 2001 and 2000 9 - 10 e. Notes to Consolidated Financial Statements 11 - 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 - 40 Item 3. Quantitative and Qualitative Disclosures About Market Risk 40 Part II. Other Information -------------------------- Item 1. Legal Proceedings 40 Item 2. Changes in Securities and Use of Proceeds 40 Item 3. Defaults Upon Senior Securities o Item 4. Submission of Matters to a Vote of Security Holders o Item 5. Other Information 40 Item 6. Exhibits and Reports on Form 8-K 40 - 41 Signature 42o The Company has nothing to report under this item.
Reference to the "Company" in this report means the Registrant or the Registrant and its subsidiaries collectively, as appropriate in the context of the disclosure. All references to a certain year in this report are to the Company's fiscal year ended September 30 of that year, unless otherwise noted.
This Form 10-Q contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements should be read with the cautionary statements and important factors included in this Form 10-Q at Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A), under the heading "Safe Harbor for Forward-Looking Statements." Forward-looking statements are all statements other than statements of historical fact, including, without limitation, those statements that are designated with a "*" following the statement, as well as those statements that are identified by the use of the words "anticipates," "estimates," "expects," "intends," "plans," "predicts," "projects," and similar expressions.
Part I. Financial InformationItem 1.Financial Statements
National Fuel Gas Company
Consolidated Statements of Income and Earnings
Reinvested in the Business
(Unaudited)
Three Months Ended June 30, (Dollars in Thousands, Except Per Common Share Amounts) 2001 2000 ----------------- ----------------- INCOME Operating Revenues $406,494 $281,201 - --------------------------------------------------------------------------------------------------- Operating Expenses Purchased Gas 168,355 94,883 Fuel Used in Heat and Electric Generation 10,493 9,896 Operation 76,944 79,469 Maintenance 5,085 5,710 Property, Franchise and Other Taxes 18,487 14,794 Depreciation, Depletion and Amortization 42,593 35,083 Income Taxes 24,934 11,323 - --------------------------------------------------------------------------------------------------- 346,891 251,158 - --------------------------------------------------------------------------------------------------- Operating Income 59,603 30,043 Other Income 3,451 2,271 - --------------------------------------------------------------------------------------------------- Income Before Interest Charges and Minority Interest in Foreign Subsidiaries 63,054 32,314 - --------------------------------------------------------------------------------------------------- Interest Charges Interest on Long-Term Debt 20,892 17,550 Other Interest 5,681 6,115 - --------------------------------------------------------------------------------------------------- 26,573 23,665 - --------------------------------------------------------------------------------------------------- Minority Interest in Foreign Subsidiaries 137 421 - --------------------------------------------------------------------------------------------------- Net Income Available for Common Stock 36,618 9,070 EARNINGS REINVESTED IN THE BUSINESS Balance at April 1 616,260 552,198 - --------------------------------------------------------------------------------------------------- 652,878 561,268 Dividends on Common Stock (2001 - $0.505 per share; 2000 - $0.48 per share) 19,980 18,794 - --------------------------------------------------------------------------------------------------- Balance at June 30 $632,898 $542,474 =================================================================================================== Earnings Per Common Share: Basic $0.93 $0.23 =================================================================================================== Diluted $0.91 $0.23 =================================================================================================== Weighted Average Common Shares Outstanding: Used in Basic Calculation 39,575,072 39,177,148 =================================================================================================== Used in Diluted Calculation 40,282,805 39,677,909 ===================================================================================================
See Notes to Consolidated Financial Statements
Item 1.Financial Statements (Cont.)National Fuel Gas Company
Consolidated Statements of Income and Earnings
Reinvested in the Business
(Unaudited)
Nine Months Ended June 30, (Dollars in Thousands, Except Per Common Share Amounts) 2001 2000 ----------------- ----------------- INCOME Operating Revenues $1,845,867 $1,175,999 - -------------------------------------------------------------------------------------------------- Operating Expenses Purchased Gas 985,961 441,912 Fuel Used in Heat and Electric Generation 47,718 46,563 Operation 256,604 241,350 Maintenance 15,370 17,101 Property, Franchise and Other Taxes 67,413 61,195 Depreciation, Depletion and Amortization 123,693 102,685 Income Taxes 110,811 73,839 - -------------------------------------------------------------------------------------------------- 1,607,570 984,645 - -------------------------------------------------------------------------------------------------- Operating Income 238,297 191,354 Other Income 13,113 7,636 - -------------------------------------------------------------------------------------------------- Income Before Interest Charges and Minority Interest in Foreign Subsidiaries 251,410 198,990 - -------------------------------------------------------------------------------------------------- Interest Charges Interest on Long-Term Debt 61,023 50,446 Other Interest 23,431 21,300 - -------------------------------------------------------------------------------------------------- 84,454 71,746 - -------------------------------------------------------------------------------------------------- Minority Interest in Foreign Subsidiaries (2,078) (2,255) - -------------------------------------------------------------------------------------------------- Net Income Available for Common Stock 164,878 124,989 EARNINGS REINVESTED IN THE BUSINESS Balance at October 1 525,847 472,517 - -------------------------------------------------------------------------------------------------- 690,725 597,506 Dividends on Common Stock (2001 - $1.465 per share; 2000 - $1.41 per share) 57,827 55,032 - -------------------------------------------------------------------------------------------------- Balance at June 30 $632,898 $542,474 ================================================================================================== Earnings Per Common Share: Basic $4.18 $3.20 ================================================================================================== Diluted $4.10 $3.17 ================================================================================================== Weighted Average Common Shares Outstanding: Used in Basic Calculation 39,478,598 39,058,490 ================================================================================================== Used in Diluted Calculation 40,199,481 39,470,417 ==================================================================================================
See Notes to Consolidated Financial Statements
Item 1.Financial Statements (Cont.)National Fuel Gas Company
Consolidated Balance Sheets
(Unaudited)
June 30, September 30, 2001 2000 ----------------- ------------------- (Thousands of Dollars) ASSETS Property, Plant and Equipment $4,195,998 $3,829,637 Less - Accumulated Depreciation, Depletion and Amortization 1,261,680 1,146,246 - -------------------------------------------------------------------------------------------------- 2,934,318 2,683,391 - -------------------------------------------------------------------------------------------------- Current Assets Cash and Temporary Cash Investments 57,258 32,125 Receivables - Net 229,378 121,639 Unbilled Utility Revenue 17,555 27,105 Gas Stored Underground 31,393 55,795 Materials and Supplies - at average cost 29,808 25,145 Unrecovered Purchased Gas Costs 20,196 29,681 Prepayments 21,304 32,293 - -------------------------------------------------------------------------------------------------- 406,892 323,783 - -------------------------------------------------------------------------------------------------- Other Assets Recoverable Future Taxes 84,199 84,199 Unamortized Debt Expense 20,419 19,841 Other Regulatory Assets 21,182 17,518 Deferred Charges 10,114 12,985 Other 123,725 95,171 - -------------------------------------------------------------------------------------------------- 259,639 229,714 - -------------------------------------------------------------------------------------------------- $3,600,849 $3,236,888 ==================================================================================================
See Notes to Consolidated Financial Statements
National Fuel Gas Company
Consolidated Balance Sheets
(Unaudited)
June 30, September 30, 2001 2000 -------------------- ------------------- (Thousands of Dollars) CAPITALIZATION AND LIABILITIES Capitalization: Comprehensive Shareholders' Equity Common Stock, $1 Par Value Authorized - 200,000,000 Shares; Issued and Outstanding - 39,602,048 Shares and 39,329,803 Shares, Respectively $ 39,602 $ 39,330 Paid in Capital 464,530 452,217 Earnings Reinvested in the Business 632,898 525,847 - ------------------------------------------------------------------------------------------------ Total Common Shareholder Equity Before Items of Other Comprehensive Loss 1,137,030 1,017,394 Accumulated Other Comprehensive Loss (39,680) (29,957) - ----------------------------------------------------------------------------------------------- Total Comprehensive Shareholders' Equity 1,097,350 987,437 Long-Term Debt, Net of Current Portion 1,151,066 953,622 - ------------------------------------------------------------------------------------------------ Total Capitalization 2,248,416 1,941,059 - ------------------------------------------------------------------------------------------------ Minority Interest in Foreign Subsidiaries 21,560 23,031 - ------------------------------------------------------------------------------------------------ Current and Accrued Liabilities Notes Payable to Banks and Commercial Paper 464,296 619,502 Current Portion of Long-Term Debt 8,957 11,262 Accounts Payable 112,622 88,853 Amounts Payable to Customers 37,278 9,583 Other Accruals and Current Liabilities 148,883 70,348 - ------------------------------------------------------------------------------------------------ 772,036 799,548 - ------------------------------------------------------------------------------------------------ Deferred Credits Accumulated Deferred Income Taxes 392,194 326,994 Taxes Refundable to Customers 14,410 14,410 Unamortized Investment Tax Credit 9,424 9,951 Other Deferred Credits 124,399 107,165 Fair Value of Derivative Financial Instruments 18,410 14,730 - ------------------------------------------------------------------------------------------------ 558,837 473,250 - ------------------------------------------------------------------------------------------------ Commitments and Contingencies - - - ------------------------------------------------------------------------------------------------ $3,600,849 $3,236,888 ================================================================================================
See Notes to Consolidated Financial Statements
Item 1.Financial Statements (Cont.)National Fuel Gas Company
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended June 30, (Thousands of Dollars) 2001 2000 ------------------- --------------------- OPERATING ACTIVITIES Net Income Available for Common Stock $164,878 $124,989 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation, Depletion and Amortization 123,693 102,685 Deferred Income Taxes 8,376 11,394 Minority Interest in Foreign Subsidiaries 2,078 2,255 Other (168) 5,102 Change in: Receivables and Unbilled Utility Revenue (95,542) (55,457) Gas Stored Underground and Materials and Supplies 18,926 14,579 Unrecovered Purchased Gas Costs 9,485 1,835 Prepayments 10,985 9,415 Accounts Payable 13,797 561 Amounts Payable to Customers 27,695 (2,864) Other Accruals and Current Liabilities 67,984 51,815 Other Assets (24,348) (6,328) Other Liabilities 9,300 1,030 - --------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 337,139 261,011 - --------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Capital Expenditures (206,748) (184,862) Investment in Subsidiaries (81,918) (123,809) Investment in Partnerships (1,530) (4,375) Other 3,770 11,390 - --------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (286,426) (301,656) - --------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Change in Notes Payable to Banks and Commercial Paper (169,006) 125,450 Net Proceeds from Issuance of Long-Term Debt 202,303 149,334 Reduction of Long-Term Debt (8,811) (161,499) Dividends Paid on Common Stock (56,690) (54,253) Proceeds from Issuance of Common Stock 8,226 11,128 - --------------------------------------------------------------------------------------------------- Net Cash (Used in) Provided By Financing Activities (23,978) 70,160 - --------------------------------------------------------------------------------------------------- Effect of Exchange Rates on Cash (1,602) (3,383) - --------------------------------------------------------------------------------------------------- Net Increase in Cash and Temporary Cash Investments 25,133 26,132 Cash and Temporary Cash Investments at October 1 32,125 29,222 - --------------------------------------------------------------------------------------------------- Cash and Temporary Cash Investments at June 30 $57,258 $55,354 ===================================================================================================
See Notes to Consolidated Financial Statements
Item 1. Financial Statements (Cont.)National Fuel Gas Company
Consolidated Statement of Comprehensive Income
(Unaudited)
