FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-3880
NATIONAL FUEL GAS COMPANY
(Exact name of registrant as specified in its charter)
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New Jersey
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13-1086010 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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6363 Main Street
Williamsville, New York
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14221 |
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(Address of principal executive offices)
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(Zip Code) |
(716) 857-7000
(Registrants 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 þ NO o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer þ | |
Accelerated filer o | |
Non-accelerated filer o | |
Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). YES o NO þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date:
Common stock, $1 par value, outstanding at January 31, 2009: 79,514,816 shares.
GLOSSARY OF TERMS
Frequently used abbreviations, acronyms, or terms used in this report:
National Fuel Gas Companies
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Company
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The Registrant, the Registrant and its subsidiaries or the Registrants
subsidiaries as appropriate in the context of the disclosure |
Data-Track
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Data-Track Account Services, Inc. |
Distribution Corporation
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National Fuel Gas Distribution Corporation |
Empire
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Empire Pipeline, Inc. |
ESNE
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Energy Systems North East, LLC |
Highland
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Highland Forest Resources, Inc. |
Horizon
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Horizon Energy Development, Inc. |
Horizon LFG
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Horizon LFG, Inc. |
Horizon Power
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Horizon Power, Inc. |
Leidy Hub
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Leidy Hub, Inc. |
Midstream
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National Fuel Gas Midstream Corporation |
Model City
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Model City Energy, LLC |
National Fuel
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National Fuel Gas Company |
NFR
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National Fuel Resources, Inc. |
Registrant
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National Fuel Gas Company |
SECI
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Seneca Energy Canada Inc. |
Seneca
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Seneca Resources Corporation |
Seneca Energy
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Seneca Energy II, LLC |
Supply Corporation
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National Fuel Gas Supply Corporation |
Regulatory Agencies
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FASB
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Financial Accounting Standards Board |
FERC
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Federal Energy Regulatory Commission |
NYDEC
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New York State Department of Environmental Conservation |
NYPSC
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State of New York Public Service Commission |
PaPUC
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Pennsylvania Public Utility Commission |
SEC
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Securities and Exchange Commission |
Other
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2008 Form 10-K
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The Companys Annual Report on Form 10-K for the year ended
September 30, 2008, as amended |
ARB 51
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Accounting Research Bulletin No. 51, Consolidated Financial Statements |
Bbl
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Barrel (of oil) |
Bcf
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Billion cubic feet (of natural gas) |
Board foot
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A measure of lumber and/or timber equal to 12 inches in length by 12
inches in width by one inch in thickness. |
Btu
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British thermal unit; the amount of heat needed to raise the temperature
of one pound of water one degree Fahrenheit. |
Capital expenditure
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Represents additions to property, plant, and equipment, or the amount of
money a company spends to buy capital assets or upgrade its existing capital assets. |
Degree day
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A measure of the coldness of the weather experienced, based on the
extent to which the daily average temperature falls below a reference
temperature, usually 65 degrees Fahrenheit. |
Derivative
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A financial instrument or other contract, the terms of which include an
underlying variable (a price, interest rate, index rate, exchange rate, or
other variable) and a notional amount (number of units, barrels, cubic
feet, etc.). The terms also permit for the instrument or contract to be
settled net and no initial net investment is required to enter into the
financial instrument or contract. Examples include futures contracts,
options, no cost collars and swaps. |
Development costs
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Costs incurred to obtain access to proved reserves and to provide
facilities for extracting, treating, gathering and storing the oil and gas. |
Dth
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Decatherm; one Dth of natural gas has a heating value of 1,000,000
British thermal units, approximately equal to the heating value of 1 Mcf of natural gas. |
-2-
GLOSSARY OF TERMS (Cont.)
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Exchange Act
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Securities Exchange Act of 1934, as amended |
Expenditures for
long-lived assets
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Includes capital expenditures, stock acquisitions and/or investments in
partnerships. |
Exploration costs
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Costs incurred in identifying areas that may warrant examination, as well
as costs incurred in examining specific areas, including drilling
exploratory wells. |
FIN
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FASB Interpretation Number |
FIN 48
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FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes
- an interpretation of SFAS 109 |
Firm transportation
and/or storage
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The transportation and/or storage service that a supplier of such service
is obligated by contract to provide and for which the customer is
obligated to pay whether or not the service is utilized. |
GAAP
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Accounting principles generally accepted in the United States of America |
Goodwill
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An intangible asset representing the difference between the fair value of
a company and the price at which a company is purchased. |
Hedging
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A method of minimizing the impact of price, interest rate, and/or foreign
currency exchange rate changes, often times through the use of
derivative financial instruments. |
Hub
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Location where pipelines intersect enabling the trading, transportation,
storage, exchange, lending and borrowing of natural gas. |
Interruptible transportation
and/or storage
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The transportation and/or storage service that, in accordance with
contractual arrangements, can be interrupted by the supplier of such
service, and for which the customer does not pay unless utilized. |
LIBOR
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London Interbank Offered Rate |
LIFO
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Last-in, first-out |
Mbbl
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Thousand barrels (of oil) |
Mcf
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Thousand cubic feet (of natural gas) |
MD&A
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Managements Discussion and Analysis of Financial Condition and
Results of Operations |
MDth
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Thousand decatherms (of natural gas) |
MMBtu
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Million British thermal units |
MMcf
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Million cubic feet (of natural gas) |
NYMEX
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New York Mercantile Exchange. An exchange which maintains a futures
market for crude oil and natural gas. |
Open Season
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A bidding procedure used by pipelines to allocate firm transportation or
storage capacity among prospective shippers, in which all bids
submitted during a defined (Open Season) time period are evaluated
as if they had been submitted simultaneously. |
Proved developed reserves
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Reserves that can be expected to be recovered through existing wells
with existing equipment and operating methods. |
Proved undeveloped reserves
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Reserves that are expected to be recovered from new wells on undrilled
acreage, or from existing wells where a relatively major
expenditure is
required to make these reserves productive. |
PRP
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Potentially responsible party |
Reserves
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The unproduced but recoverable oil and/or gas in place in a formation
which has been proven by production. |
Restructuring
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Generally referring to partial deregulation of the utility industry by
statutory or regulatory process. Restructuring of federally regulated
natural gas pipelines resulted in the separation (or unbundling) of gas
commodity service from transportation service for wholesale and large-
volume retail markets. State restructuring programs attempt to extend
the same process to retail mass markets. |
SAR
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Stock-settled stock appreciation right |
SFAS
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Statement of Financial Accounting Standards |
SFAS 87
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Statement of Financial Accounting Standards No. 87, Employers
Accounting for Pensions |
-3-
GLOSSARY OF TERMS (Concl.)
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SFAS 88
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Statement of Financial Accounting Standards No. 88, Employers
Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits |
SFAS 106
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Statement of Financial Accounting Standards No. 106, Employers
Accounting for Postretirement Benefits Other Than Pensions |
SFAS 109
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Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes |
SFAS 115
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Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities |
SFAS 123R
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Statement of Financial Accounting Standards No. 123R, Share-Based
Payment |
SFAS 131
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Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information |
SFAS 132R
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Statement of Financial Accounting Standards No. 132R, Employers
Disclosures about Pensions and Other Postretirement Benefits |
SFAS 133 |
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Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities |
SFAS 141R
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Statement of Financial Accounting Standards No. 141R, Business
Combinations |
SFAS 157
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Statement of Financial Accounting Standards No. 157, Fair Value
Measurements |
SFAS 158
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Statement of Financial Accounting Standards No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of SFAS 87, 88, 106, and 132R |
SFAS 159
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Statement of Financial Accounting Standards No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities Including an
Amendment of SFAS 115 |
SFAS 160
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Statement of Financial Accounting Standards No. 160, Noncontrolling
Interests in Consolidated Financial Statements, an Amendment of ARB 51. |
SFAS 161
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Statement of Financial Accounting Standards No. 161, Disclosures about
Derivative Instruments and Hedging Activities, an Amendment of SFAS 133 |
Stock acquisitions
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Investments in corporations. |
Unbundled service
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A service that has been separated from other services, with rates
charged that reflect only the cost of the separated service. |
VEBA
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Voluntary Employees Beneficiary Association |
WNC
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Weather normalization clause; a clause in utility rates which adjusts
customer rates to allow a utility to recover its normal operating costs
calculated at normal temperatures. If temperatures during the
measured period are warmer than normal, customer rates are adjusted
upward in order to recover projected operating costs. If
temperatures
during the measured period are colder than normal, customer
rates
are adjusted downward so that only the projected operating costs
will
be recovered. |
-4-
INDEX
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6 |
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7 - 8 |
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9 |
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10 |
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11 - 23 |
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24 - 42 |
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42 |
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42 |
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42 |
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42 - 44 |
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45 |
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Item 3. Defaults Upon Senior Securities |
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Item 4. Submission of Matters to a Vote of Security Holders |
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Item 5. Other Information |
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45 - 46 |
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47 |
EX-10.1 |
EX-10.2 |
EX-10.3 |
EX-12 |
EX-31.1 |
EX-31.2 |
EX-32 |
EX-99 |
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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 Companys 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 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, statements regarding future
prospects, plans, objectives, goals, projections, strategies, future events or performance and
underlying assumptions, capital structure, anticipated capital expenditures, completion of
construction and other projects, projections for pension and other post-retirement benefit
obligations, impacts of the adoption of new accounting rules, and possible outcomes of litigation
or regulatory proceedings, as well as statements that are identified by the use of the words
anticipates, estimates, expects, forecasts, intends, plans, predicts, projects,
believes, seeks, will, may, and similar expressions.