Three Months Ended June 30, (Thousands of Dollars) 2001 2000 --------------------------------- Net Income Available for Common Stock $36,618 $9,070 - ------------------------------------------------------------------------------------------------------ Other Comprehensive Income, Before Tax: Foreign Currency Translation Adjustment 8,047 762 Unrealized Gain on Securities Available for Sale Arising During the Period 545 447 Unrealized Gain on Derivative Financial Instruments Arising During the Period 54,566 - Reclassification Adjustment for Realized Losses on Derivative Financial Instruments in Net Income 16,698 - Reclassification Adjustment for Realized Gains on Securities Available for Sale in Net Income - (103) - ------------------------------------------------------------------------------------------------------ Other Comprehensive Income, Before Tax 79,856 1,106 - ------------------------------------------------------------------------------------------------------ Income Tax Expense Related to Unrealized Gain on Securities Available for Sale Arising During the Period 190 156 Income Tax Expense Related to Unrealized Gain on Derivative Financial Instruments Arising During the Period 20,760 - Reclassification Adjustment for Income Tax Benefit on Realized Losses on Derivative Financial Instruments in Net Income 6,529 - Reclassification Adjustment for Income Tax Expense on Realized Gains on Securities Available for Sale in Net Income - (36) - ------------------------------------------------------------------------------------------------------ Income Taxes - Net 27,479 120 - ------------------------------------------------------------------------------------------------------ Other Comprehensive Income, Net of Tax 52,377 986 - ------------------------------------------------------------------------------------------------------ Comprehensive Income $88,995 $10,056 ======================================================================================================
See Notes to Consolidated Financial Statements
Item 1. Financial Statements (Cont.)National Fuel Gas Company
Consolidated Statement of Comprehensive Income
(Unaudited)
Nine Months Ended June 30, (Thousands of Dollars) 2001 2000 --------------------------------- Net Income Available for Common Stock $164,878 $124,989 - ----------------------------------------------------------------------------------------------------- Other Comprehensive Income, Before Tax: Foreign Currency Translation Adjustment (946) (15,802) Unrealized Gain on Securities Available for Sale Arising During the Period 473 1,867 Unrealized Gain on Derivative Financial Instruments Arising During the Period 17,539 - Reclassification Adjustment for Realized Losses on Derivative Financial Instruments in Net Income 81,073 - Reclassification Adjustment for Realized Gains on Securities Available for Sale in Net Income - (103) - ----------------------------------------------------------------------------------------------------- Other Comprehensive Income (Loss), Before Tax 98,139 (14,038) - ----------------------------------------------------------------------------------------------------- Income Tax Expense Related to Unrealized Gain on Securities Available for Sale Arising During the Period 165 653 Income Tax Expense Related to Unrealized Gain on Derivative Financial Instruments Arising During the Period 6,846 - Reclassification Adjustment for Income Tax Benefit on Realized Losses on Derivative Financial Instruments in Net Income 31,084 - Reclassification Adjustment for Income Tax Expense on Realized Gains on Securities Available for Sale in Net Income - (36) - ----------------------------------------------------------------------------------------------------- Income Taxes - Net 38,095 617 - ----------------------------------------------------------------------------------------------------- Other Comprehensive Income (Loss), Before Cumulative Effect, Net of Tax 60,044 (14,655) - ----------------------------------------------------------------------------------------------------- Cumulative Effect of Change in Accounting, Net of Tax (69,767) - - ----------------------------------------------------------------------------------------------------- Other Comprehensive Loss, After Cumulative Effect, Net of Tax (9,723) (14,655) - ----------------------------------------------------------------------------------------------------- Comprehensive Income $155,155 $110,334 =====================================================================================================
See Notes to Consolidated Financial Statements
National Fuel Gas Company
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation. The Company consolidates its majority owned entities. The equity method is used to account for minority owned entities. All significant intercompany balances and transactions are eliminated.
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Quarterly Earnings. The Company, in its opinion, has included all adjustments that are necessary for a fair statement of the results of operations for the reported periods. The consolidated financial statements and notes thereto, included herein, should be read in conjunction with the financial statements and notes for the years ended September 30, 2000, 1999 and 1998 that are included in the Company’s Form 10-K for 2000. The 2001 consolidated financial statements will be examined by the Company’s independent accountants after the end of the fiscal year.
The earnings for the nine months ended June 30, 2001 should not be taken as a prediction of earnings for the entire fiscal year ending September 30, 2001. Most of the Utility segment’s business is seasonal in nature and is influenced by weather conditions. Because of the seasonal nature of the Utility segment’s heating business, earnings during the winter months normally represent a substantial part of the Utility segment’s earnings for the entire fiscal year. The impact of abnormal weather on earnings during the heating season is partially reduced by the operation of a weather normalization clause (WNC) included in Distribution Corporation’s New York tariff. The WNC is effective for October through May billings. Distribution Corporation’s tariff for its Pennsylvania jurisdiction does not have a WNC. While the Pipeline and Storage segment’s business is influenced by weather conditions, Supply Corporation’s straight fixed-variable rate design, which allows for recovery of substantially all fixed costs in the demand or reservation charge, reduces the earnings impact of weather fluctuations.
Consolidated Statement of Cash Flows. For purposes of the Consolidated Statement of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity of generally three months or less to be cash equivalents.
Reclassification. Certain prior year amounts have been reclassified to conform with current year presentation.
Item 1. Financial Statements (Cont.)Cumulative Effect of Change in Accounting. Effective October 1, 2000, the Company adopted the Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133) as amended by SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of FASB Statement No. 133” and by SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of Statement 133.” The cumulative effect of this change decreased other comprehensive income by $69.8 million after tax for the nine months ended June 30, 2001. The cumulative effect of this change did not have a material impact on net income. The derivative financial instruments that comprise the cumulative effect recorded in other comprehensive income have been designated and qualify as cash flow hedges. These instruments hedge the Company’s exposure to variability in expected future cash flows and relate primarily to the Company’s use of derivative financial instruments to manage a portion of the market risk associated with the fluctuations in the price of natural gas and crude oil. The liability for all of the Company’s derivative financial instruments was $18.4 million at June 30, 2001, and is reflected on the Consolidated Balance Sheet as Fair Value of Derivative Financial Instruments. The Consolidated Balance Sheet does not reflect the anticipated physical transactions related to the Company’s cash flow hedges.
Accumulated Other Comprehensive Income (Loss). The components of Accumulated Other Comprehensive Income (Loss) are as follows (in thousands):
At June 30, 2001 At September 30, 2000 Cumulative Foreign Currency Translation Adjustment $(32,881) $(31,935) Net Unrealized Loss on Derivative Financial Instruments (9,085) - Net Unrealized Gain on Securities Available for Sale 2,286 1,978 Accumulated Other Comprehensive Loss $(39,680) $(29,957) ======== ========
Earnings Per Common Share. Basic earnings per common share is computed by dividing income available for common stock by the weighted average number of common shares outstanding for the period. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The only potentially dilutive securities the Company has outstanding are stock options. The diluted weighted average shares outstanding shown on the Consolidated Statement of Income reflects the potential dilution that could result from the exercise of these stock options as determined using the Treasury Stock Method.
New Accounting Pronouncements. In July 2001, the FASB issued SFAS No. 141, "Business Combinations" (SFAS 141), SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142) and SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 141 requires that all business combinations initiated after June 30, 2001 be accounted for by the purchase method. It also requires disclosure of the primary reasons for a business combination and the allocation of the purchase price paid to the assets acquired and liabilities assumed by major balance sheet caption. Additional disclosure would be required when goodwill and intangible assets represent a significant portion of the purchase price paid. SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. Under this standard, goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives, but the amortization period will not be limited to a certain period of time. SFAS 142 requires that the Company adopt this standard by October 1, 2002. However, goodwill and intangible assets acquired after June 30, 2001 will be subject immediately to the nonamortization and amortization provisions of SFAS 142. Early adoption is permitted by SFAS 142. Under these provisions, the earliest the Company could adopt SFAS 142 would be October 1, 2001. Management is currently evaluating the provisions of SFAS 142 regarding the impact on the financial condition and results of operations of the Company and has not determined when it will fully
Item 1. Financial Statements (Cont.)adopt SFAS 142. 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 a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is adjusted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. When the liability is settled, the entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS 143 requires that the Company adopt this standard by October 1, 2002, with earlier application encouraged. Management is currently evaluating the provisions of SFAS 143 regarding the impact on the financial condition and results of operations of the Company and has not determined when it will adopt SFAS 143.
Note 2 - Income Taxes
The components of federal and state income taxes included in the Consolidated Statement of Income are as follows (in thousands):
Nine Months Ended June 30, 2001 2000 ------------------- -------------------- Operating Expenses: Current Income Taxes Federal $76,285 $49,979 State 21,484 13,538 Foreign 4,666 (1,072) Deferred Income Taxes Federal 2,595 6,927 State 159 409 Foreign 5,622 4,058 - --------------------------------------------------------------------------------- 110,811 73,839 Other Income: Deferred Investment Tax Credit (523) (788) Minority Interest in Foreign Subsidiaries (862) (479) - --------------------------------------------------------------------------------- Total Income Taxes $109,426 $72,572 =================================================================================
The U.S. and foreign components of income before income taxes are as follows (in thousands):
Nine Months Ended June 30, 2001 2000 ------------------- -------------------- U.S. $251,957 $184,486 Foreign 22,347 13,075 - ----------------------------------------------------------------------------- $274,304 $197,561 =============================================================================
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):
Nine Months Ended June 30, 2001 2000 ------------------- -------------------- Net income available for common stock $164,878 $124,989 Total income taxes 109,426 72,572 - -------------------------------------------------------------------------------------------- Income before income taxes $274,304 $197,561 ============================================================================================ Income tax expense, computed at statutory rate of 35% $ 96,006 $ 69,146 Increase (reduction) in taxes resulting from: State income taxes 14,068 9,229 Depreciation 1,225 1,387 Foreign tax in excess of (less than) statutory rate 1,605 (2,629) Miscellaneous (3,478) (4,561) - -------------------------------------------------------------------------------------------- Total Income Taxes $109,426 $ 72,572 ============================================================================================
Significant components of the Company's deferred tax liabilities (assets) were as follows (in thousands):
At June 30, 2001 At September 30, 2000 --------------------------------- ---------------------------- Deferred Tax Liabilities: Property, Plant and Equipment $457,093 $375,660 Other 11,461 23,776 - --------------------------------------------------------------------------------------------------- Total Deferred Tax Liabilities $468,554 $399,436 - --------------------------------------------------------------------------------------------------- Deferred Tax Assets: Other (76,360) (72,442) - --------------------------------------------------------------------------------------------------- Total Deferred Tax Assets (76,360) (72,442) - --------------------------------------------------------------------------------------------------- Total Net Deferred Income Taxes $392,194 $326,994 ===================================================================================================Item 1. Financial Statements (Cont.)
Note 3 – Stock Acquisition
In June 2001, National Fuel Exploration Corp. (NFEC), a wholly-owned subsidiary of Seneca, acquired approximately 91% of the issued and outstanding shares of Player Petroleum Corporation (Player), an oil and gas exploration and development company with operations based primarily in the Province of Alberta, Canada. This acquisition was made through NFEC’s wholly-owned subsidiary, NFEx Acquisition Corp. The cost of acquiring the shares of Player was approximately $81.9 million. The acquisition was financed with short-term borrowings.
The acquisition of Player was accounted for in accordance with the purchase method as specified by Accounting Principles Board Opinion No. 16. Player's balance sheet has been incorporated into the Company's consolidated balance sheet at June 30, 2001. At June 30, 2001, the Company recorded an accrued liability of $8.7 million for the purchase of the remaining 9% of the issued and outstanding shares of Player. The accrued liability (reflected in "liabilities assumed" below) was recorded based on NFEC's intent to acquire all of the remaining issued and outstanding shares of Player by way of a compulsory acquisition transaction pursuant to the Business Corporations Act (in Alberta, Canada). This accrual brings the total acquisition cost for all of the issued and outstanding shares of Player to $90.6 million. Player's results of operations will be incorporated into the Company's consolidated statement of income effective July 1, 2001. Details of the acquisition at June 30, 2001 are as follows (dollars in millions):
Assets Acquired $178.9 Liabilities Assumed (97.0) Cash Acquired at Acquisition - ------ Cash Paid $ 81.9 ======
Note 4 – Capitalization
Common Stock. During the nine months ended June 30, 2001, the Company issued 272,245 shares of common stock under the Company's stock and benefit plans.
On December 7, 2000, 731,000 stock options and 275,000 stock appreciation rights were granted at an exercise price of $55.595 per share.
A two-for-one stock split will occur on September 7, 2001. The record date for the stock split will be August 24, 2001.
Note 5 – Commitments and Contingencies
Environmental Matters. The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. The Company has established procedures for the ongoing evaluation of its operations to identify potential environmental exposures and 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 June 30, 2001, the Company has estimated its remaining clean-up costs related to former manufactured gas plant sites and third party waste disposal sites will be in the range of $5.2 million to $6.6 million. The minimum liability of $5.2 million has been recorded on the Consolidated Balance Sheet at June 30, 2001. Other than discussed in Note H in Item 8 of the 2000 Form 10-K (referred to below), the Company is currently not aware of any material additional exposure to environmental liabilities. However, adverse changes in environmental regulations or other factors could impact the Company.
For further discussion refer to Note H – Commitments and Contingencies under the heading "Environmental Matters" in Item 8 of the 2000 Form 10–K.
Item 1. Financial Statements (Cont.)Other. The Company is involved in litigation arising in the normal course of business. The Company is involved in regulatory matters arising in the normal course of business that involve rate base, cost of service and purchased gas cost issues. While the resolution of such litigation or regulatory matters could have a material effect on earnings and cash flows in the year of resolution, none of this litigation, and none of these regulatory matters, are currently expected to have a material adverse effect on the financial condition of the Company.
Note 6 – Business Segment Information.
The Company has six reportable segments: Utility, Pipeline and Storage, Exploration and Production, International, Energy Marketing, and Timber. The breakdown of the Company's reportable segments is based upon a combination of factors including differences in products and services, regulatory environment and geographic factors.
The data presented in the tables below reflect the reportable segments and reconciliations to consolidated amounts. There have been no changes in the basis of segmentation nor in the basis of measuring segment profit or loss from those used in the 2000 Form 10-K. There have been no material changes in the amount of assets for any operating segment from the amounts disclosed in the 2000 Form 10-K, except for the Exploration and Production segment. In June 2001, the Exploration and Production segment's acquisition of Player increased assets by $178.9 million. See further discussion of this acquisition in Note 3 - Stock Acquisition.
Quarter Ended June 30, 2001 (Thousands) - -------------------------------------------------------------------------------------------------------------------------------------------- Pipeline Exploration Total Corporate and and and Energy Reportable Intersegment Total Utility Storage Production International Marketing Timber Segments All Other Eliminations Consolidated - -------------------------------------------------------------------------------------------------------------------------------------------- Revenue from External Customers $196,062 $22,798 $105,816 $17,018 $57,024 $7,924 $406,642 $(148) $ - $406,494 Intersegment - Revenues 3,745 22,581 - - - - 26,326 93 (26,419) Segment Profit: Net Income (Loss) 6,143 12,954 19,888 (1,879) (2,968) 2,240 36,378 (114) 354 36,618 Nine Months Ended June 30, 2001 (Thousands) - -------------------------------------------------------------------------------------------------------------------------------------------- Pipeline Exploration Total Corporate and and and Energy Reportable Intersegment Total Utility Storage Production International Marketing Timber Segments All Other Eliminations Consolidated - -------------------------------------------------------------------------------------------------------------------------------------------- Revenue from External Customers $1,114,079 $64,965 $305,521 $86,825 $234,584 $33,496 $1,839,470 $6,397 $ - $1,845,867 Intersegment Revenues 17,895 67,720 - - - - 85,615 11,097 (96,712) - Segment Profit: Net Income (Loss) 63,873 34,314 59,455 3,142 (1,099) 7,362 167,047 (3,319) 1,150 164,878 Quarter Ended June 30, 2000 (Thousands) - -------------------------------------------------------------------------------------------------------------------------------------------- Pipeline Exploration Total Corporate and and and Energy Reportable Intersegment Total Utility Storage Production International Marketing Timber Segments All Other Eliminations Consolidated - -------------------------------------------------------------------------------------------------------------------------------------------- Revenue from External Customers $160,428 $19,736 $53,447 $15,303 $25,653 $10,662 $285,229 $(4,028) $ - $281,201 Intersegment Revenues 4,022 22,104 - - - - 26,126 4,322 (30,448) - Segment Profit: Net Income (Loss) 5,565 7,324 6,026 (1,394) (9,390) 1,155 9,286 (315) 99 9,070 Nine Months Ended June 30, 2000 (Thousands) - -------------------------------------------------------------------------------------------------------------------------------------------- Pipeline Exploration Total Corporate and and and Energy Reportable Intersegment Total Utility Storage Production International Marketing Timber Segments All Other Eliminations Consolidated - -------------------------------------------------------------------------------------------------------------------------------------------- Revenue from External Customers $727,172 $61,775 $153,591 $92,985 $108,561 $30,933 $1,175,017 $982 $ - $1,175,999 Intersegment Revenues 16,868 66,425 224 - - - 83,517 4,323 (87,840) - Segment Profit: Net Income (Loss) 68,843 26,762 21,910 7,606 (7,942) 6,175 123,354 212 1,423 124,989Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Earnings. The Company’s earnings were $36.6 million, or $0.93 per common share ($0.91 per common share on a diluted basis), for the quarter ended June 30, 2001. This compares with earnings of $9.1 million, or $0.23 per common share ($0.23 per common share on a diluted basis), for the quarter ended June 30, 2000. The increase in earnings of approximately $27.5 million is the result of higher earnings in the Exploration and Production, Utility, Timber, and Pipeline and Storage segments. Earnings were also impacted as the result of a reduced loss in the Energy Marketing segment and a slightly higher loss in the International segment.
The Company's earnings were $164.9 million, or $4.18 per common share ($4.10 per common share on a diluted basis), for the nine months ended June 30, 2001. This compares with earnings of $125.0 million, or $3.20 per common share ($3.17 per common share on a diluted basis), for the nine months ended June 30, 2000. The increase in earnings of $39.9 million is the result of higher earnings in the Exploration and Production, Pipeline and Storage and Timber segments. Earnings were also impacted as the result of a reduced loss in the Energy Marketing segment, lower earnings in the Utility and International segments and a net loss in the All Other category.
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 Nine Months Ended June 30, June 30, - ----------------------------------------------------------------------------------------------- (Thousands) 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------- Utility $ 6,143 $ 5,565 $63,873 $ 68,843 Pipeline and Storage 12,954 7,324 34,314 26,762 Exploration and Production 19,888 6,026 59,455 21,910 International (1,879) (1,394) 3,142 7,606 Energy Marketing (2,968) (9,390) (1,099) (7,942) Timber 2,240 1,155 7,362 6,175 - ----------------------------------------------------------------------------------------------- Total Reportable Segments 36,378 9,286 167,047 123,354 All Other (114) (315) (3,319) 212 Corporate 354 99 1,150 1,423 - ----------------------------------------------------------------------------------------------- Total Consolidated $36,618 $9,070 $164,878 $124,989 - -----------------------------------------------------------------------------------------------Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)
Utility
Utility Operating Revenues
- -------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, - -------------------------------------------------------------------------------------------- (Thousands) 2001 2000 2001 2000 - -------------------------------------------------------------------------------------------- Retail Sales Revenues: Residential $139,340 $107,883 $ 807,181 $515,703 Commercial 21,380 15,856 144,195 84,418 Industrial 5,911 3,742 26,588 13,217 - -------------------------------------------------------------------------------------------- 166,631 127,481 977,964 613,338 - -------------------------------------------------------------------------------------------- Off-System Sales 12,515 9,417 73,886 38,605 Transportation 18,166 24,861 75,904 90,167 Other 2,495 2,691 4,220 1,930 - -------------------------------------------------------------------------------------------- $199,807 $164,450 $1,131,974 $744,040 - --------------------------------------------------------------------------------------------
Utility Throughput
- ----------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, - ----------------------------------------------------------------------------------------------- (MMcf) 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------- Retail Sales: Residential 10,643 11,305 68,491 62,766 Commercial 1,781 1,907 13,081 11,425 Industrial 809 851 3,468 2,929 - ----------------------------------------------------------------------------------------------- 13,233 14,063 85,040 77,120 - ----------------------------------------------------------------------------------------------- Off-System Sales 2,493 2,295 9,977 10,916 Transportation 14,903 17,085 56,267 60,763 - ----------------------------------------------------------------------------------------------- 30,629 33,443 151,284 148,799 - -----------------------------------------------------------------------------------------------
2001 Compared with 2000
Operating revenues for the Utility segment increased $35.4 million and $387.9 million, respectively, for the quarter and nine months ended June 30, 2001 as compared with the same periods a year ago. These increases are primarily a result of higher retail sales revenues and off-system sales revenues offset in part by lower transportation revenues.