-5-
Part I. Financial Information
Item 1. Financial Statements
National Fuel Gas Company
Consolidated Statements of Income and Earnings
Reinvested in the Business
(Unaudited)
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Three Months Ended |
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December 31, |
(Thousands of Dollars, Except Per Common Share Amounts) |
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2008 |
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2007 |
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INCOME |
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Operating Revenues |
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$ |
607,163 |
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$ |
568,268 |
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Operating Expenses |
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Purchased Gas |
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328,733 |
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278,010 |
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Operation and Maintenance |
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101,334 |
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102,455 |
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Property, Franchise and Other Taxes |
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18,762 |
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17,672 |
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Depreciation, Depletion and Amortization |
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42,342 |
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44,121 |
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Impairment of Oil and Gas Producing Properties |
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182,811 |
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673,982 |
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442,258 |
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Operating Income (Loss) |
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(66,819 |
) |
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126,010 |
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Other Income (Expense): |
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Income (Loss) from Unconsolidated Subsidiaries |
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(686 |
) |
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2,275 |
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Interest Income |
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1,892 |
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3,093 |
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Other Income |
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5,327 |
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1,253 |
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Interest Expense on Long-Term Debt |
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(18,056 |
) |
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(16,289 |
) |
Other Interest Expense |
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375 |
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(724 |
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Income (Loss) Before Income Taxes |
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(77,967 |
) |
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115,618 |
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Income Tax Expense (Benefit) |
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(35,289 |
) |
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45,014 |
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Net Income (Loss) Available for Common Stock |
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(42,678 |
) |
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70,604 |
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EARNINGS REINVESTED IN THE BUSINESS |
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Balance at October 1 |
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953,799 |
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983,776 |
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911,121 |
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1,054,380 |
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Cumulative Effect of the Adoption of FIN 48 |
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(406 |
) |
Adoption of SFAS 158 Measurement Date Provision |
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(804 |
) |
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Dividends on Common Stock
(2008 - $0.325; 2007 - $0.31) |
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(25,841 |
) |
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(26,023 |
) |
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Balance at December 31 |
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$ |
884,476 |
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$ |
1,027,951 |
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Earnings Per Common Share: |
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Basic: |
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Net Income (Loss) Available for Common Stock |
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$ |
(0.54 |
) |
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$ |
0.84 |
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Diluted: |
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Net Income (Loss) Available for Common Stock |
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$ |
(0.53 |
) |
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$ |
0.82 |
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Weighted Average Common Shares Outstanding: |
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Used in Basic Calculation |
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79,289,005 |
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83,611,177 |
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Used in Diluted Calculation |
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80,167,893 |
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85,819,534 |
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See Notes to Condensed Consolidated Financial Statements
-6-
Item 1. Financial Statements (Cont.)
National Fuel Gas Company
Consolidated Balance Sheets
(Unaudited)
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December 31, |
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September 30, |
(Thousands of Dollars) |
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2008 |
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2008 |
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ASSETS |
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Property, Plant and Equipment |
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$ |
4,982,596 |
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$ |
4,873,969 |
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Less Accumulated Depreciation, Depletion
and Amortization |
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1,938,841 |
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1,719,869 |
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3,043,755 |
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3,154,100 |
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Current Assets |
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Cash and Temporary Cash Investments |
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136,685 |
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68,239 |
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Hedging Collateral Deposits |
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3,743 |
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1 |
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Receivables Net of Allowance for
Uncollectible Accounts of $41,369 and
$33,117, Respectively |
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229,220 |
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185,397 |
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Unbilled Utility Revenue |
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79,404 |
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24,364 |
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Gas Stored Underground |
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64,279 |
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87,294 |
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Materials and Supplies at average cost |
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25,694 |
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31,317 |
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Unrecovered Purchased Gas Costs |
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26,716 |
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37,708 |
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Other Current Assets |
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56,385 |
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65,158 |
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Deferred Income Taxes |
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6,340 |
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628,466 |
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499,478 |
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Other Assets |
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Recoverable Future Taxes |
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83,541 |
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82,506 |
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Unamortized Debt Expense |
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13,531 |
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13,978 |
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Other Regulatory Assets |
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190,890 |
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189,587 |
|
Deferred Charges |
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4,233 |
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|
4,417 |
|
Other Investments |
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|
69,801 |
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|
80,640 |
|
Investments in Unconsolidated Subsidiaries |
|
|
13,443 |
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|
16,279 |
|
Goodwill |
|
|
5,476 |
|
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|
5,476 |
|
Intangible Assets |
|
|
25,620 |
|
|
|
26,174 |
|
Prepaid Post-Retirement Benefit Costs |
|
|
20,775 |
|
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|
21,034 |
|
Fair Value of Derivative Financial Instruments |
|
|
111,303 |
|
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|
28,786 |
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Other |
|
|
13,353 |
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7,732 |
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|
|
|
551,966 |
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|
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476,609 |
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Total Assets |
|
$ |
4,224,187 |
|
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$ |
4,130,187 |
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See Notes to Condensed Consolidated Financial Statements
-7-
Item 1. Financial Statements (Cont.)
National Fuel Gas Company
Consolidated Balance Sheets
(Unaudited)
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December 31, |
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September 30, |
(Thousands of Dollars) |
|
2008 |
|
2008 |
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|
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CAPITALIZATION AND LIABILITIES |
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Capitalization: |
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Comprehensive Shareholders Equity |
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Common Stock, $1 Par Value
Authorized - 200,000,000 Shares;
Issued And Outstanding 79,512,716 Shares
And 79,120,544 Shares, Respectively |
|
$ |
79,513 |
|
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$ |
79,121 |
|
Paid in Capital |
|
|
580,377 |
|
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|
567,716 |
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Earnings Reinvested in the Business |
|
|
884,476 |
|
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|
953,799 |
|
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Total Common Shareholder Equity Before
Items of Other Comprehensive Income |
|
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1,544,366 |
|
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|
1,600,636 |
|
Accumulated Other Comprehensive Income |
|
|
50,101 |
|
|
|
2,963 |
|
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Total Comprehensive Shareholders Equity |
|
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1,594,467 |
|
|
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1,603,599 |
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Long-Term Debt, Net of Current Portion |
|
|
999,000 |
|
|
|
999,000 |
|
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Total Capitalization |
|
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2,593,467 |
|
|
|
2,602,599 |
|
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Current and Accrued Liabilities |
|
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Notes Payable to Banks and Commercial Paper |
|
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66,000 |
|
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Current Portion of Long-Term Debt |
|
|
100,000 |
|
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|
100,000 |
|
Accounts Payable |
|
|
197,968 |
|
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|
142,520 |
|
Amounts Payable to Customers |
|
|
4,715 |
|
|
|
2,753 |
|
Dividends Payable |
|
|
25,841 |
|
|
|
25,714 |
|
Interest Payable on Long-Term Debt |
|
|
15,557 |
|
|
|
22,114 |
|
Customer Advances |
|
|
30,093 |
|
|
|
33,017 |
|
Other Accruals and Current Liabilities |
|
|
65,415 |
|
|
|
45,220 |
|
Deferred Income Taxes |
|
|
|
|
|
|
1,871 |
|
Fair Value of Derivative Financial Instruments |
|
|
2,941 |
|
|
|
1,362 |
|
|
|
|
|
508,530 |
|
|
|
374,571 |
|
|
|
|
|
|
|
|
|
|
|
Deferred Credits |
|
|
|
|
|
|
|
|
Deferred Income Taxes |
|
|
604,044 |
|
|
|
634,372 |
|
Taxes Refundable to Customers |
|
|
18,452 |
|
|
|
18,449 |
|
Unamortized Investment Tax Credit |
|
|
4,516 |
|
|
|
4,691 |
|
Cost of Removal Regulatory Liability |
|
|
103,877 |
|
|
|
103,100 |
|
Other Regulatory Liabilities |
|
|
96,378 |
|
|
|
91,933 |
|
Pension and Other Post-Retirement Liabilities |
|
|
73,076 |
|
|
|
78,909 |
|
Asset Retirement Obligations |
|
|
92,597 |
|
|
|
93,247 |
|
Other Deferred Credits |
|
|
129,250 |
|
|
|
128,316 |
|
|
|
|
|
1,122,190 |
|
|
|
1,153,017 |
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capitalization and Liabilities |
|
$ |
4,224,187 |
|
|
$ |
4,130,187 |
|
|
See Notes to Condensed Consolidated Financial Statements
-8-
Item 1. Financial Statements (Cont.)
National Fuel Gas Company
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
December 31, |
(Thousands of Dollars) |
|
2008 |
|
2007 |
|
|
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net Income (Loss) Available for Common Stock |
|
$ |
(42,678 |
) |
|
$ |
70,604 |
|
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities: |
|
|
|
|
|
|
|
|
Impairment of Oil and Gas Producing Properties |
|
|
182,811 |
|
|
|
|
|
Depreciation, Depletion and Amortization |
|
|
42,342 |
|
|
|
44,121 |
|
Deferred Income Taxes |
|
|
(69,626 |
) |
|
|
5,296 |
|
(Income) Loss from Unconsolidated Subsidiaries,
Net of Cash Distributions |
|
|
1,032 |
|
|
|
431 |
|
Impairment of Investment in Partnership |
|
|
1,804 |
|
|
|
|
|
Excess Tax Benefits Associated with Stock-Based
Compensation Awards |
|
|
(5,927 |
) |
|
|
(16,275 |
) |
Other |
|
|
6,628 |
|
|
|
4,916 |
|
Change in: |
|
|
|
|
|
|
|
|
Hedging Collateral Deposits |
|
|
(3,742 |
) |
|
|
2,070 |
|
Receivables and Unbilled Utility Revenue |
|
|
(98,914 |
) |
|
|
(127,894 |
) |
Gas Stored Underground and Materials and Supplies |
|
|
20,971 |
|
|
|
(186 |
) |
Unrecovered Purchased Gas Costs |
|
|
10,992 |
|
|
|
2,583 |
|
Prepayments and Other Current Assets |
|
|
14,958 |
|
|
|
10,422 |
|
Accounts Payable |
|
|
3,705 |
|
|
|
42,398 |
|
Amounts Payable to Customers |
|
|
1,962 |
|
|
|
(1,228 |
) |
Customer Advances |
|
|
(2,924 |
) |
|
|
635 |
|
Other Accruals and Current Liabilities |
|
|
30,407 |
|
|
|
25,400 |
|
Other Assets |
|
|
12,560 |
|
|
|
10,163 |
|
Other Liabilities |
|
|
(6,217 |
) |
|
|
1,889 |
|
|
Net Cash Provided by Operating Activities |
|
|
100,144 |
|
|
|
75,345 |
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Capital Expenditures |
|
|
(84,268 |
) |
|
|
(69,744 |
) |
Cash Held in Escrow |
|
|
|
|
|
|
58,397 |
|
Net Proceeds from Sale of Oil and Gas Producing Properties |
|
|
|
|
|
|
1,500 |
|
Other |
|
|
(632 |
) |
|
|
(761 |
) |
|
Net Cash Used in Investing Activities |
|
|
(84,900 |
) |
|
|
(10,608 |
) |
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Change in Notes Payable to Banks and Commercial Paper |
|
|
66,000 |
|
|
|
|
|
Excess Tax Benefits Associated with Stock-Based
Compensation Awards |
|
|
5,927 |
|
|
|
16,275 |
|
Reduction of Long-Term Debt |
|
|
|
|
|
|
(24 |
) |
Dividends Paid on Common Stock |
|
|
(25,714 |
) |
|
|
(25,873 |
) |
Net Proceeds from Issuance of Common Stock |
|
|
6,989 |
|
|
|
9,846 |
|
|
Net Cash Provided by Financing Activities |
|
|
53,202 |
|
|
|
224 |
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash and Temporary Cash Investments |
|
|
68,446 |
|
|
|
64,961 |
|
|
|
|
|
|
|
|
|
|
Cash and Temporary Cash Investments at October 1 |
|
|
68,239 |
|
|
|
124,806 |
|
|
|
|
|
|
|
|
|
|
|
Cash and Temporary Cash Investments at December 31 |
|
$ |
136,685 |
|
|
$ |
189,767 |
|
|
See Notes to Condensed Consolidated Financial Statements
-9-
Item 1. Financial Statements (Cont.)