Retail sales revenues increased $39.2 million and $364.6 million, respectively, for the quarter and nine months ended June 30, 2001 as compared with the same periods a year ago. The increases in retail sales revenues resulted primarily from the recovery of higher gas costs stemming from an increase in the average cost of purchased gas. Gas costs are recovered dollar for dollar in revenues with gas costs increasing $37.6 million and $391.2 million, respectively, for the quarter and nine months ended June 30, 2001 as compared with the same periods a year ago. The average cost of purchased gas was $6.39 per thousand cubic feet (Mcf) and $5.21 per Mcf, respectively, for the quarters ended June 30, 2001 and June 30, 2000. The average cost of purchased gas was $7.84 per Mcf and $4.55 per Mcf, respectively, for the nine months ended June 30, 2001 and June 30, 2000.
Off-system sales revenue increased $3.1 million and $35.3 million, respectively, for the quarter and nine months ended June 30, 2001, as compared with the same periods a year ago. For the quarter ended June 30, 2001, higher prices and volumes contributed to the increase. For the nine months ended June 30, 2001, higher prices more than offset a decrease in volumes. However, due to profit sharing with retail customers, the margins resulting from off-system sales are minimal.
Transportation revenues decreased $6.7 million and $14.3 million, respectively, for the quarter and nine months ended June 30, 2001 as compared with the same periods a year ago. The decrease in transportation revenues is a result of lower transportation volumes primarily due to residential transportation customers switching back to sales customers and the fact that certain commercial and industrial customers are reducing usage due to a slowing economy and/or are fuel switching.
Revenues for the nine months ended June 30, 2001 as compared to the same period a year ago also decreased as a result of a $10.0 million rate decrease for the Utility’s New York customers that went into effect October 1, 2000 in connection with the three year rate settlement reached with the New York State Public Service Commission. This rate decrease was provided in the form of a bill credit included in rates during the November 1 through March 31 heating season.
The Utility segment’s third quarter 2001 earnings were $6.1 million, an increase of $0.6 million when compared with third quarter 2000 earnings. A factor in this quarter’s earnings improvement is lower operation and maintenance expenses reflecting the benefit of the early retirement offers in New York and Pennsylvania that occurred in the first and second quarters of 2001. Also, the Utility segment’s operation and maintenance expenses were $1.7 million (after tax) lower than the third quarter of 2000 due to a reduction in the Company’s stock appreciation right (SAR) liability. This SAR liability, which is spread across all segments, decreased as the market price of the Company’s stock decreased from $53.58 at March 31, 2001 to $51.99 at June 30, 2001. During the quarter ended June 30, 2000, the Company experienced an increase in its SAR liability as the market price of the Company’s stock increased from $44.56 at March 31, 2000 to $48.75 at June 30, 2000. Partially offsetting these positive contributions to earnings, third quarter 2001 earnings compared to third quarter 2000 earnings were negatively impacted by lower throughput resulting from conservation efforts made by retail customers, and lower transportation revenues primarily from commercial and industrial customers impacted by a slowing economy. Weather, which in the Pennsylvania jurisdiction was approximately 11.5% warmer than the three months ended June 30, 2000, also decreased earnings for the third quarter of 2001. The impact of weather variations in the New York jurisdiction is mitigated by that jurisdiction’s weather normalization clause (WNC). The WNC in New York, which covers the eight month period from October through May, has had a stabilizing effect on earnings for the New York rate jurisdiction. In addition, in periods of colder than normal weather, the WNC benefits Distribution Corporation’s New York customers. For the quarters ended June 30, 2001 and 2000, as the weather was warmer than normal in both periods, the WNC preserved earnings of $1.4 million (after tax) in both quarters.
The Utility segment’s earnings for the nine months ended June 30, 2001 were $63.9 million, a decrease of $4.9 million when compared with the earnings of $68.8 million for the nine months ended June 30, 2000. As previously discussed, a $10.0 million rate decrease in the Utility segment’s New York jurisdiction was a major factor in the earnings decrease. Also, the Utility segment recorded an early retirement expense in its Pennsylvania jurisdiction ($0.6 million after tax) during the first quarter of 2001 and an early retirement expense in its New York jurisdiction ($3.6 million after tax) during the second quarter of 2001. Partially offsetting the decrease in earnings, the nine months ended June 30, 2000 included a $3.3 million refund provision ($2.1 million after tax) related to a 50% sharing with customers of earnings over a predetermined amount in accordance with the New York rate settlement of 1998. Also, the Utility segment’s operation and maintenance expenses were $2.0 million (after tax) lower than the
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)nine months ended June 30, 2000 due to a reduction in the Company’s SAR liability. This SAR liability decreased as the market price of the Company’s stock decreased from $56.06 at September 30, 2000 to $51.99 at June 30, 2001. During the nine months ended June 30, 2000, the Company experienced an increase in its SAR liability as the market price of the Company’s stock increased from $47.19 at September 30, 1999 to $48.75 at June 30, 2000. Weather, which in the Pennsylvania jurisdiction was approximately 12.9% colder than the nine months ended June 30, 2000, also increased earnings in 2001. In the New York jurisdiction, the impact of weather variations was mitigated by the WNC. For the nine months ended June 30, 2001 and 2000, as the weather was warmer than normal in both periods, the WNC preserved earnings of $1.2 million (after tax) and $8.1 million (after tax), respectively.
Degree Days
- -------------------------------------------------------------------------------------------------------- Percent (Warmer) Three Months Ended Colder Than -------------------------------- June 30 Normal 2001 2000 Normal Prior Year - -------------------------------------------------------------------------------------------------------- Buffalo 969 779 936 (19.6) (16.8) Erie 873 739 835 (15.3) (11.5) - -------------------------------------------------------------------------------------------------------- Nine Months Ended June 30 - -------------------------------------------------------------------------------------------------------- Buffalo 6,669 6,503 6,090 (2.5) 6.8 Erie 6,079 6,183 5,478 1.7 12.9 - --------------------------------------------------------------------------------------------------------
Pipeline and Storage
Pipeline and Storage Operating Revenues
- --------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, - --------------------------------------------------------------------------------------------------- (Thousands) 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------------- Firm Transportation $22,626 $22,663 $69,543 $69,078 Interruptible Transportation 1,067 826 2,707 1,800 - --------------------------------------------------------------------------------------------------- 23,693 23,489 72,250 70,878 - --------------------------------------------------------------------------------------------------- Firm Storage Service 15,591 15,594 46,172 47,706 Interruptible Storage Service 445 38 661 211 - --------------------------------------------------------------------------------------------------- 16,036 15,632 46,833 47,917 - --------------------------------------------------------------------------------------------------- Other 5,650 2,719 13,602 9,405 - --------------------------------------------------------------------------------------------------- $45,379 $41,840 $132,685 $128,200 - ---------------------------------------------------------------------------------------------------
Pipeline and Storage Throughput
- --------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, - --------------------------------------------------------------------------------------------------- (MMcf) 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------------- Firm Transportation 52,840 52,834 248,036 237,575 Interruptible Transportation 6,202 4,752 14,820 7,199 - --------------------------------------------------------------------------------------------------- 59,042 57,586 262,856 244,774 - ---------------------------------------------------------------------------------------------------Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)
2001 Compared with 2000
Operating revenues for the Pipeline and Storage segment increased $3.5 million and $4.5 million for the quarter and nine months ended June 30, 2001, respectively, as compared with the same periods a year ago. For the quarter ended June 30, 2001, the increase can be attributed primarily to a $3.2 million increase in revenues from unbundled pipeline sales and open access transportation due to higher prices and volumes. For the nine months ended June 30, 2001, the increase can largely be attributed to a $2.4 million increase in revenues from unbundled pipeline sales and open access transportation (due to higher prices and volumes) and a $1.2 million increase in cashout revenues (a cash resolution of a gas imbalance whereby a customer pays Supply Corporation for gas it receives in excess of amounts delivered into Supply Corporation’s system by the customer’s shipper). Cashout revenues are offset by purchased gas expense. While transportation volumes increased during both the quarter and nine month periods, volume fluctuations generally do not have a significant impact on revenues as a result of Supply Corporation’s straight fixed-variable rate design. However, higher interruptible transportation volumes did contribute to an increase in interruptible transportation revenues during both the quarter and nine month periods, as shown above.
The Pipeline and Storage segment’s third quarter 2001 earnings were $13.0 million, an increase of $5.6 million when compared with earnings from the third quarter of 2000. Major factors in this increase were higher revenues from unbundled pipeline sales and open access transportation ($2.0 million after tax) and a $2.3 million (after tax) reduction in operation and maintenance expenses associated with a reduction in the Company’s SAR liability, as previously discussed.
The Pipeline and Storage segment’s earnings for the nine months ended June 30, 2001 were $34.3 million, an increase of $7.5 million when compared with earnings for the nine months ended June 30, 2000. This increase in earnings can be attributed to a $3.1 million (after tax) reduction in operation and maintenance expenses associated with a reduction in the Company’s SAR liability, as previously discussed. Also, there was a $1.6 million (after tax) increase in revenues from unbundled pipeline sales and open access transportation. The increase in earnings can also be attributed to the buy-out by a customer of a long-term transportation contract ($2.6 million after tax) during the first quarter of 2001. The resulting gain from this buy-out was recorded in other income.
Exploration and Production
Exploration and Production Operating Revenues
- --------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, - --------------------------------------------------------------------------------------------------- (Thousands) 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------------- Gas (after Hedging) $46,632 $28,321 $127,188 $83,532 Oil (after Hedging) 42,484 28,624 125,735 66,059 Gas Processing Plant 11,451 4,170 33,845 12,541 Other 5,249 (7,668) 18,753 (8,317) - --------------------------------------------------------------------------------------------------- $105,816 $53,447 $305,521 $153,815 - ---------------------------------------------------------------------------------------------------
Production Volumes
- ---------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, - ---------------------------------------------------------------------------------------------------------------------- 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------------------------- Gas Production (million cubic feet - MMcf) Gulf Coast 7,665 8,860 21,080 24,948 West Coast 1,078 1,058 3,176 3,301 Appalachia 968 1,100 3,074 3,252 Canada 111 17 341 17 - ---------------------------------------------------------------------------------------------------------------------- 9,822 11,035 27,671 31,518 - ---------------------------------------------------------------------------------------------------------------------- Oil Production (thousands of barrels) Gulf Coast 554 372 1,378 1,025 West Coast 696 714 2,155 2,106 Appalachia 2 3 5 7 Canada 757 128 2,275 128 - ---------------------------------------------------------------------------------------------------------------------- 2,009 1,217 5,813 3,266 - ----------------------------------------------------------------------------------------------------------------------
Average Prices
- --------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, - --------------------------------------------------------------------------------------------------------- 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------------------- Average Gas Price/Mcf Gulf Coast $4.57 $3.57 $5.84 $2.93 West Coast $13.32 $3.58 $12.59 $3.02 Appalachia $5.65 $3.03 $5.27 $2.94 Canada $4.08 $2.68 $4.67 $2.68 Weighted Average $5.63 $3.52 $6.54 $2.94 Weighted Average After Hedging $4.75 $2.57 $4.60 $2.65 Average Oil Price/barrel (bbl) Gulf Coast $26.49 $28.83 $28.33 $27.06 West Coast $23.33 $24.15 $24.73 $22.70 Appalachia $26.85 $27.16 $29.15 $24.23 Canada $23.92 $28.58 $25.07 $28.58 Weighted Average $24.43 $26.06 $25.72 $24.30 Weighted Average After Hedging $21.15 $23.52 $21.63 $20.22 - ---------------------------------------------------------------------------------------------------------Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)
2001 Compared with 2000
Operating revenues for the Exploration and Production segment increased $52.4 million and $151.7 million, respectively, for the quarter and nine months ended June 30, 2001, as compared with the same periods a year ago. Gas production revenue after hedging increased $18.3 million and $43.7 million, respectively, for the quarter and nine months ended June 30, 2001, as compared with the same periods a year ago. The increase in gas production revenue is due primarily to an increase in the weighted average price of gas after hedging. Overall gas production decreased, primarily in the Gulf Coast region as there have been delays in placing new platforms on production (due to rig availability constraints) and delays in work-over activity, mostly during the first and second quarters of 2001. Also, new Gulf Coast production in the third quarter of 2001 was primarily oil production. Oil production revenue after hedging increased $13.9 million and $59.7 million, respectively, for the quarter and nine months ended June 30, 2001, as compared with the same periods a year ago. This increase is due primarily to an overall increase in oil production, largely attributable to the Exploration and Production segment’s Canadian properties acquired in June 2000. Revenue from this segment’s gas processing plant was up $7.3 million and $21.3 million, respectively, for the quarter and nine months ended June 30, 2001, as compared with the same periods a year ago, due to higher gas prices. In addition, this segment recognized other revenue increases of $11.9 million and $25.0 million, respectively, for the quarter and nine months ended June 30, 2001, as compared with the same periods a year ago, for mark-to-market and other revenue adjustments related to derivative financial instruments. Refer to further discussion of derivative financial instruments under the heading “Market Risk Sensitive Instruments” that follows. Refer to the tables above for production and price information. Refer to the Outlook for 2001 and 2002 section below for the Exploration and Production segment’s production estimates for 2001 and 2002.