National Fuel Gas Company
Consolidated Statements of Comprehensive Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
December 31, |
(Thousands of Dollars) |
|
2008 |
|
2007 |
|
|
|
Net Income (Loss) Available for Common Stock |
|
$ |
(42,678 |
) |
|
$ |
70,604 |
|
|
Other Comprehensive Income (Loss), Before Tax: |
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment |
|
|
8 |
|
|
|
(18 |
) |
Unrealized Loss on Securities Available for
Sale Arising During the Period |
|
|
(10,032 |
) |
|
|
(1,201 |
) |
Unrealized Gain (Loss) on Derivative Financial
Instruments Arising During the Period |
|
|
118,880 |
|
|
|
(20,859 |
) |
Reclassification Adjustment for Realized
(Gains) Losses on Derivative Financial
Instruments in Net Income |
|
|
(28,792 |
) |
|
|
5,421 |
|
|
Other Comprehensive Income (Loss), Before Tax |
|
|
80,064 |
|
|
|
(16,657 |
) |
|
Income Tax Benefit Related to Unrealized Loss on
Securities Available for Sale Arising During the
Period |
|
|
(3,791 |
) |
|
|
(59 |
) |
Income Tax Expense (Benefit) Related to
Unrealized Gain (Loss) on Derivative Financial
Instruments Arising During the Period |
|
|
48,128 |
|
|
|
(8,648 |
) |
Reclassification Adjustment for Income Tax
(Expense) Benefit on Realized (Gains) Losses from
Derivative Financial Instruments In Net Income |
|
|
(11,411 |
) |
|
|
2,133 |
|
|
Income Taxes Net |
|
|
32,926 |
|
|
|
(6,574 |
) |
|
Other Comprehensive Income (Loss) |
|
|
47,138 |
|
|
|
(10,083 |
) |
|
Comprehensive Income |
|
$ |
4,460 |
|
|
$ |
60,521 |
|
|
See Notes to Condensed Consolidated Financial Statements
-10-
Item 1. Financial Statements (Cont.)
National Fuel Gas Company
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Earnings for Interim Periods. 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, 2008, 2007 and 2006 that
are included in the Companys 2008 Form 10-K. The consolidated financial statements for the year
ended September 30, 2009 will be audited by the Companys independent registered public accounting
firm after the end of the fiscal year.
The earnings for the three months ended December 31, 2008 should not be taken as a prediction
of earnings for the entire fiscal year ending September 30, 2009. Most of the business of the
Utility and Energy Marketing segments is seasonal in nature and is influenced by weather
conditions. Due to the seasonal nature of the heating business in the Utility and Energy Marketing
segments, earnings during the winter months normally represent a substantial part of the earnings
that those segments are expected to achieve for the entire fiscal year.
Consolidated Statement of Cash Flows. For purposes of the Consolidated Statement of Cash Flows,
the Company considers all highly liquid investments purchased with a maturity of generally three
months or less to be cash equivalents.
At December 31, 2008, the Company accrued $51.7 million of capital expenditures in the
Exploration and Production segment, the majority of which was for lease acquisitions in the
Appalachian region. This amount was excluded from the Consolidated Statement of Cash Flows at
December 31, 2008 since it represented a non-cash investing activity at that date.
At September 30, 2008, the Company accrued $16.8 million of capital expenditures related to
the construction of the Empire Connector project. This amount was excluded from the Consolidated
Statement of Cash Flows at September 30, 2008 since it represented a non-cash investing activity at
that date. These capital expenditures were paid during the quarter ended December 31, 2008 and
have been included in the Consolidated Statement of Cash Flows at December 31, 2008.
Hedging Collateral Deposits. This is an account title for cash held in margin accounts funded by the Company to serve as
collateral for open positions on exchange-traded futures contracts and over-the-counter swap
agreements.
At December 31, 2008, the Company had hedging collateral deposits of $3.7 million related to
its exchange-traded futures contracts. The Companys over-the-counter swap agreements were in a
significant asset position at December 31, 2008. Under the terms of those agreements, the Company
was not required to fund any cash as hedging collateral; rather, the counterparties were required
to provide collateral to the Company. The amount of the collateral received was $34.1 million.
This amount
-11-
Item 1. Financial Statements (Cont.)
is included in Accounts Payable on the Consolidated Balance Sheet at December 31, 2008. It is the
Companys policy to not offset hedging collateral deposits paid or received against the derivative
financial instruments liability or asset balances.
Cash Held in Escrow. On August 31, 2007, the Company received approximately $232.1 million of
proceeds from the sale of SECI, of which $58.0 million was placed in escrow pending receipt of a
tax clearance certificate from the Canadian government. The escrow account was a Canadian dollar
denominated account. On a U.S. dollar basis, the value of this account was $62.0 million at
September 30, 2007. In December 2007, the Canadian government issued the tax clearance
certificate, thereby releasing the proceeds from restriction as of December 31, 2007. To hedge
against foreign currency exchange risk related to the cash being held in escrow, the Company held a
forward contract to sell Canadian dollars. For presentation purposes on the Consolidated Statement
of Cash Flows, for the three months ended December 31, 2007, the Cash Held in Escrow line item
within Investing Activities reflects the net proceeds to the Company (received on January 8, 2008)
after adjusting for the impact of the foreign currency hedge.
Gas Stored Underground Current. In the Utility segment, gas stored underground current is
valued using the LIFO method. This value or cost is lower than the current market value of the gas stored underground. Gas stored underground current normally
declines during the first and second quarters of the year and is replenished during the third and
fourth quarters. In the Utility segment, the current cost of replacing gas withdrawn from storage
is recorded in the Consolidated Statements of Income and a reserve for gas replacement is recorded
in the Consolidated Balance Sheets under the caption Other Accruals and Current Liabilities.
Such reserve, which amounted to $36.2 million at December 31, 2008, is reduced to zero by September
30 of each year as the inventory is replenished.
Property, Plant and Equipment. In the Companys Exploration and Production segment, oil and gas
property acquisition, exploration and development costs are capitalized under the full cost method
of accounting. Under this methodology, all costs associated with property acquisition, exploration
and development activities are capitalized, including internal costs directly identified with
acquisition, exploration and development activities. The internal costs that are capitalized do not
include any costs related to production, general corporate overhead, or similar activities. The
Company does not recognize any gain or loss on the sale or other disposition of oil and gas
properties unless the gain or loss would significantly alter the relationship between capitalized
costs and proved reserves of oil and gas attributable to a cost center.
Capitalized costs include costs related to unproved properties, which are excluded from
amortization until proved reserves are found or it is determined that the unproved properties are
impaired. All costs related to unproved properties are reviewed quarterly to determine if
impairment has occurred. The amount of any impairment is transferred to the pool of capitalized
costs being amortized.
Capitalized costs are subject to the SEC full cost ceiling test. The ceiling test, which is
performed each quarter, determines a limit, or ceiling, on the amount of property acquisition,
exploration and development costs that can be capitalized. The ceiling under this test represents
(a) the present value of estimated future net cash flows, excluding future cash outflows associated
with settling asset retirement obligations that have been accrued on the balance sheet, using a
discount factor of 10%, which is computed by applying current market prices of oil and gas (as
adjusted for hedging) to estimated future production of proved oil and gas reserves as of the date
of the latest balance sheet, less estimated future expenditures, plus (b) the cost of unevaluated
properties not being depleted, less (c) income tax effects related to the differences between the
book and tax basis of the properties. If capitalized costs, net of accumulated depreciation,
depletion and amortization and related deferred income taxes, exceed the ceiling at the end of any
quarter, a permanent impairment is required to be charged to earnings in that quarter. The
Companys capitalized costs exceeded the full cost ceiling for the Companys oil and gas properties
at December 31, 2008. As such, the Company recognized a pre-tax impairment of $182.8 million at
December 31, 2008. Deferred income taxes of $74.6 million were recorded associated with this
impairment.
-12-
Item 1. Financial Statements (Cont.)
Accumulated Other Comprehensive Income. The components of Accumulated Other Comprehensive Income,
net of related tax effect, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008 |
|
|
At September 30, 2008 |
|
Funded Status of the
Pension and Other
Post-Retirement Benefit
Plans |
|
$ |
(19,741 |
) |
|
$ |
(19,741 |
) |
Cumulative Foreign
Currency Translation
Adjustment |
|
|
(63 |
) |
|
|
(71 |
) |
Net Unrealized Gain on
Derivative Financial
Instruments |
|
|
69,320 |
|
|
|
15,949 |
|
Net Unrealized Gain on
Securities Available for
Sale (1) |
|
|
585 |
|
|
|
6,826 |
|
|
|
|
|
|
|
|
Accumulated Other
Comprehensive Income |
|
$ |
50,101 |
|
|
$ |
2,963 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes a balanced equity mutual fund that is in an unrealized loss position
of $3.3 million ($2.1 million after taxes) and $1.1 million ($0.7 million after taxes) at December
31, 2008 and September 30, 2008, respectively. The fair value of this investment was $10.9 million
at December 31, 2008 and $12.4 million at September 30, 2008. This investment has been in an
unrealized loss position for less than twelve months. Based on this fact and the fact that
management has the intent and ability to hold the investment for a sufficient period of time for
the asset to recover in value, management does not consider this investment to be other than
temporarily impaired. |
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 reflect the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted into common stock.
For purposes of determining diluted earnings per common share, the only potentially dilutive
securities the Company has outstanding are stock options and stock-settled SARs. The diluted
weighted average shares outstanding shown on the Consolidated Statement of Income reflects the
potential dilution as a result of these stock options and stock-settled SARs as determined using
the Treasury Stock Method. Stock options and stock-settled SARs that are antidilutive are excluded
from the calculation of diluted earnings per common share. For the quarter ended December 31,
2008, there were 765,000 stock options and 365,000 stock-settled SARs excluded as being
antidilutive. For the quarter ended December 31, 2007, there were no stock options or
stock-settled SARs excluded as being antidilutive.
Stock-Based Compensation. During the quarter ended December 31, 2008, the Company granted 610,000
performance-based stock-settled SARs having a weighted average exercise price of $29.88 per share.
The weighted average grant date fair value of these stock-settled SARs was $4.09 per share. The
accounting treatment for such stock-settled SARs is the same under SFAS 123R as the accounting for
stock options under SFAS 123R. The stock-settled SARs granted during the quarter ended December 31,
2008 vest and become exerciseable annually in one-third increments, provided that a performance
condition is met. The performance condition for each fiscal year, generally stated, is an increase over the prior
fiscal year of at least five percent in certain oil and natural gas production of the Exploration
and Production segment. The weighted average grant date fair value of these stock-settled SARs
granted during the current quarter was estimated on the date of grant using the same accounting
treatment that is applied for stock options under SFAS 123R, and assumes that the performance
conditions specified will be achieved. If such conditions are not met or it is not considered
probable that such conditions will be met, no compensation expense is recognized and any previously recognized
compensation expense is reversed.
There were no stock options or restricted share awards (non-vested stock as defined in SFAS
123R) granted during the quarter ended December 31, 2008.
-13-
Item 1. Financial Statements (Cont.)
New Accounting Pronouncements. In September 2006, the FASB issued SFAS 157, Fair Value
Measurements. SFAS 157 provides guidance for using fair value to measure assets and liabilities.
The pronouncement serves to clarify the extent to which companies measure assets and liabilities at
fair value, the information used to measure fair value, and the effect that fair-value measurements
have on earnings. SFAS 157 is to be applied whenever another standard requires or allows assets or
liabilities to be measured at fair value. In accordance with FASB Staff Position FAS No. 157-2, on
October 1, 2008, the Company adopted SFAS 157 for financial assets and financial liabilities that
are recognized or disclosed at fair value on a recurring basis. The same FASB Staff Position
delays the effective date for nonfinancial assets and nonfinancial liabilities, except for items
that are recognized or disclosed at fair value on a recurring basis, until the Companys first
quarter of fiscal 2010. For further discussion of the impact of the adoption of SFAS 157 for
financial assets and financial liabilities, refer to Note 2 Fair Value Measurements. The Company
is currently evaluating the impact that the adoption of SFAS 157 for nonfinancial assets and
nonfinancial liabilities will have on its consolidated financial statements. The Company
has identified Goodwill as being the major nonfinancial asset that will be impacted by SFAS 157 and Asset Retirement Obligations as being the major nonfinancial liability that will be
impacted by SFAS 157.
In September 2006, the FASB issued SFAS 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans (an amendment of SFAS 87, SFAS 88, SFAS 106, and SFAS
132R). SFAS 158 requires that companies recognize a net liability or asset to report the
underfunded or overfunded status of their defined benefit pension and other post-retirement benefit
plans on their balance sheets, as well as recognize changes in the funded status of a defined
benefit post-retirement plan in the year in which the changes occur through comprehensive income.
The pronouncement also specifies that a plans assets and obligations that determine its funded
status be measured as of the end of the Companys fiscal year, with limited exceptions. In
accordance with SFAS 158, the Company has recognized the funded status of its benefit plans and
implemented the disclosure requirements of SFAS 158 at September 30, 2007. The requirement to
measure the plan assets and benefit obligations as of the Companys fiscal year-end date will be
fully adopted by the Company by the end of fiscal 2009. The Company has historically measured its
plan assets and benefit obligations using a June 30th measurement date. In anticipation of
changing to a September 30th measurement date, the Company will be recording fifteen months of
pension and other post-retirement benefit costs during fiscal 2009. In accordance with the
provisions of SFAS 158, these costs have been calculated using June 30, 2008 measurement date data.
Three of those months pertain to the period of July 1, 2008 to September 30, 2008. The pension
and other post-retirement benefit costs for that period amounted to $5.1 million and have been
recorded by the Company during the quarter ended December 31, 2008 as a $3.8 million increase to
Other Regulatory Assets in the Companys Utility and Pipeline and Storage segments and a $1.3
million ($0.8 million after tax) adjustment to earnings reinvested in the business. For further
discussion of the impact of adopting the measurement date provisions of SFAS 158, refer to Note 8
Retirement Plan and Other Post-Retirement Benefits.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of SFAS 115. SFAS 159 permits entities to choose to
measure many financial instruments and certain other items at fair value that are not otherwise
required to be measured at fair value under GAAP. A company that elects the fair value option for
an eligible item will be required to recognize in current earnings any changes in that items fair
value in reporting periods subsequent to the date of adoption. SFAS 159 became effective for the
Company on October 1, 2008. The Company did not elect the fair value measurements option for any
of its financial instruments other than those that are already being measured at fair value.
In December 2007, the FASB issued SFAS 141R, Business Combinations. SFAS 141R will
significantly change the accounting for business combinations in a number of areas including the
treatment of contingent consideration, contingencies, acquisition costs, in process research and
development and restructuring costs. In addition, under SFAS 141R, changes in deferred tax asset
valuation allowances and acquired income tax uncertainties in a business combination after the
measurement period will impact income tax expense. SFAS 141R is effective as of the Companys
first quarter of fiscal 2010.
-14-
Item 1. Financial Statements (Cont.)
In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated
Financial Statements, an Amendment of ARB 51. SFAS 160 will change the accounting and reporting
for minority interests, which will be recharacterized as noncontrolling interests (NCI) and
classified as a component of equity. This new consolidation method will significantly change the
accounting for transactions with minority interest holders. SFAS 160 is effective as of the
Companys first quarter of fiscal 2010. The Company currently does not have any NCI.
In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging
Activities, an Amendment of SFAS 133. SFAS 161 requires entities to provide enhanced disclosures
related to an entitys derivative instruments and hedging activities in order to enable investors
to better understand how derivative instruments and hedging activities impact an entitys financial
reporting. The additional disclosures include how and why an entity uses derivative instruments,
how derivative instruments and related hedged items are accounted for under SFAS 133 and its
related interpretations, and how derivative instruments and related hedged items affect an entitys
financial position, financial performance, and cash flows. SFAS 161 is effective as of the
Companys second quarter of fiscal 2009. The Company is currently evaluating the impact that the
adoption of SFAS 161 will have on its disclosures in the notes to the consolidated financial
statements.
On December 31, 2008, the SEC issued a final rule on Modernization of Oil and Gas Reporting.
The final rule modifies the SECs reporting and disclosure rules for oil and gas reserves and
aligns the full cost accounting rules with the revised disclosures. The most notable changes of
the final rule include the replacement of the single day period-end pricing to value oil and gas
reserves to a 12-month average of the first day of the month price for each month within the
reporting period. The final rule also permits voluntary disclosure of probable and possible
reserves, a disclosure previously prohibited by SEC rules. The revised reporting and disclosure requirements are
effective for the Companys Form 10-K for the period ended September 30, 2010. Early adoption is
not permitted. The Company is currently evaluating the impact that adoption of these rules will
have on its consolidated financial statements and MD&A disclosures.
Note 2 Fair Value Measurements
Beginning in fiscal 2009, the Company adopted the provisions of SFAS 157, Fair Value
Measurements. SFAS 157 establishes a fair-value hierarchy, which prioritizes the inputs used in
valuation techniques that measure fair value. Those inputs are prioritized into three levels.
Level 1 inputs are unadjusted quoted prices in active markets for assets or liabilities that the
Company has the ability to access at the measurement date. Level 2 inputs are inputs other than
quoted prices included within Level 1 that are observable for the asset or liability, either
directly or indirectly at the measurement date. Level 3 inputs are unobservable inputs for the
asset or liability at the measurement date. The Companys assessment of the significance of a
particular input to the fair value measurement requires judgment, and may affect the valuation of
fair value assets and liabilities and their placement within the fair
value hierarchy levels. The adoption of SFAS 157 has not had a significant
impact on the consolidated financial statements.
The following table sets forth, by level within the fair value hierarchy, the Companys
financial assets and liabilities that were accounted for at fair value on a recurring basis as of
December 31, 2008. As required by SFAS 157, financial assets and liabilities are classified in
their entirety based on the lowest level of input that is significant to the fair value
measurement.
-15-
Item 1. Financial Statements (Cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring Fair Value Measures |
|
At fair value as of December 31, 2008 |
(Dollars in thousands) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Equivalents |
|
$ |
114,547 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
114,547 |
|
Derivative Financial Instruments |
|
|
|
|
|
|
28,273 |
|
|
|
83,030 |
|
|
|
111,303 |
|
Other Investments |
|
|
17,715 |
|
|
|
|
|
|
|
|
|
|
|
17,715 |
|
Hedging Collateral Deposits |
|
|
3,743 |
|
|
|
|
|
|
|
|
|
|
|
3,743 |
|
|
|
|
Total |
|
$ |
136,005 |
|
|
$ |
28,273 |
|
|
$ |
83,030 |
|
|
$ |
247,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Financial Instruments |
|
$ |
2,941 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,941 |
|
|
|
|
Total |
|
$ |
2,941 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,941 |
|
|
|
|
Derivative Financial Instruments
The derivative financial instruments reported in Level 1 consist of NYMEX futures contracts.
The hedging collateral deposits associated with these futures contracts have been reported in Level
1 as well. The derivative financial instruments reported in Level 2 consist of natural gas swap
agreements used in the Companys Exploration and Production segment and natural gas swap agreements
used in the Energy Marketing segment. The fair value of these natural gas price swap agreements is
based on an internal model that uses observable inputs. The fair market value of the price swap
agreements reported in Level 2 as assets has been reduced by $0.7 million based on an assessment of
counterparty credit risk. The derivative financial instruments reported in Level 3 consist of all
of the Exploration and Production segments crude oil swap agreements and some of its natural gas
swap agreements. The fair value of the crude oil and natural gas price swap agreements is based on
an internal model that uses both observable and unobservable inputs. The fair market value of the
price swap agreements reported in Level 3 as assets has been reduced by $2.7 million based on an
assessment of counterparty credit risk. This credit reserve, as well as the credit reserve
established for the Level 2 price swap agreement assets, was determined by applying default
probabilities to the anticipated cash flows that the Company is either expecting from its
counterparties or expecting to pay to its counterparties.
Cash Equivalents
The cash equivalents reported in Level 1 consist of SEC registered money market mutual funds.
Other Investments
The other investments reported in Level 1 consist of publicly traded equity securities and a
publicly traded balanced equity mutual fund.
The table listed below provides a reconciliation of the beginning and ending net balances for
assets and liabilities measured at fair value and classified as Level 3.
-16-
Item 1. Financial Statements (Cont.)