The Exploration and Production segment’s third quarter 2001 earnings were $19.9 million, an increase of $13.9 million when compared with third quarter 2000 earnings. A 65% increase in oil production, largely attributable to the Canadian properties acquired in June 2000, combined with higher natural gas prices were major factors in this segment’s earnings increase. Also, this segment’s earnings benefited from the mark-to-market revenue increases discussed above.
The Exploration and Production segment’s earnings for the nine months ended June 30, 2001 were $59.5 million, an increase of $37.5 million when compared with the earnings for the nine months ended June 30, 2000. A 78% increase in oil production, largely attributed to this segment’s Canadian properties, combined with higher natural gas and oil prices were major factors in this segment’s earnings increase. Also, this segment’s earnings benefited from the mark-to-market revenue increases discussed above.
International
International Operating Revenues
- ---------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, - ---------------------------------------------------------------------------------------------- (Thousands) 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------- Heating $10,845 $7,601 $63,149 $64,291 Electricity 5,575 7,141 21,987 25,466 Other 598 561 1,689 3,228 - ---------------------------------------------------------------------------------------------- $17,018 $15,303 $86,825 $92,985 - ----------------------------------------------------------------------------------------------
International Heating and Electric Volumes
- -------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, - -------------------------------------------------------------------------------------------------------- 2001 2000 2001 2000 - -------------------------------------------------------------------------------------------------------- Heating Sales (Gigajoules) (1) 1,538,739 1,199,835 9,152,522 9,464,307 Electricity Sales (megawatt hours) 225,112 271,823 847,042 911,520 - --------------------------------------------------------------------------------------------------------(1) Gigajoules = one billion joules. A joule is a unit of energy.
2001 Compared with 2000
Operating revenues for the International segment increased $1.7 million for the quarter ended June 30, 2001 as compared to the same period a year ago. The revenue decrease largely reflects a decrease in value of the Czech koruna compared to the U.S. dollar. Heating revenues increased due to rate increases and colder weather. This increase more than offset a decrease in electric revenues, which resulted from the scheduled shutdown of a generating turbine that had reached the end of its useful life and a decline in electric rates.
Operating revenues for the International segment decreased $6.2 million for the nine months ended June 30, 2001 as compared to the same period a year ago. The revenue decrease largely reflects a decrease in value of the Czech koruna compared to the U.S. dollar. Exclusive of the exchange rate impact, heating revenues are actually up due to rate increases offset partly by lower volumes associated with warmer weather. Electric revenues, once again exclusive of the exchange rate impact, decreased as a result of the scheduled shutdown of a generating turbine discussed above and a decline in electric rates.
The International segment experienced a loss of $1.9 million for the third quarter of 2001, $0.5 million more than the loss of $1.4 million for the third quarter of 2000. The increased loss can be attributed primarily to higher operation and maintenance expenses.
The International segment’s earnings for the nine months ended June 30, 2001 were $3.1 million, a decrease of $4.5 million when compared with the earnings for the nine months ended June 30, 2000. Lower heat and electric margins as a result of warmer weather and the scheduled shutdown of a generating turbine are the primary reasons for this decrease. The decrease also reflects a decrease in value of the Czech koruna compared to the U.S. dollar, as previously discussed.
Energy Marketing
Energy Marketing Operating Revenues
- ------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, - ------------------------------------------------------------------------------------------------------- (Thousands) 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------- Natural Gas (after Hedging) $56,663 $38,631 $232,392 $120,193 Electricity 349 536 1,362 1,290 Other 12 (13,514) 830 (12,922) - ------------------------------------------------------------------------------------------------------- $57,024 $25,653 $234,584 $108,561 - -------------------------------------------------------------------------------------------------------
Energy Marketing Volumes
- ------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, - ------------------------------------------------------------------------------------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------- Natural Gas - (MMcf) 8,794 9,233 31,825 31,496 - -------------------------------------------------------------------------------------------------------
2001 Compared with 2000
Operating revenues for the Energy Marketing segment increased $31.4 million and $126.0 million, respectively, for the quarter and nine months ended June 30, 2001, as compared with the same periods a year ago. These increases primarily reflect higher gas sales revenue due to the increased price of natural gas. Also, NFR recognized a negative $13.8 million mark-to-market adjustment related to derivative financial instruments for the quarter and nine months ended June 30, 2000 (included in “Other” on the table above). NFR did not experience any mark-to-market adjustments for the quarter ended June 30, 2001. For the nine months ended June 30, 2001, NFR experienced a positive mark-to-market adjustment of $0.5 million.
The Energy Marketing segment incurred losses for both the quarter and nine months ended June 30, 2001. When compared to the same periods a year ago, losses decreased $6.4 million for the quarter and $6.8 million for the nine month period. The most significant reason for the lower losses were the mark-to-market adjustments in 2000, referred to above. NFR’s third quarter 2001 loss reflects a decline in natural gas sales volumes, a loss on gas sales and higher operation and maintenance expense, mainly attributable to higher bad debt expense. NFR’s loss for the nine months ended June 30, 2001, reflects lower margins, higher operation and maintenance expense, mainly attributable to higher bad debt expense, and higher interest expense.
Timber
Timber Operating Revenues
- ------------------------------------------------------------- ---------------------------------- Three Months Ended Nine Months Ended June 30, June 30, - ----------------------------------------------------------------------------------------------- (Thousands) 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------- Log Sales $3,049 $6,334 $19,185 $19,688 Green Lumber Sales 1,326 1,272 4,319 3,401 Kiln Dry Lumber Sales 3,394 2,950 9,477 7,414 Other 155 106 515 430 - ---------------------------------------------------------------------------------------------- $7,924 $10,662 $33,496 $30,933 - ----------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, - -------------------------------------------------------------------------------------------------- Board Feet (Thousands) 2001 2000 2001 2000 - -------------------------------------------------------------------------------------------------- Log Sales 1,764 2,331 6,912 7,439 Green Lumber Sales 2,744 2,251 7,827 6,405 Kiln Dry Lumber Sales 2,349 2,046 6,602 5,343 - -------------------------------------------------------------------------------------------------- 6,857 6,628 21,341 19,187 - --------------------------------------------------------------------------------------------------
2001 Compared with 2000
Operating revenues for the Timber segment decreased $2.7 million for the quarter ended June 30, 2001, as compared with the same period a year ago. The decrease primarily reflects lower sales of quality logs offset partly by higher average prices.
Operating revenues for the Timber segment increased $2.6 million for the nine months ended June 30, 2001, as compared with the same period a year ago. Green lumber sales revenues are up due to an increase in board feet sold at slightly higher prices. The increase in kiln dry lumber sales is due to the operation of two more kilns brought on-line in August 2000. The decrease in log sales revenues primarily reflects lower sales of quality logs offset partly by higher average prices.
Earnings in the Timber segment increased $1.1 million and $1.2 million, respectively, for the quarter and nine months ended June 30, 2001, as compared with the same periods a year ago. The increase for the quarter is primarily due to a gain realized on the sale of land, higher margins on timber sales, and lower interest expense. The increase in earnings for the nine months ended June 30, 2001, is primarily due to higher margins on timber sales and lower interest expense.
Other Income and Interest Charges
Although variances in Other Income items and Interest Charges are discussed in the earnings discussion by segment above, following is a recap on a consolidated basis:
Other Income
Other income increased $1.2 million for the quarter ended June 30, 2001 compared with the quarter ended June 30, 2000. This increase resulted primarily from a $0.6 million gain on the sale of land during the quarter ending June 30, 2001 and equity method income from NFR Power’s partnership interest in electric generation facilities.
Other income increased $5.5 million for the nine months ended June 30, 2001 compared with the nine months ended June 30, 2000. This increase was principally due to a buyout of a long-term transportation contract by a customer in the Pipeline and Storage segment during the quarter ended December 31, 2000. Another factor in the increase is equity method income from NFR Power’s partnership interests in electric generation facilities.
Interest Charges
Interest on long-term debt increased $3.3 million and $10.6 million for the quarter and nine months ended June 30, 2001, respectively, as compared with the quarter and nine months ended June 30, 2000. These increases can be attributed primarily to higher average amounts of long-term debt outstanding combined with slightly higher weighted average interest rates.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)Other interest charges decreased $0.4 million for the quarter ended June 30, 2001. This decrease resulted mainly from lower weighted average interest rates in the current quarter, offset partially by an increase in the average amount of short-term debt outstanding. For the nine months ended June 30, 2001, other interest charges increased $2.1 million. Higher average amounts of short-term debt outstanding contributed to this increase offset partly by slightly lower weighted average interest rates.
Outlook for 2001 and 2002*
This “Outlook for 2001 and 2002” section contains forward-looking statements, all of which are based on current expectations. There is no assurance that the Company’s projections will in fact be achieved, and these projections do not reflect any acquisitions or divestitures which may occur during the remainder of 2001 or during 2002. The earnings per diluted common share amounts discussed below do not reflect the two-for-one stock split which will occur on September 7, 2001. Reference should be made to the various important factors listed under the heading “Safe Harbor for Forward-Looking Statements” that could cause actual future results to differ materially.