Fair Value Measurements Using Unobservable Inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains/Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized and Unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Other |
|
|
Transfer |
|
|
|
|
|
|
October 1, |
|
|
Included in |
|
|
Comprehensive |
|
|
In/Out of |
|
|
December 31, |
|
(Dollars in thousands) |
|
2008 |
|
|
Earnings |
|
|
Income |
|
|
Level 3 |
|
|
2008 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Financial Instruments |
|
$ |
7,110 |
|
|
$ |
(3,716 |
)(1) |
|
$ |
79,636 |
|
|
$ |
|
|
|
$ |
83,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,110 |
|
|
$ |
(3,716 |
) |
|
$ |
79,636 |
|
|
$ |
|
|
|
$ |
83,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Financial Instruments |
|
$ |
(777 |
) |
|
$ |
(12,104 |
)(1) |
|
$ |
12,881 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(777 |
) |
|
$ |
(12,104 |
) |
|
$ |
12,881 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts are reported in Operating Revenues in the Consolidated Statement of Income
for the three months ended December 31, 2008. |
Note 3 Income Taxes
The components of federal and state income taxes included in the Consolidated Statement of
Income are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
December 31, |
|
|
2008 |
|
2007 |
|
|
|
Current Income Taxes |
|
|
|
|
|
|
|
|
Federal |
|
$ |
26,518 |
|
|
$ |
34,259 |
|
State |
|
|
7,819 |
|
|
|
5,459 |
|
|
|
|
|
|
|
|
|
|
Deferred Income Taxes |
|
|
|
|
|
|
|
|
Federal |
|
|
(54,055 |
) |
|
|
(80 |
) |
State |
|
|
(15,571 |
) |
|
|
5,376 |
|
|
|
|
|
|
|
(35,289 |
) |
|
|
45,014 |
|
|
|
|
|
|
|
|
|
|
Deferred Investment Tax Credit |
|
|
(174 |
) |
|
|
(174 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total Income Taxes |
|
$ |
(35,463 |
) |
|
$ |
44,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Presented as Follows: |
|
|
|
|
|
|
|
|
Other Income |
|
$ |
(174 |
) |
|
$ |
(174 |
) |
Income Tax Expense (Benefit) |
|
|
(35,289 |
) |
|
|
45,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income Taxes |
|
$ |
(35,463 |
) |
|
$ |
44,840 |
|
|
|
|
Total income taxes as reported differ from the amounts that were computed by applying the
federal income tax rate to income (loss) before income taxes. The following is a reconciliation of
this difference (in thousands):
-17-
Item 1. Financial Statements (Cont.)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
December 31, |
|
|
2008 |
|
2007 |
|
|
|
U.S. Income (Loss) Before Income Taxes |
|
$ |
(78,141 |
) |
|
$ |
115,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expense (Benefit), Computed at Federal
Statutory Rate of 35% |
|
$ |
(27,349 |
) |
|
$ |
40,405 |
|
|
|
|
|
|
|
|
|
|
Increase (Reduction) in Taxes Resulting From: |
|
|
|
|
|
|
|
|
State Income Taxes |
|
|
(5,039 |
) |
|
|
7,043 |
|
Miscellaneous |
|
|
(3,075 |
) |
|
|
(2,608 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total Income Taxes |
|
$ |
(35,463 |
) |
|
$ |
44,840 |
|
|
|
- |
Significant components of the Companys deferred tax liabilities and assets were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008 |
|
At September 30, 2008 |
|
|
|
Deferred Tax Liabilities: |
|
|
|
|
|
|
|
|
Property, Plant and Equipment |
|
$ |
614,556 |
|
|
$ |
673,313 |
|
Pension and Other Post-Retirement Benefit
Costs SFAS 158 |
|
|
44,345 |
|
|
|
43,340 |
|
Unrealized Hedging Gains |
|
|
47,856 |
|
|
|
14,936 |
|
Other |
|
|
36,975 |
|
|
|
40,455 |
|
|
|
|
Total Deferred Tax Liabilities |
|
|
743,732 |
|
|
|
772,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Assets: |
|
|
|
|
|
|
|
|
Pension and Other Post-Retirement Benefit
Costs SFAS 158 |
|
|
(44,831 |
) |
|
|
(43,340 |
) |
Other |
|
|
(101,197 |
) |
|
|
(92,461 |
) |
|
|
|
Total Deferred Tax Assets |
|
|
(146,028 |
) |
|
|
(135,801 |
) |
|
|
|
Total Net Deferred Income Taxes |
|
$ |
597,704 |
|
|
$ |
636,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Presented as Follows: |
|
|
|
|
|
|
|
|
Net Deferred Tax Liability/(Asset) Current |
|
$ |
(6,340 |
) |
|
$ |
1,871 |
|
Net Deferred Tax Liability Non-Current |
|
|
604,044 |
|
|
|
634,372 |
|
|
|
|
Total Net Deferred Income Taxes |
|
$ |
597,704 |
|
|
$ |
636,243 |
|
|
|
|
Regulatory liabilities representing the reduction of previously recorded deferred income taxes
with rate-regulated activities that are expected to be refundable to customers amounted to $18.5
million and $18.4 million at December 31, 2008 and September 30, 2008, respectively. Also,
regulatory assets representing future amounts collectible from customers, corresponding to
additional deferred income taxes not previously recorded because of prior ratemaking practices,
amounted to $83.5 million and $82.5 million at December 31, 2008 and September 30, 2008,
respectively.
The Company files U.S. federal and various state income tax returns. The Internal Revenue
Service (IRS) is currently conducting an examination of the Company for fiscal 2008 in accordance
with the Compliance Assurance Process (CAP). The CAP audit employs a real time review of the
Companys books and tax records by the IRS that is intended to permit issue resolution prior to the
filing of the tax return. While the federal statute of limitations remains open for fiscal 2005
and later years, IRS examinations for fiscal 2007 and prior years have been completed and the
Company believes such years are effectively settled.
-18-
Item 1. Financial Statements (Cont.)
The Company is also subject to various routine state income tax examinations. The Companys
operating subsidiaries mainly operate in four states which have statutes of limitations that generally expire between
three to four years from the date of filing of the income tax return.
Note 4 Capitalization
Common Stock. During the three months ended December 31, 2008, the Company issued 687,180 original
issue shares of common stock as a result of stock option exercises. The Company also issued 2,100
original issue shares of common stock to the seven non-employee directors of the Company who
receive compensation under the Companys Retainer Policy for Non-Employee Directors, as partial
consideration for the directors services during the three months ended December 31, 2008. Holders
of stock options or restricted stock will often tender shares of common stock to the Company for
payment of option exercise prices and/or applicable withholding taxes. During the three months
ended December 31, 2008, 297,108 shares of common stock were tendered to the Company for such
purposes. The Company considers all shares tendered as cancelled shares restored to the status of
authorized but unissued shares, in accordance with New Jersey law.
Shareholder Rights Plan. In 1996, the Companys Board of Directors adopted a shareholder rights
plan (Plan). The Plan has been amended six times since it was adopted and is now embodied in an
Amended and Restated Rights Agreement effective December 4,
2008, a copy of which was included as an exhibit to the Form
8-K filed by the Company on December 4, 2008.
Pursuant to the Plan, holders of the Companys common stock have one right (Right) for each of their shares.
Each Right is initially evidenced by the Companys common stock certificates representing the
outstanding shares of common stock.
The Rights have anti-takeover effects because they will cause substantial dilution of the
Companys common stock if a person attempts to acquire the Company on terms not approved by the
Board of Directors (an Acquiring Person).
The Rights become exercisable upon the occurrence of a Distribution Date as described below,
but after a Distribution Date Rights that are owned by an Acquiring Person will be null and void.
At any time following a Distribution Date, each holder of a Right may exercise its right to
receive, upon payment of an amount calculated under the Rights Agreement, common stock of the
Company (or, under certain circumstances, other securities or assets of the Company) having a value
equal to two times the amount paid to exercise the Right. However, the Rights are subject to
redemption or exchange by the Company prior to their exercise as described below.
A Distribution Date would occur upon the earlier of (i) ten days after the public announcement
that a person or group has acquired, or obtained the right to acquire, beneficial ownership of the
Companys common stock or other voting stock (including Synthetic Long Positions as defined in the
Plan) having 10% or more of the total voting power of the Companys common stock and other voting
stock and (ii) ten days after the commencement or announcement by a person or group of an intention
to make a tender or exchange offer that would result in that person acquiring, or obtaining the
right to acquire, beneficial ownership of the Companys common stock or other voting stock having
10% or more of the total voting power of the Companys common stock and other voting stock.
In certain situations after a person or group has acquired beneficial ownership of 10% or more
of the total voting power of the Companys stock as described above, each holder of a Right will
have the right to exercise its Rights to receive, upon exercise of the right, common stock of the
acquiring company having a value equal to two times the amount paid to exercise the right. These
situations would arise if the Company is acquired in a merger or other business combination or if
50% or more of the Companys assets or earning power are sold or transferred.
-19-
Item 1. Financial Statements (Cont.)
At any time prior to the end of the business day on the tenth day following the Distribution
Date, the Company may redeem the Rights in whole, but not in part, at a price of $0.005 per Right,
payable in cash or stock. A decision to redeem the Rights requires the vote of 75% of the Companys
full Board of Directors. Also, at any time following the Distribution Date, 75% of the Companys
full Board of Directors may vote to exchange the Rights, in whole or in part, at an exchange rate
of one share of common stock, or other property deemed to have the same value, per Right, subject
to certain adjustments.
Upon exercise of the Rights, the Company may need additional regulatory approvals to satisfy
the requirements of the Rights Agreement. The Rights will expire on July 31, 2018, unless earlier
than that date, they are exchanged or redeemed or the Plan is amended to extend the expiration
date.
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 to
comply with regulatory policies and procedures. It is the Companys 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.
As disclosed in Note H of the Companys 2008 Form 10-K, the Company has agreed with the NYDEC to remediate a former manufactured
gas plant site located in New York. The Company has submitted a Remedial Design/Remedial Action work plan to the NYDEC and has recorded
an estimated minimum liability for remediation of this site of $16.4 million.
At December 31, 2008, the Company has estimated its remaining clean-up costs related to former
manufactured gas plant sites and third party waste disposal sites (including the former
manufactured gas plant site discussed above) will be in the range of $19.3 million to $23.5
million. The minimum estimated liability of $19.3 million, which includes the $16.4 million
discussed above, has been recorded on the Consolidated Balance Sheet at December 31, 2008. The
Company expects to recover its environmental clean-up costs from a combination of rate recovery and
deferred insurance proceeds that are currently recorded as a regulatory liability on the
Consolidated Balance Sheet.
The Company is currently not aware of any material additional exposure to environmental
liabilities. However, changes in environmental regulations, new information or other factors could
adversely impact the Company.
Other. The Company is involved in other litigation and regulatory matters arising in the normal
course of business. These other matters may include, for example, negligence claims and tax,
regulatory or other governmental audits, inspections, investigations and other proceedings. These
matters may involve state and federal taxes, safety, compliance with regulations, rate base, cost
of service and purchased gas cost issues, among other things. While these normal-course matters
could have a material effect on earnings and cash flows in the quarterly and annual period in which
they are resolved, they are not expected to change materially the Companys present liquidity
position, or have a material adverse effect on the financial condition of the Company.
Note 6 Business Segment Information
In the Companys 2008 Form 10-K, the Company reported financial results for five business
segments: Utility, Pipeline and Storage, Exploration and Production, Energy Marketing and Timber.