The Company continues to expect that earnings for 2001 will fall within the range of $168 million to $172 million, or $4.25 to $4.35 per diluted common share.* The Company further expects that earnings for the fourth quarter of 2001 will be within the range of $0.15 to $0.25 per diluted common share.* The Exploration and Production segment continues to be the main driver of the expected increase in earnings for 2001 as compared with actual earnings for 2000.* Production estimates for 2001 are expected to be 88 billion cubic feet (Bcf) of natural gas equivalent (Bcfe) (with oil representing 54% of expected production).* The Company’s earnings estimate for 2001 no longer assumes a market price for the Company’s stock of $63 by fiscal year-end, but rather the June 30, 2001 price of $51.99.
For 2002, the Company expects its base case earnings to be in the range of $4.10 to $4.20 per diluted common share.* The Company expects lower earnings in 2002 from the Exploration and Production segment offset partially by higher 2002 earnings in the International and Other Business units.* Also for 2002, the Company expects the contributions from its regulated business units, Distribution Corporation and Supply Corporation, to remain about the same as the anticipated earnings for 2001.*
Commencing with 2002, the Company anticipates a gradual reduction of emphasis in the Gulf of Mexico over several years and expects to focus more of its production efforts on its on-shore resources in Canada, in the Appalachian basin in the Northeast and in California.* The Company’s 2002 production estimate for its Exploration and Production segment is approximately 100 Bcfe (with oil representing 51% of estimated production).* The Company’s 2002 pricing estimates for production in the Exploration and Production segment are $3.68 per Mcf for natural gas and $22.27 per bbl for crude oil.* These price assumptions are exclusive of hedging. Additional information on the Exploration and Production segment’s hedging program is provided in the “Market Risk Sensitive Instruments” section in Item 7 of the Company’s 2000 Form 10-K.
CAPITAL RESOURCES AND LIQUIDITY
The Company’s primary sources of cash during the nine-month period ended June 30, 2001 consisted of cash provided by operating activities and long-term debt. These sources were supplemented by issuances of common stock under the Company’s stock and benefit plans.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)Operating Cash Flow.
Internally generated cash from operating activities consists of net income available for common stock, adjusted for non-cash expenses, non-cash income and changes in operating assets and liabilities. Non-cash items include depreciation, depletion and amortization, deferred income taxes and minority interest in foreign subsidiaries.
Cash provided by operating activities in the Utility and the Pipeline and Storage segments may vary from period to period because of the impact of rate cases. In the Utility segment, supplier refunds, over- or under-recovered purchased gas costs and weather also significantly impact cash flow. The impact of weather on cash flow is tempered in the Utility segment’s New York rate jurisdiction by its WNC and in the Pipeline and Storage segment by Supply Corporation’s straight fixed-variable rate design.
Because of the seasonal nature of the heating business in the Utility, Energy Marketing and International segments, revenues in these segments are relatively high during the heating season, primarily the first and second quarters of the year, and receivables historically increase during these periods from what was receivable at September 30.
The storage gas inventory normally declines during the first and second quarters of the year and is replenished during the third and fourth quarters. For storage gas inventory accounted for under the last-in, first-out (LIFO) method, the current cost of replacing gas withdrawn from storage is recorded in the Consolidated Statements of Income and a reserve for gas replacement is recorded in the Consolidated Balance Sheets and is included under the caption “Other Accruals and Current Liabilities.” Such reserve is reduced as the inventory is replenished.
Net cash provided by operating activities totaled $337.1 million for the nine months ended June 30, 2001, an increase of $76.1 million compared with $261.0 million provided by operating activities for the nine months ended June 30, 2000. Higher cash receipts from the sale of oil and gas in the Exploration and Production segment were the major reasons for the increase. Oil and gas prices were up in the Exploration and Production segment, and oil production increased significantly due to this segment’s Canadian properties acquired in June 2000.
Investing Cash Flow.
Expenditures for Long-Lived AssetsExpenditures for long-lived assets include additions to property, plant and equipment (capital expenditures) and investments in corporations (stock acquisitions) or partnerships, net of any cash acquired.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)The Company’s expenditures for long-lived assets totaled $290.2 million during the nine months ended June 30, 2001. The table below presents these expenditures:
- -------------------------------------------------------------------------------------------------------- Nine Months Ended June 30, 2001 (in millions of dollars) - -------------------------------------------------------------------------------------------------------- Investments in Total Capital Corporations Expenditures for Expenditures And Partnerships Long-Lived Assets - -------------------------------------------------------------------------------------------------------- Utility $28.6 $ - $28.6 Pipeline and Storage 18.2 0.7 18.9 Exploration and Production 144.4 81.9 226.3 International 12.0 - 12.0 Timber 3.3 - 3.3 Energy Marketing 0.1 - 0.1 All Other 0.1 0.9 1.0 - -------------------------------------------------------------------------------------------------------- $206.7 $83.5 $290.2 - --------------------------------------------------------------------------------------------------------Utility
The majority of the Utility capital expenditures were made for replacement of mains and main extensions, as well as for the replacement of service lines.
Pipeline and StorageThe Pipeline and Storage segment’s capital expenditures made during the nine months ended June 30, 2001 included $8.1 million for the construction of a transmission line from Lamont, Pennsylvania to Roystone, Pennsylvania. The remaining capital expenditures were made for additions, improvements and replacements to this segment’s transmission and gas storage systems. The budgeted capital expenditures for 2001 included $5.0 million for an increase in horsepower at the Ellisburg, Pennsylvania compressor station. This project has been delayed until 2002.
The Company also continues to explore various opportunities to participate in transporting gas to the Northeast, either through Supply’s system or in partnership with others. The only significant capital expenditure for this purpose has been SIP’s investment in Independence Pipeline Company, a Delaware general partnership (Independence). During the nine months ended June 30, 2001, SIP made or committed to make an additional $980,000 investment in Independence. SIP’s total investment through June 30, 2001 was $14.3 million, with an additional $300,000 invested in August, 2001.
The investment represents a one-third partnership interest in Independence. The investment has been financed with short-term borrowings. Independence intends to build a 400 mile natural gas pipeline (the Independence Pipeline) from Defiance, Ohio to Leidy, Pennsylvania at an estimated cost of about $700 million.* If the Independence Pipeline project is not constructed, SIP’s share of the developmental costs (including SIP’s investment in Independence) is estimated not to exceed $15.5 million.*
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)On July 12, 2000, the Federal Energy Regulatory Commission (FERC) issued a Certificate of Public Convenience and Necessity (the Certificate) authorizing, among other things, the construction and operation of the Independence Pipeline, subject to satisfaction of various conditions spelled out in the Certificate and in previous FERC orders. Among those conditions is the requirement that the pipeline shall be in service by July 12, 2003. Another condition is that, before construction may commence, Independence must file at FERC executed, firm transportation agreements with “no out” clauses for at least 68.2% of its capacity. (Independence already filed, on June 26 and July 6, 2000, precedent agreements for firm transportation amounting to about 38% of the capacity of the Independence Pipeline, thereby satisfying a FERC requirement previously imposed as a precondition to FERC’s issuance of the Certificate.) The Independence Pipeline partners are working on obtaining the required additional customer commitments, and have extended the planned in-service date to allow additional time to obtain those commitments. Assuming customer contracts satisfactory to the partners are in place by the time it is necessary to commit to key purchases such as pipe, compression and right-of-way, the Independence Pipeline’s planned in-service date is July 12, 2003.*
The Certificate also includes an environmental condition that Independence file an “implementation plan” within 60 days after Independence accepted the Certificate. FERC has extended the due date for submission of that implementation plan to November 1, 2001. Independence is currently performing environmental surveys and other efforts which are necessary to meet that deadline, and expects that it will be able to file a timely implementation plan.*
Exploration and ProductionThe Exploration and Production segment capital expenditures for the nine months ended June 30, 2001 included approximately $66.6 million for Seneca’s offshore program in the Gulf of Mexico, including offshore drilling expenditures, offshore construction, lease acquisition costs and geological and geophysical expenditures. The remaining $77.8 million of capital expenditures included on-shore drilling, construction and recompletion costs for wells located in Louisiana, Texas, California and Canada as well as on-shore geological and geophysical costs, including the purchase of certain three-dimensional seismic data and fixed asset purchases. Of the $77.8 million discussed above, $41.5 million was spent on the Exploration and Production segment’s Canadian properties.
In June 2001, National Fuel Exploration Corp. (NFEC), a wholly-owned subsidiary of Seneca, acquired approximately 91% of the issued and outstanding shares of Player Petroleum Corporation (Player), an oil and gas exploration and development company with operations based primarily in the Province of Alberta, Canada. This acquisition was made through NFEC’s wholly-owned subsidiary, NFEx Acquisition Corp. The cost of acquiring the shares of Player was approximately $81.9 million. The acquisition was financed with short-term borrowings. At June 30, 2001, the Company recorded an accrued liability of $8.7 million for the purchase of the remaining 9% of the issued and outstanding shares of Player. The accrued liability was recorded based on NFEC’s intent to acquire all of the remaining issued and outstanding shares of Player by way of a compulsory acquisition transaction pursuant to the Business Corporations Act (in Alberta, Canada).* This accrual brings the total acquisition cost for all of the issued and outstanding shares of Player to $90.6 million.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)International
The majority of the International segment’s capital expenditures were concentrated on the construction of a boiler at a district heating and power generation plant in the Czech Republic. In June 2001, United Energy, a.s., an indirect subsidiary of Horizon, sold its 65.78% ownership interest in Jablonecká teplárenská a realitní, a.s. (JTR). JTR is a district heating plant in the northern part of the Czech Republic. The proceeds from this sale, net of cash sold, were $5.6 million. There was a loss of less than $0.1 million on the sale.
TimberThe majority of the Timber segment’s capital expenditures were made for purchases of land and timber for Seneca’s timber operations, as well as equipment for Highland’s sawmill and kiln operations. As discussed under the Timber segment’s results of operations, in November 2000 this segment sold timber properties with a book value of $5.2 million for $7.3 million. In April 2001, this segment sold land having a minimal book value for $0.6 million.
All OtherExpenditures for Long-Lived Assets for all other subsidiaries consisted of Horizon Power’s purchase of a 50% partnership interest in Model City Energy, LLC (Model City) ($0.4 million) and Horizon Power’s purchase of a 50% partnership interest in Energy Systems North East, LLC (ESNE) ($0.5 million). Horizon Power also financed ESNE with a long-term note in the principal amount of $11.5 million. Model City generates electricity by using methane gas obtained from a landfill in Model City, New York, which is owned by an outside party. ESNE is an 80-megawatt power plant located in North East, Pennsylvania. The plant provides thermal energy to an adjacent, industrial facility, as well as electric power to the New York power pool.
The Company continuously evaluates capital expenditures and investments in corporations and partnerships. The amounts are subject to modification for opportunities such as the acquisition of attractive oil and gas properties, timber or storage facilities and the expansion of transmission line capacities. While the majority of capital expenditures in the Utility segment are necessitated by the continued need for replacement and upgrading of mains and service lines, the magnitude of future capital expenditures or other investments in the Company’s other business segments depends, to a large degree, upon market conditions.*
Financing Cash Flow.