The division of the Companys operations into the reported segments is based upon a combination of
factors including differences in products and services, regulatory environment and geographic
factors. During the quarter ended December 31, 2008, management made the decision to eliminate the
Timber segment as a reportable segment based on the fact that the Timber operations do not meet any of the
quantitative thresholds specified by SFAS 131. Furthermore, from a qualitative standpoint,
managements focus has changed regarding the Timber operations. While the Timber segment will
continue to harvest hardwood
-20-
Item 1. Financial Statements (Cont.)
timber and process lumber products that are used in high-end furniture, cabinetry and flooring,
management no longer considers the Timber operations to be integral to the overall
operations of the Company. As a result of this change in focus and the fact that the Timber operations
cannot be aggregated into one of the other four reportable business segments,
the Timber operations have been included in the All Other category in the disclosures that follow.
Prior year segment information shown below has been restated to reflect this change in
presentation.
The data presented in the tables below reflect the reported segments and reconciliations to
consolidated amounts. As stated in the 2008 Form 10-K, the Company evaluates segment performance
based on income before discontinued operations, extraordinary items and cumulative effects of
changes in accounting (when applicable). When these items are not applicable, the Company
evaluates performance based on net income. There have been no changes in the basis of
segmentation, other than as noted above, nor in the basis of measuring segment profit or loss, from
those used in the Companys 2008 Form 10-K. There have been no material changes in the amount of
assets for any operating segment from the amounts disclosed in the 2008 Form 10-K. While the
Exploration and Production segment reported a pre-tax impairment charge of $182.8 million at
December 31, 2008, this reduction in segment assets was largely offset by increases in the asset
position of its derivative financial instruments combined with the receipt of cash collateral on
such derivative financial instruments.
Quarter Ended December 31, 2008 (Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exploration |
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and |
|
|
|
|
|
|
|
|
Pipeline and |
|
and |
|
Energy |
|
Total Reportable |
|
|
|
|
|
Intersegment |
|
Total |
|
|
Utility |
|
Storage |
|
Production |
|
Marketing |
|
Segments |
|
All Other |
|
Eliminations |
|
Consolidated |
|
Revenue from
External Customers |
|
$ |
349,637 |
|
|
$ |
35,267 |
|
|
$ |
96,712 |
|
|
$ |
115,007 |
|
|
$ |
596,623 |
|
|
$ |
10,325 |
|
|
$ |
215 |
|
|
$ |
607,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment Revenues |
|
$ |
4,553 |
|
|
$ |
20,837 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
25,390 |
|
|
$ |
2,322 |
|
|
$ |
(27,712 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
22,088 |
|
|
$ |
17,176 |
|
|
$ |
(83,557 |
) |
|
$ |
599 |
|
|
$ |
(43,694 |
) |
|
$ |
(868 |
) |
|
$ |
1,884 |
|
|
$ |
(42,678 |
) |
Quarter Ended December 31, 2007 (Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exploration |
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and |
|
|
|
|
|
|
|
|
Pipeline and |
|
and |
|
Energy |
|
Total Reportable |
|
|
|
|
|
Intersegment |
|
Total |
|
|
Utility |
|
Storage |
|
Production |
|
Marketing |
|
Segments |
|
All Other |
|
Eliminations |
|
Consolidated |
|
Revenue from
External Customers |
|
$ |
327,125 |
|
|
$ |
31,884 |
|
|
$ |
107,955 |
|
|
$ |
86,719 |
|
|
$ |
553,683 |
|
|
$ |
14,450 |
|
|
$ |
135 |
|
|
$ |
568,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment Revenues |
|
$ |
4,299 |
|
|
$ |
20,347 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
24,646 |
|
|
$ |
2,714 |
|
|
$ |
(27,360 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
20,217 |
|
|
$ |
12,778 |
|
|
$ |
34,022 |
|
|
$ |
954 |
|
|
$ |
67,971 |
|
|
$ |
2,736 |
|
|
$ |
(103 |
) |
|
$ |
70,604 |
|
-21-
Item 1. Financial Statements (Cont.)
Note 7 Intangible Assets
The components of the Companys intangible assets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
|
At December 31, 2008 |
|
|
2008 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Net |
|
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amount |
|
Intangible Assets Subject to Amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Transportation Contracts |
|
$ |
8,580 |
|
|
$ |
(6,213 |
) |
|
$ |
2,367 |
|
|
$ |
2,522 |
|
Long-Term Gas Purchase Contracts |
|
|
31,864 |
|
|
|
(8,611 |
) |
|
|
23,253 |
|
|
|
23,652 |
|
|
|
|
|
|
|
|
|
$ |
40,444 |
|
|
$ |
(14,824 |
) |
|
$ |
25,620 |
|
|
$ |
26,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Amortization Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2008 |
|
$ |
554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2007 |
|
$ |
666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross carrying amount of intangible assets subject to amortization at December 31, 2008
remained unchanged from September 30, 2008. The only activity with regard to intangible assets
subject to amortization was amortization expense as shown in the table above. Amortization expense
for the long-term transportation contracts is estimated to be $0.3 million for the remainder of
2009 and $0.4 million annually for 2010, 2011, 2012 and 2013. Amortization expense for the
long-term gas purchase contracts is estimated to be $1.2 million for the remainder of 2009 and $1.6
million annually for 2010, 2011, 2012 and 2013.
Note 8 Retirement Plan and Other Post-Retirement Benefits
Components of Net Periodic Benefit Cost (in thousands):
Three months ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Plan |
|
Other Post-Retirement Benefits |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Service Cost |
|
$ |
2,728 |
|
|
$ |
3,150 |
|
|
$ |
950 |
|
|
$ |
1,276 |
|
Interest Cost |
|
|
11,709 |
|
|
|
11,237 |
|
|
|
6,875 |
|
|
|
6,771 |
|
Expected Return on Plan Assets |
|
|
(14,489 |
) |
|
|
(13,750 |
) |
|
|
(7,904 |
) |
|
|
(8,429 |
) |
Amortization of Prior Service Cost |
|
|
183 |
|
|
|
202 |
|
|
|
(268 |
) |
|
|
1 |
|
Amortization of Transition Amount |
|
|
|
|
|
|
|
|
|
|
566 |
|
|
|
1,782 |
|
Amortization of Losses |
|
|
1,419 |
|
|
|
2,766 |
|
|
|
2,318 |
|
|
|
732 |
|
Net Amortization and Deferral
For Regulatory Purposes (Including
Volumetric Adjustments) (1) |
|
|
3,240 |
|
|
|
1,100 |
|
|
|
4,339 |
|
|
|
7,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Cost |
|
$ |
4,790 |
|
|
$ |
4,705 |
|
|
$ |
6,876 |
|
|
$ |
9,345 |
|
|
|
|
|
|
|
|
|
(1) |
|
The Companys policy is to record retirement plan and other post-retirement benefit
costs in the Utility segment on a volumetric basis to reflect the fact that the Utility segment
experiences higher throughput of natural gas in the winter months and lower throughput of natural
gas in the summer months. |
-22-
Item 1. Financial Statements (Cont.)
As indicated under New Accounting Pronouncements in Note 1 Summary of Significant
Accounting Policies, in accordance with the measurement date provisions of SFAS 158 that specifies
that a plans assets and obligations that determine its funded status be measured as of the end of
the Companys fiscal year, the Company will be recording fifteen months of pension and other
post-retirement benefit costs during fiscal 2009. As allowed by SFAS 158, these costs have been
calculated using June 30, 2008 measurement date data. Three of those months pertain to the period
of July 1, 2008 to September 30, 2008. The pension and other post-retirement benefit costs for
that period amounted to $3.8 million and have been recorded by the Company during the quarter ended
December 31, 2008 as a $3.4 million increase to Other Regulatory Assets in the Companys Utility
and Pipeline and Storage segments and a $0.4 million ($0.2 million after tax) adjustment to
earnings reinvested in the business. In addition, for the Companys non-qualified pension plan,
benefit costs of $1.3 million have been recorded by the Company during the quarter ended December
31, 2008 as a $0.4 million increase to Other Regulatory Assets in the Companys Utility segment and
a $0.9 million ($0.6 million after tax) adjustment to earnings reinvested in the business. The
requirement to measure the plan assets and benefit obligations as of the Companys fiscal year-end
date will be fully adopted by the Company by the end of fiscal 2009.
Employer Contributions. During the three months ended December 31, 2008, the Company contributed
$7.0 million to its retirement plan and $6.6 million to its VEBA trusts and 401(h) accounts for its
other post-retirement benefits. In the remainder of 2009, the Company expects to contribute in the
range of $8.0 million to $13.0 million to its retirement plan. As a result of the recent downturn
in the stock markets and general economic conditions, it is likely that the Company will have to
fund larger amounts to the retirement plan subsequent to fiscal 2009 in order to be in compliance
with the Pension Protection Act of 2006. In the remainder of 2009, the Company expects to
contribute in the range of $18.0 million to $23.0 million to its VEBA trusts and 401(h) accounts.
-23-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
OVERVIEW
In the Companys 2008 Form 10-K, the Company reported financial results for five business
segments: Utility, Pipeline and Storage, Exploration and Production, Energy Marketing and Timber.
During the quarter ended December 31, 2008, management made the decision to eliminate the Timber
segment as a reportable segment based on the fact that the Timber operations do not meet any of the
quantitative thresholds specified by SFAS 131. Furthermore, from a qualitative standpoint,
managements focus has changed regarding the Timber operations. While the Timber segment will
continue to harvest hardwood timber and process lumber products that are used in high-end
furniture, cabinetry and flooring, management no longer considers the Timber operations to
be integral to the overall operations of the Company. As a result of this change in focus and the
fact that the Timber operations cannot be aggregated into one of the other four
reportable business segments, the Timber operations have been included in the All Other category in the
disclosures that follow. Prior year segment information shown below has been restated to reflect
this change in presentation.
The Company experienced a loss of $42.7 million for the quarter ended December 31, 2008
compared to earnings of $70.6 million for the quarter ended December 31, 2007. The loss for the
quarter ended December 31, 2008 was driven largely by an impairment charge of $182.8 million
($108.2 million after tax) recorded in the Exploration and Production segment. In the Companys
Exploration and Production segment, oil and gas property acquisition, exploration and development
costs are capitalized under the full cost method of accounting. Such costs are subject to a
quarterly ceiling test prescribed by SEC Regulation S-X Rule 4-10 that determines a limit, or
ceiling, on the amount of property acquisition, exploration and development costs that can be
capitalized. At December 31, 2008, due to significant declines in crude oil and natural gas
commodity prices (Cushing, Oklahoma West Texas Intermediate oil reported spot price of $44.60 per Bbl at
December 31, 2008 versus a reported price of $100.70 per Bbl at September 30, 2008; Henry Hub natural gas reported spot price of
$5.63 per MMBtu at December 31, 2008 versus a reported price of $7.12 per MMBtu at September 30, 2008), the book value
of the Companys oil and gas properties exceeded the ceiling, resulting in the impairment charge
mentioned above. (Note Because actual pricing of the Companys various producing properties varies depending on their location, the actual various prices received for such production is utilized to calculate the ceiling, rather than the Cushing oil and Henry Hub prices, which are only indicative.) If natural gas prices used in the ceiling test calculation at December 31, 2008
had been $1 per MMBtu lower, the Company would have recorded an additional impairment charge of
approximately $51 million (after tax). If crude oil prices used in the ceiling test calculation at
December 31, 2008 had been $5 per Bbl lower, the Company would have recorded an additional
impairment charge of approximately $53 million (after tax). If both natural gas and crude oil
prices used in the ceiling test calculation at December 31, 2008 were lower by $1 per MMBtu and $5
per Bbl, respectively, the Company would have recorded an additional impairment charge of
approximately $104 million (after tax). These calculated impairment charges are based solely on
price changes and do not take into account any other changes to the ceiling test calculation.
Despite the loss for the quarter ended December 31, 2008, the Companys balance sheet remains
strong with a capitalization structure of 58% equity and 42% debt at December 31, 2008. The
Company also continues to have strong liquidity despite the generally reported problems in the credit
markets. The Company has been able to borrow short-term funds under its credit lines and through
the commercial paper market to fund working capital needs throughout the quarter. The Company
maintains a number of individual uncommitted or discretionary lines of credit with financial
institutions for general corporate purposes. These credit lines, which aggregate to $420.0
million, are revocable at the option of the financial institutions and are reviewed on an annual
basis. The Company anticipates that these lines of credit will continue to be renewed, or replaced
by similar lines. At December 31, 2008, the Company had borrowed $66.0 million under its lines of
credit. The total amount available to be issued under the Companys commercial paper program is
$300.0 million. The commercial paper program is backed by a syndicated committed credit facility
totaling $300.0 million, which commitment extends through September 30, 2010. At December 31, 2008, the Company
did not have any borrowings under its committed credit facility.
CRITICAL ACCOUNTING ESTIMATES
For a complete discussion of critical accounting estimates, refer to Critical Accounting
Estimates in Item 7 of the Companys 2008 Form 10-K. There have been no material changes to that
disclosure other than as set forth below. The information presented below updates and should be
read in conjunction with the critical accounting estimates in that Form 10-K.
-24-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Cont.)
Oil and Gas Exploration and Development Costs. The Company, in its Exploration and Production
segment, follows the full cost method of accounting for determining the book value of its oil and
natural gas properties. In accordance with this methodology, the Company is required to perform a
quarterly ceiling test. Under the ceiling test, the present value of future revenues from the
Companys oil and gas reserves based on current market prices (the ceiling) is compared with the
book value of those reserves at the balance sheet date. If the book value of the reserves in any
country exceeds the ceiling, a non-cash charge must be recorded to reduce the book value of the
reserves to the calculated ceiling. As disclosed in the Companys 2008 Form 10-K, at September 30,
2008, the ceiling exceeded the book value of the Companys oil and gas properties by approximately
$500 million. Because of declines in commodity prices since September 30, 2008, the book value of
the Companys oil and gas properties exceeded the ceiling at December 31, 2008. The quoted
Cushing, Oklahoma spot price for West Texas Intermediate oil had declined from a reported price of $100.70 per Bbl at
September 30, 2008 to a reported price of $44.60 per Bbl at December 31, 2008. The quoted Henry Hub spot price for
natural gas had declined from a reported price of $7.12 per MMBtu at September 30, 2008 to a reported price of $5.63 per MMBtu at December
31, 2008. Consequently, the Company recorded an impairment charge of $182.8 million ($108.2
million after-tax) during the quarter ended December 31, 2008. (Note Because actual pricing of the Company's various producing properties varies
depending on their location, the actual various prices received for such production is utilized to calculate the ceiling,
rather than the Cushing oil and Henry Hub prices, which are only indicative.) If natural gas prices used in the
ceiling test calculation at December 31, 2008 had been $1 per MMBtu lower, the Company would have
recorded an additional impairment charge of approximately $51 million (after tax). If crude oil
prices used in the ceiling test calculation at December 31, 2008 had been $5 per Bbl lower, the
Company would have recorded an additional impairment charge of approximately $53 million (after
tax). If both natural gas and crude oil prices used in the ceiling test calculation at December
31, 2008 were lower by $1 per MMBtu and $5 per Bbl, respectively, the Company would have recorded
an additional impairment charge of approximately $104 million (after tax). These calculated
impairment charges are based solely on price changes and do not take into account any other changes
to the ceiling test calculation. For a more complete discussion of the full cost method of
accounting, refer to Oil and Gas Exploration and Development Costs under Critical Accounting
Estimates in Item 7 of the Companys 2008 Form 10-K.
Accounting for Derivative Financial Instruments. The Company, in its Exploration and Production
segment, Energy Marketing segment, and Pipeline and Storage segment, uses a variety of derivative
financial instruments to manage a portion of the market risk associated with fluctuations in the
price of natural gas and crude oil. These instruments are categorized as price swap agreements and
futures contracts. Gains or losses associated with the derivative financial instruments are
matched with gains or losses resulting from the underlying physical transaction that is being
hedged. To the extent that the derivative financial instruments would ever be deemed to be
ineffective based on the effectiveness testing, mark-to-market gains or losses from the derivative
financial instruments would be recognized in the income statement without regard to an underlying
physical transaction.
The Company uses both exchange-traded and non exchange-traded derivative financial
instruments. The Company adopted SFAS 157 during the quarter ended December 31, 2008. As such,
the fair value of such derivative financial instruments is determined under the provisions of SFAS
157. The fair value of exchange traded derivative financial instruments is determined from Level 1
inputs, which are quoted prices in active markets. The Company determines the fair value of non
exchange-traded derivative financial instruments based on an internal model, which uses both
observable and unobservable inputs other than quoted prices. These inputs are considered Level 2
or Level 3 inputs. All derivative financial instrument assets and liabilities are evaluated for
the probability of default by either the counterparty or the Company. Credit reserves are applied
against the fair values of such assets or liabilities. For a more complete discussion of the types
of derivative financial instruments used by the Company, refer to the Market Risk Sensitive
Instruments section in Item 7 of the Companys 2008 Form 10-K.
-25-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Cont.)
RESULTS OF OPERATIONS
Earnings
The Company experienced a loss of $42.7 million for the quarter ended December 31, 2008
compared to earnings of $70.6 million for the quarter ended December 31, 2007. The decrease in
earnings of $113.3 million is primarily the result of a loss recognized in the Exploration and
Production segment. Lower earnings in the Energy Marketing segment, as well as a loss in the All
Other category, also contributed to the decrease. Higher earnings in the Utility and Pipeline and
Storage segments and the Corporate category slightly offset these decreases. The Companys loss
for the quarter ended December 31, 2008, includes a non-cash $182.8 million impairment charge ($108.2
million after tax) for the Exploration and Production segments oil and gas producing properties
under the full cost method of accounting using crude oil and natural gas commodity pricing at
December 31, 2008, which were lower than the pricing at September 30, 2008, the last ceiling test
measurement date. Additional discussion of earnings in each of the business segments can be found
in the business segment information that follows. Note that all amounts used in the earnings
discussions are after-tax amounts, unless otherwise noted.
Earnings (Loss) by Segment
Three Months Ended December 31 (Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
Utility |
|
$ |
22,088 |
|
|
$ |
20,217 |
|
|
$ |
1,871 |
|
Pipeline and Storage |
|
|
17,176 |
|
|
|
12,778 |
|
|
|
4,398 |
|
Exploration and Production |
|
|
(83,557 |
) |
|
|
34,022 |
|
|
|
(117,579 |
) |
Energy Marketing |
|
|
599 |
|
|
|
954 |
|
|
|
(355 |
) |
|
|
|
|
|
|
|
|
|
|
Total Reportable Segments |
|
|
(43,694 |
) |
|
|
67,971 |
|
|
|
(111,665 |
) |
All Other |
|
|
(868 |
) |
|
|
2,736 |
|
|
|
(3,604 |
) |
Corporate |
|
|
1,884 |
|
|
|
(103 |
) |
|
|
1,987 |
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated |
|
$ |
(42,678 |
) |
|
$ |
70,604 |
|
|
$ |
(113,282 |
) |
|
|
|
|
|
|
|
|
|
|
Utility
Utility Operating Revenues
Three Months Ended December 31 (Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
Retail Sales Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
$ |
272,418 |
|
|
$ |
246,797 |
|
|
$ |
25,621 |
|
Commercial |
|
|
41,333 |
|
|
|
38,033 |
|
|
|
3,300 |
|
Industrial |
|
|
2,106 |
|
|
|
1,651 |
|
|
|
455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
315,857 |
|
|
|
286,481 |
|
|
|
29,376 |
|
|
|
|
|
|
|
|
|
|
|
Transportation |
|
|
32,011 |
|
|
|
33,424 |
|
|
|
(1,413 |
) |
Off-System Sales |
|
|
3,732 |
|
|
|
8,213 |
|
|
|
(4,481 |
) |
Other |
|
|
2,590 |
|
|
|
3,306 |
|
|
|
(716 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
354,190 |
|
|
$ |
331,424 |
|
|
$ |
22,766 |
|
|
|
|
|
|
|
|
|
|
|
-26-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Cont.)
Utility Throughput
Three Months Ended December 31 (MMcf)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
2008 |
|
2007 |
|
(Decrease) |
Retail Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
18,166 |
|
|
|
17,127 |
|
|
|
1,039 |
|
Commercial |
|
|
2,911 |
|
|
|
2,877 |
|
|
|
34 |
|
Industrial |
|
|
143 |
|
|
|
123 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,220 |
|
|
|
20,127 |
|
|
|
1,093 |
|
Transportation |
|
|
17,473 |
|
|
|
17,827 |
|
|
|
(354 |
) |
Off-System Sales |
|
|
512 |
|
|
|
1,031 |
|
|
|
(519 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,205 |
|
|
|
38,985 |
|
|
|
220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Degree Days
Three Months Ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Colder (Warmer) Than |
|
|
Normal |
|
2008 |
|
2007 |
|
Normal |
|
Prior Year |
Buffalo |
|
|
2,260 |
|
|
|
2,313 |
|
|
|
2,094 |
|
|
|
2.3 |
|
|
|
10.5 |
|
Erie |
|
|
2,081 |
|
|
|
2,067 |
|
|
|
1,871 |
|
|
|
(0.7 |
) |
|
|
10.5 |
|
2008 Compared with 2007
Operating revenues for the Utility segment increased $22.8 million for the quarter ended
December 31, 2008 as compared with the quarter ended December 31, 2007. This increase largely
resulted from a $29.4 million increase in retail gas revenues coupled with a $4.5 million decrease
in off-system sales revenues and a $1.4 million decrease in transportation revenues.