In November 2000, the Company issued $200.0 million of 7.50% medium-term notes due in November 2010. After deducting underwriting discounts and commissions, the net proceeds to the Company amounted to $197.3 million. The proceeds of this debt issuance were used to reduce short-term debt.
Consolidated short-term debt decreased $155.2 million during the first nine months of 2001. The Company continues to consider short-term debt an important source of cash for temporarily financing capital expenditures and investments in corporations and/or partnerships, gas-in-storage inventory, unrecovered purchased gas costs, exploration and development expenditures and other working capital needs. Fluctuations in these items can have a significant impact on the amount and timing of short-term debt.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)In March 1998, the Company obtained authorization from the Securities and Exchange Commission (SEC), under the Public Utility Holding Company Act of 1935, to issue long-term debt securities and equity securities in amounts not exceeding $2.0 billion at any one time outstanding during the order’s authorization period, which extends to December 31, 2002. In August 1999, the Company registered $625.0 million of debt and equity securities under the Securities Act of 1933. After the November 2000 medium-term note issuance discussed above, the Company currently has $275.0 million of debt and equity securities registered under the Securities Act of 1933.
The Company’s present liquidity position is believed to be adequate to satisfy known demands.* Under the Company’s existing indenture covenants, at June 30, 2001, the Company would have been permitted to issue up to a maximum of $458.0 million in additional long-term unsecured indebtedness at projected market interest rates. Excluding the unrealized loss for derivative financial instruments reflected in Accumulated Other Comprehensive Loss on the Consolidated Balance Sheet, the Company would have been permitted to issue up to a maximum of $472.0 million in additional long-term unsecured indebtedness at projected market interest rates. In addition, at June 30, 2001, the Company had regulatory authorizations and unused short-term credit lines that would have permitted it to borrow an additional $285.7 million of short-term debt.
The amounts and timing of the issuance and sale of debt and/or equity securities will depend on market conditions, regulatory authorizations, and the requirements of the Company.
The Company is involved in litigation arising in the normal course of business. The Company is involved in regulatory matters arising in the normal course of business that involve rate base, cost of service and purchased gas cost issues, among other things. While the resolution of such litigation or regulatory matters could have a material effect on earnings and cash flows in the year of resolution, none of this litigation, and none of these regulatory matters are currently expected to change materially the Company’s present liquidity position, nor have a material adverse effect on the financial condition of the Company.*
Market Risk Sensitive Instruments
For a complete discussion of market risk sensitive instruments, refer to “Market Risk Sensitive Instruments” in Item 7 of the Company’s 2000 Form 10-K. There have been no subsequent material changes to the Company’s exposure to market risk sensitive instruments.
RATE MATTERS
Utility Operation
New York Jurisdiction
On October 11, 2000, the State of New York Public Service Commission (NYPSC) approved a settlement agreement (Agreement) between Distribution Corporation, Staff of the Department of Public Service, the New York State Consumer Protection Board and Multiple Intervenors (an advocate for large commercial and industrial customers) that establishes rates for a three-year period beginning October 1, 2000. The Agreement provides that customers will receive a bill credit of $17.6 million in the first year, of which $7.6 million relates to customers’ share of earnings accumulated under previous settlements. The credit will be reduced to $5.0 million in the second year, and in the third and subsequent years the credit will remain
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)at $5.0 million unless the Company can demonstrate that it is no longer justified. Also, earnings beyond a target level of 11.5% return on equity will be shared equally between shareholders and ratepayers. The Agreement provides further that the Company and interested parties will resume discussions to address the NYPSC’s competition initiatives, including changes to “customer choice” transportation services, among other things. Those discussions commenced in November 2000 and ultimately produced an interim “Joint Proposal,” or settlement agreement, addressing several discrete issues of interest to the parties and the NYPSC. In an order issued on May 30, 2001, the NYPSC adopted the parties’ Joint Proposal. As recommended by the parties, the Joint Proposal modifies Distribution Corporation’s operations relating to transportation services and transactions with marketers and producers of indigenous natural gas. Under the Joint Proposal, the parties also agreed to continue negotiations to implement additional features of the NYPSC’s restructuring initiative (described below). Those confidential discussions, dubbed “Phase III negotiations,” are under way. The Joint Proposal makes no changes in Distribution Corporation’s revenue requirement or other such matters addressed in the above-described settlement agreement.
On November 3, 1998, the NYPSC issued itsPolicy Statement Concerning the Future of the Natural Gas Industry in New York State and Order Terminating Capacity Assignment (Policy Statement). The Policy Statement sets forth the NYPSC’s “vision” on “how best to ensure a competitive market for natural gas in New York.” The Policy Statement has been regarded as the Commission’s template for restructuring of the gas industry. The Commission’s vision includes the following goals:
- Effective competition in the gas supply market for retail customers;
- Downward pressure on customer gas prices;
- Increased customer choice of gas suppliers and service options;
- A provider of last resort (not necessarily the utility);
- Continuation of reliable service and maintenance of operations procedures that treat all participants fairly;
- Sufficient and accurate information for customers to use in making informed decisions;
- The availability of information that permits adequate oversight of the market to ensure fair competition; and
- Coordination of Federal and State policies affecting gas supply and distribution in New York State.
The Policy Statement provides that the most effective way to establish a competitive market in gas supply is “for local distribution companies to cease selling gas.” The NYPSC indicated in its order that it hopes to accomplish that objective over a three-to-seven year transition period from the date the Policy Statement was issued, taking into account “statutory requirements” and the individual needs of each local distribution company (LDC).* The Policy Statement directs Staff to schedule “discussions” with each LDC on an “individualized plan that would effectuate our vision.” In preparation for negotiations, LDCs will be required to address issues such as a strategy to hold new capacity contracts to a minimum, a long-term rate plan with a goal of reducing or freezing rates, and a plan for further unbundling. In addition, Staff was instructed to hold collaborative sessions with multiple parties to discuss generic issues including reliability and market power regulation. Distribution Corporation has participated in the collaborative sessions. These collaborative sessions have not yet produced a consensus document on all issues before the NYPSC. Distribution Corporation will continue to participate in all future collaborative sessions.*
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)On March 22, 2000, the NYPSC issued an order directing electric and gas utilities to file tariff amendments “to accommodate the wishes of retail access customers who prefer to receive combined, single bills from either their utility company or their [marketer]” (Billing Order). The tariff amendments will provide for marketer single-bill or utility single-bill services, thereby allowing a customer to choose a billing preference through the customer’s choice of suppliers – utility or marketer. Distribution Corporation has permitted marketer single billing since 1996.
On November 1, 2000, Distribution Corporation filed tariff amendments in compliance with the Billing Order (and a subsequent order on rehearing of the Billing Order). Consistent with the provisions of the Billing Order, Distribution Corporation’s filing proposed to maintain its long-standing marketer single-bill model and add a permanent version of a utility-provided competitive single-bill service that has been available since May 2000. In addition, the filing proposed a credit (one of a variety of “back-out credits” referred to below), available to marketers that issue single retail bills, equal to the long-run marginal cost of billing services avoided by Distribution Corporation. The NYPSC approved Distribution Corporation’s filing in an order issued on May 18, 2001 with modifications to the proposed back-out credit. Pursuant to the May order, the company’s tariff now provides a monthly back-out credit of $0.80 for all customers enrolled in an aggregation group. For marketers who choose to use Distribution Corporation’s billing service, the charge is $0.84 per bill (producing an incremental charge of $0.04). The May order, like its predecessor orders, provides that utilities may petition for recovery of revenue deficiencies resulting from the back-out credit. Distribution Corporation is discussing cost recovery mechanisms in its generic restructuring proceedings (described above). At this juncture, however, the outcome of those discussions cannot be ascertained.
On March 30, 2000, a collaborative was convened to address the NYPSC’s Order Instituting Proceeding in the so-called “Provider of Last Resort” (POLR) case. The collaborative was charged with the task of helping the NYPSC to “refine our concept of the mature competitive retail energy markets (especially the future role of the regulated utilities) and to identify and remove obstacles to its achievement.” The parties in this case are addressing, among other things, issues arising from utilities exiting the merchant function. The proceeding is also focusing on utilities’ responsibility to provide low-income assistance programs. The parties held frequent meetings on a periodic basis in an attempt to develop consensus on various end-state models for consideration by the NYPSC. Although a consensus model was not developed, a proposal was designed using the gas Policy Statement (described above) as a guide. Collaboration having essentially failed to produce a consensus model, the parties are pursuing a more traditional litigation route by filing legal briefs on issues to be addressed by the NYPSC. Distribution Corporation filed briefs stating generally that the NYPSC’s end-state vision, which takes the LDC out of the merchant role, is unattainable under current laws, among other things. While Distribution Corporation’s briefs acknowledged the potential benefits of LDCs exiting competitive functions, Distribution Corporation’s position has been governed by the NYPSC’s inability to fully address the legal obstacles that prevent a transition to the Policy Statement’s end-state.
On July 13, 2001, a panel of NYPSC hearing officers issued a Recommended Decision (RD) in response to the legal briefs filed by the various parties. The RD addressed most issues raised in the POLR collaborative, including end-state policy options, transition to markets, customer migration strategies, back-out credits, unbundling, public benefits (low income) programs and the NYPSC’s legal authority to proceed to an alternative POLR environment. Very briefly summarized, the RD recommends that the NYPSC adopt as its “end-state vision” one in which the utilities “no longer provide gas and electric commodity service.” Similar to the 1998 Policy Statement, the RD proposes to extend the time-table for implementation by recommending that several preconditions be met, including “a determination that the wholesale and retail markets are operating without the exercise of market power.” The RD then goes on to declare that the only “workably competitive market” is the commodity market for non-residential gas customers. In that area, the RD recommends that the NYPSC “move forward” and
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)remove utilities from providing commodity service to that class of customers. The RD also recommends that marketers be subject to some (or potentially all) consumer protection requirements currently applied to utilities. The RD also recommends that a “universal service” policy be formally adopted for gas and electric service. Distribution Corporation plans to file briefs in opposition to several recommendations contained in the RD, and will object particularly to the assumption that utilities cannot participate in “workably competitive markets.” Distribution Corporation cannot ascertain the outcome of this proceeding at this time.
In connection with the POLR proceeding the NYPSC issued anOrder Directing Expedited Consideration of Rate Unbundling on March 29, 2001 (Unbundling Order). The Unbundling Order directs the state’s electric and gas utilities, including Distribution Corporation, to submit cost studies for “bottom-up” unbundling, which as described by the NYPSC, “begins with the total costs of the utility’s business and then assigns those costs to the various functions, some of which are expected to become competitively available.” This is in contrast to methods used for establishing “back-out” credits, although the result is essentially the same: competitive functions are identified and priced in order to subsidize market entry for marketers. Numerous parties met for several collaborative sessions and were unable to reach consensus on the methodology for the studies. Accordingly, briefs have been filed and a decision on the appropriate methodology to use will be issued by the NYPSC at a later date. Distribution Corporation has no objection to the NYPSC’s authority to order unbundling cost studies, but to the extent any legally-mandated utility functions are identified as “competitive,” there is a possibility that stranded costs may be incurred. While at this juncture the NYPSC has not indicated that stranded cost recovery would be denied, in whole or in part, the issue remains open for consideration in individual utility proceedings. At this time, Distribution Corporation is unable to ascertain the outcome of this proceeding.*
On July 23, 2001, the NYPSC ordered inplementation of an initial set of electronic data interchange (EDI) datasets for electronic exchange of retail access data in New York (EDI Order). As described by the NYPSC, EDI is the computer-to-computer exchange of routine business information in a standard form. The NYPSC believes that EDI is necessary to develop uniform data exchange protocol for the state’s customer choice initiatives. The EDI Order adopts modified enrollment and historical usage datasets initially prepared by an EDI working group involving utilities, marketers and other interests. The Order identifies required changes to uniform business practices and also adopts Web Site Design principles and EDI testing plans. Initial EDI implementation is ordered for calendar year-end 2001 following completion of EDI testing. Phased testing of EDI is expected to begin during the fourth quarter of calendar 2001. The NYPSC also directs development of datasets governing billing and payment processing based upon the recommendations of a national group of stakeholders. It is expected that EDI datasets governing billing will be built during calendar 2001 and implemented during calendar 2002.
The NYPSC continues to address, through various proceedings and “collaboratives,” upstream pipeline capacity issues arising from the restructuring. Currently Distribution Corporation remains authorized to release upstream intermediate capacity to marketers serving former sales customers. Costs relating to retained upstream transmission capacity are recovered through a transition cost surcharge. At this time, Distribution Corporation does not foresee any material changes to upstream capacity requirements in the near term.*
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)On May 15, 2000, the New York State tax law was amended to phase out the long-running tax on utility gross revenues beginning January 1, 2001. Offsetting the scheduled reductions, however, is the imposition of a net income based tax on the same utilities. In a report issued on October 13, 2000, the New York Department of Public Service (Department) recommended, among other things, that utilities be kept whole for any tax increases resulting from implementation of the changes. Toward that end, the report proposed that the mechanism in rates currently used for recovery of the gross revenue tax would be utilized to collect the new income tax. To the extent a utility’s income tax liability exceeded the amount collectible through the existing gross revenue tax recovery mechanism, deferral accounting would be authorized. On December 18, 2000, Distribution Corporation and other parties submitted comments addressing Staff’s recommendations. Distribution Corporation’s comments expressed concern that the Department’s methodology for calculating amounts subject to deferral was flawed. On December 21, 2000, the NYPSC issued an abbreviated order adopting the Department’s recommendation. Distribution Corporation filed tariff amendments revising its tax recovery mechanism consistent with the order. A comprehensive order, describing the basis for the NYPSC’s decision, is forthcoming. The abbreviated order specified that the time for filing rehearing petitions “will be deemed to run from the date of issuance of the subsequent order.” To protect its appeal rights, Distribution Corporation and another New York LDC filed a joint appeal of the NYPSC’s abbreviated order in the proceeding. The appeal, filed with the Supreme Court, Albany County, challenges various provisions of the NYPSC’s abbreviated order. The principal argument on the appeal is that it arbitrarily limits a utility’s ability to defer, for later collection from customers, annual under-collection of the taxes recently enacted by the legislature. At this time, Distribution Corporation is unable to ascertain the outcome of this proceeding.*
Pennsylvania Jurisdiction
Distribution Corporation currently does not have a rate case on file with the Pennsylvania Public Utility Commission (PaPUC). Management will continue to monitor its financial position in the Pennsylvania jurisdiction to determine the necessity of filing a rate case in the future.
A natural gas restructuring bill was signed into law on June 22, 1999. Entitled the Natural Gas Choice and Competition Act (Act), the new law requires all Pennsylvania LDCs to file tariffs designed to provide retail customers with direct access to competitive gas markets. Distribution Corporation submitted its compliance filing on October 1, 1999 for an effective date on or about July 1, 2000. The filing largely mirrored Distribution Corporation’s System Wide Energy Select program previously in effect, which substantially complied with the Act’s requirements. After negotiations with PaPUC Staff and intervenors, a settlement was reached with all parties except for the Pennsylvania Office of Consumer Advocate (OCA). The settlement parties generally agreed that Distribution Corporation’s proposal needed only modest changes to meet the requirements of the Act. Hearings were held and briefs filed on OCA’s open issues. In a Recommended Decision issued on March 31, 2000, the Administrative Law Judge rejected the OCA’s arguments and recommended approval of the settlement agreement. On June 29, 2000, the PaPUC entered an Opinion and Order adopting the settlement, with immaterial changes. Distribution Corporation’s restructured rates and services became effective on July 1, 2000.
Base rate adjustments in both the New York and Pennsylvania jurisdictions do not reflect the recovery of purchased gas costs. Such costs are recovered through operation of the purchased gas adjustment clauses of the appropriate regulatory authorities.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)Pipeline and Storage
Supply Corporation currently does not have a rate case on file with the FERC. Management will continue to monitor Supply Corporation’s financial position to determine the necessity of filing a rate case in the future.
Other Matters
Environmental Matters
The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. The Company has established procedures for the ongoing evaluation of its operations to identify potential environmental exposures and 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 June 30, 2001, the Company has estimated its remaining clean-up costs related to former manufactured gas plant sites and third party waste disposal sites will be in the range of $5.2 million to $6.6 million. The minimum liability of $5.2 million has been recorded on the Consolidated Balance Sheet at June 30, 2001. Other than discussed in Note H in Item 8 of the 2000 Form 10-K (referred to below), the Company is currently not aware of any material additional exposure to environmental liabilities. However, adverse changes in environmental regulations or other factors could impact the Company.*
For further discussion refer to Note H - Commitments and Contingencies under the heading “Environmental Matters” in Item 8 of the 2000 Form 10-K.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations” (SFAS 141), SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142) and SFAS No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143). For a discussion of SFAS 141, SFAS 142 and SFAS 143 and their impact on the Company, refer to Part I, Item 1 at Note 1.
Safe Harbor for Forward-Looking Statements. The Company is including the following cautionary statement in this Form 10-Q to make applicable and take advantage of the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934 for any forward-looking statements made by, or on behalf of, the Company. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements which are other than statements of historical facts. From time to time, the Company may publish or otherwise make available forward-looking statements of this nature. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of the Company, are also expressly qualified by these cautionary statements. Certain statements contained herein, including without limitation those which are designated with a “*", are forward-looking statements and accordingly involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. The forward-looking statements contained herein are based on various assumptions, many of which are based, in turn, upon further assumptions. The Company’s expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including, without limitation, management’s examination of historical operating trends, data contained in the Company’s records and other data available from third
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.)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:
- Changes in economic conditions, demographic patterns and weather conditions;
- Changes in the availability and/or price of natural gas and oil;
- Inability to obtain new customers or retain existing ones;
- Significant changes in competitive factors affecting the Company;
- 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;
- Unanticipated impacts of restructuring initiatives in the natural gas and electric industries;
- Significant changes from expectations in actual capital expenditures and operating expenses and unanticipated project delays or changes in project costs;
- The nature and projected profitability of pending and potential projects and other investments;
- Occurrences affecting the Company's ability to obtain funds from operations, debt or equity to finance needed capital expenditures and other investments;
- Uncertainty of oil and gas reserve estimates;
- Ability to successfully identify and finance oil and gas property acquisitions and ability to operate and integrate existing and any subsequently acquired business or properties;
- Ability to successfully identify, drill for and produce economically viable natural gas and oil reserves;
- Significant changes from expectations in the Company's actual production levels for natural gas or oil;
- Changes in the availability and/or price of derivative financial instruments;
- Changes in the price of natural gas or oil and the related effect given the accounting treatment or valuation of these financial instruments;
- Inability of the various counterparties to meet their obligations with respect to the Company's financial instruments;
- Regarding foreign operations - changes in foreign trade and monetary policies, laws and regulations related to foreign operations, political and governmental changes, inflation and exchange rates, taxes and operating conditions;
- Significant changes in tax rates or policies or in rates of inflation or interest;
- 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; or
- Changes in accounting principles and/or the application of such principles to the Company.
The Company disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof.
Item 3. Quantitative and Qualitative Disclosures About Market RiskRefer to the “Market Risk Sensitive Instruments” section in Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Part II. Other InformationItem 1. Legal Proceedings
For a discussion of various environmental matters, refer to Part I, Item 1 at Note 5 and to Part I, Item 2 - MD&A of this report under the heading “Other Matters.”
Item 2. Changes in Securities and Use of ProceedsOn April 2, 2001, the Company issued 840 unregistered shares of Company common stock to the non-employee directors of the Company. The shares were issued as partial consideration for the directors’ service during the quarter ended June 30, 2001, pursuant to the Company’s Retainer Policy for Non-Employee Directors. These transactions were exempt from registration by Section 4(2) of the Securities Act of 1933, as transactions not involving a public offering.
Item 5. Other InformationIn June 2001, NFR Power, Inc. changed its name to Horizon Power, Inc.
Item 6. Exhibits and Reports on Form 8-K(a) Exhibits Exhibit Number Description of Exhibit (12) Statements regarding Computation of Ratios: Ratio of Earnings to Fixed Charges for the Twelve Months Ended June 30, 2001 and the Fiscal Years Ended September 30, 1996 through 2000. (99) National Fuel Gas Company Consolidated Statement of Income for the Twelve Months Ended June 30, 2001 and 2000.Item 6. Exhibits and Reports on Form 8-K (Concl) (b) Reports on Form 8-K On May 4, 2001, the Company filed a Form 8-K (under Item 5 and Item 7) regarding press releases issued by the Company and its subsidiary, Seneca Resources Corporation (Seneca). One press release dealt with an agreement whereby Seneca's wholly-owned subsidiary, National Fuel Exploration Corp., would offer to acquire all of the outstanding common shares of Player Petroleum Corporation, a Canadian exploration and production company. The other press releases were in regards to the Company's and Seneca's earnings for the second quarter of 2001. The report included partial financial statements and other financial information. On June 19, 2001, the Company filed a Form 8-K (under Item 5 and Item 7) regarding a press release issued by the Company concerning the approval by the Company's Board of Directors of a two-for-one stock split and an increase in the regular quarterly dividend.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NATIONAL FUEL GAS COMPANY ------------------------- (Registrant) /s/Joseph P. Pawlowski -------------------------------------------------------- Joseph P. Pawlowski Treasurer and Principal Accounting OfficerDate: August 14, 2001
EXHIBIT INDEX
(Form 10-Q)
Exhibit 12 Statements regarding Computation of Ratios: Ratio of Earnings to Fixed Charges for the Twelve Months Ended June 30, 2001 and the Years Ended September 30, 1996 through 2000. Exhibit 99 National Fuel Gas Company Consolidated Statement of Income for the Twelve Months Ended June 30, 2001 and 2000.