The increase in retail gas sales revenues for the Utility segment was primarily due to higher
retail sales volumes, as shown in the table above. The volume increase, most notably in the
residential category, is primarily the result of weather that was 10.5 percent colder than the
prior year in both operating jurisdictions.
In the New York jurisdiction, the NYPSC issued an order providing for an annual rate increase
of $1.8 million beginning December 28, 2007. As part of this rate order, a rate design change was adopted that shifts a greater amount of cost recovery into the minimum bill amount, thus spreading the recovery of such costs more evenly throughout the year. As a result of this rate order, retail and transportation revenues for the quarter ended December 31, 2008 were $2.2 million lower than revenues for the quarter ended December 31, 2007.
Total off-system sales revenues for the quarters ended December 31, 2008 and December 31, 2007
amounted to $3.7 million and $8.2 million, respectively. Due to profit sharing with retail
customers, the margins resulting from off-system sales are minimal and there was no material impact
to margins for the quarters ended December 31, 2008 and 2007. On October 16, 2008, the FERC issued
Order No. 717 (Final Rule). The Final Rule regarding the standards of conduct was effective
November 26, 2008. The Final Rule seemingly holds that a local distribution company making
off-system sales on unaffiliated pipelines would engage in marketing that would require
compliance with the FERCs standards of conduct. Accordingly, pending clarification from the FERC
of this issue, as of November 1, 2008, Distribution Corporation ceased off-system sales activities.
The Utility segments earnings for the quarter ended December 31, 2008 were $22.1 million, an
increase of $1.9 million when compared with earnings of $20.2 million for the quarter ended
December 31, 2007. In the Pennsylvania jurisdiction, earnings increased $0.6 million. The major
factors contributing to this increase were the positive earnings impact associated with colder
weather ($0.8 million), a slight increase in usage per account ($0.2 million), and lower interest
expense ($0.2 million), offset by higher operating expenses of $0.6 million (primarily bad debt
expense due to higher gas costs and the possible impact current economic conditions may have on
customers). In the New York jurisdiction, earnings increased $1.3 million. This increase was
primarily the result of $1.9 million in lower operating expenses (primarily due to a decrease in
other post-retirement benefit costs) and lower interest expense ($0.6 million).
These
increases were partly offset by the earnings impact of the December
28, 2007 rate order discussed above ($1.4 million). The
-27-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Cont.)
phrase usage per account in this paragraph refers to the average gas consumption per customer
account after factoring out any impact that weather may have had on consumption. The decrease in
other post-retirement benefit costs discussed above stems from the NYPSC rate order that became
effective December 28, 2007 whereby the rate allowance for post-retirement benefit costs was
reduced given projected reductions in the other post-retirement benefit obligation as a result of
an increase in the discount rate from 5% to 6.25% during 2006. The decreases to interest expense
primarily reflect lower borrowings and slightly lower rates.
The impact of weather variations on earnings in the New York jurisdiction is mitigated by that
jurisdictions weather normalization clause (WNC). The WNC in New York, which covers the
eight-month period from October through May, has had a stabilizing effect on earnings for the New
York rate jurisdiction. For the quarter ended December 31, 2008, the WNC did not have a significant
impact on earnings as the weather was close to normal. For the quarter ended December 31, 2007, the
WNC preserved $1.1 million of earnings, as weather was warmer than normal for the period. In
periods of colder than normal weather, the WNC benefits Distribution Corporations New York
customers.
Pipeline and Storage
Pipeline and Storage Operating Revenues
Three Months Ended December 31 (Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
Increase |
Firm Transportation |
|
$ |
33,105 |
|
|
$ |
31,406 |
|
|
$ |
1,699 |
|
Interruptible Transportation |
|
|
1,103 |
|
|
|
991 |
|
|
|
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,208 |
|
|
|
32,397 |
|
|
|
1,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firm Storage Service |
|
|
16,686 |
|
|
|
16,621 |
|
|
|
65 |
|
Other |
|
|
5,210 |
|
|
|
3,213 |
|
|
|
1,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
56,104 |
|
|
$ |
52,231 |
|
|
$ |
3,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipeline and Storage Throughput
Three Months Ended December 31 (MMcf)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
Increase |
Firm Transportation |
|
|
110,315 |
|
|
|
92,883 |
|
|
|
17,432 |
|
Interruptible Transportation |
|
|
1,792 |
|
|
|
1,083 |
|
|
|
709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,107 |
|
|
|
93,966 |
|
|
|
18,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Compared with 2007
Operating revenues for the Pipeline and Storage segment increased $3.9 million in the quarter
ended December 31, 2008 as compared with the quarter ended December 31, 2007. This increase
consisted of a $1.8 million increase in firm and interruptible transportation revenues. The
Pipeline and Storage segment was able to obtain multiple new contracts for firm transportation
service in the quarter ended December 31, 2008 which resulted in higher reservation, commodity and
surcharge, and overrun revenues. In addition, there were increased efficiency gas revenues ($2.0
million) reported as part of other revenues in the table above. Under Supply Corporations tariff
with shippers, Supply Corporation is allowed to retain a set percentage of shipper-supplied gas to
cover compressor fuel costs and other operational purposes. To the extent that Supply Corporation
does not need all of the gas to cover such operational needs, it is allowed to keep the excess gas
as inventory. That inventory is later sold to customers. The excess gas that is retained as
inventory represents efficiency gas revenue to Supply Corporation. During the quarter ended
December 31, 2008, Supply Corporation retained a higher volume of gas than was retained during the
quarter ended December 31, 2007.
The Pipeline and Storage segments earnings for the quarter ended December 31, 2008 were
$17.2 million, an increase of $4.4 million when compared with earnings of $12.8 million for the
quarter ended December 31, 2007. The increase is largely attributable to higher transportation
revenues ($1.2 million) due to the addition of new contracts for firm transportation service and
higher efficiency gas revenues ($1.3 million), as discussed above. In addition, there was an
increase in allowance for funds
-28-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Cont.)
used during construction of $2.1 million. The increase in allowance for funds used during
construction is a result of the construction of the Empire Connector, which was completed and
placed in service on December 10, 2008. Construction of the Empire Connector began in September
2007 so the calculated allowance for funds used during construction was relatively small during
the quarter ended December 31, 2007. With much more significant construction work in progress
balances during the quarter ended December 31, 2008, the calculated allowance for funds used
during construction was much higher. These earnings increases were partially offset by higher
interest expense of $0.4 million. The increase in interest expense was due to higher borrowings.
Exploration and Production
Exploration and Production Operating Revenues
Three Months Ended December 31 (Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
Gas (after Hedging) |
|
$ |
41,093 |
|
|
$ |
45,557 |
|
|
$ |
(4,464 |
) |
Oil (after Hedging) |
|
|
53,071 |
|
|
|
59,643 |
|
|
|
(6,572 |
) |
Gas Processing Plant |
|
|
7,328 |
|
|
|
11,075 |
|
|
|
(3,747 |
) |
Other |
|
|
417 |
|
|
|
(1,309 |
) |
|
|
1,726 |
|
Intrasegment Elimination (1) |
|
|
(5,197 |
) |
|
|
(7,011 |
) |
|
|
1,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
96,712 |
|
|
$ |
107,955 |
|
|
$ |
(11,243 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the elimination of certain West Coast gas production revenue included in
Gas (after Hedging) in the table above that was sold to the gas processing plant shown in the
table above. An elimination for the same dollar amount was made to reduce the gas processing
plants Purchased Gas expense. |
Production Volumes
Three Months Ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
2008 |
|
2007 |
|
(Decrease) |
Gas Production (MMcf) |
|
|
|
|
|
|
|
|
|
|
|
|
Gulf Coast |
|
|
1,746 |
|
|
|
2,826 |
|
|
|
(1,080 |
) |
West Coast |
|
|
1,022 |
|
|
|
1,027 |
|
|
|
(5 |
) |
Appalachia |
|
|
1,851 |
|
|
|
1,917 |
|
|
|
(66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Production |
|
|
4,619 |
|
|
|
5,770 |
|
|
|
(1,151 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil Production (Mbbl) |
|
|
|
|
|
|
|
|
|
|
|
|
Gulf Coast |
|
|
128 |
|
|
|
156 |
|
|
|
(28 |
) |
West Coast |
|
|
682 |
|
|
|
629 |
|
|
|
53 |
|
Appalachia |
|
|
15 |
|
|
|
37 |
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Production |
|
|
825 |
|
|
|
822 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Prices
Three Months Ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
Average Gas Price/Mcf |
|
|
|
|
|
|
|
|
|
|
|
|
Gulf Coast |
|
$ |
7.04 |
|
|
$ |
7.14 |
|
|
$ |
(0.10 |
) |
West Coast |
|
$ |
5.02 |
|
|
$ |
6.77 |
|
|
$ |
(1.75 |
) |
Appalachia |
|
$ |
8.53 |
|
|
$ |
7.45 |
|
|
$ |
1.08 |
|
Weighted Average |
|
$ |
7.19 |
|
|
$ |
7.18 |
|
|
$ |
0.01 |
|
Weighted Average After Hedging |
|
$ |
8.90 |
|
|
$ |
7.90 |
|
|
$ |
1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Oil Price/Bbl |
|
|
|
|
|
|
|
|
|
|
|
|
Gulf Coast |
|
$ |
56.19 |
|
|
$ |
89.84 |
|
|
$ |
(33.65 |
) |
West Coast |
|
$ |
48.01 |
|
|
$ |
81.80 |
|
|
$ |
(33.79 |
) |
Appalachia |
|
$ |
69.06 |
|
|
$ |
84.12 |
|
|
$ |
(15.06 |
) |
Weighted Average |
|
$ |
49.66 |
|
|
$ |
83.43 |
|
|
$ |
(33.77 |
) |
Weighted Average After Hedging |
|
$ |
64.34 |
|
|
$ |
72.59 |
|
|
$ |
(8.25 |
) |
-29-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Cont.)
2008 Compared with 2007
Operating revenues for the Exploration and Production segment decreased $11.2 million for the
quarter ended December 31, 2008 as compared with the quarter ended December 31, 2007. Oil
production revenue after hedging decreased $6.6 million. A decrease in the weighted average price
of oil after hedging ($8.25 per Bbl) was the primary cause, as a production increase in the West
Coast offset decreases in Gulf Coast and Appalachian production, keeping overall oil production
flat. Gas production revenue after hedging decreased $4.5 million. A decrease in gas production
(1,151 MMcf) more than offset an increase in the weighted average price of gas after hedging ($1.00
per Mcf). The decrease in gas production occurred primarily in this segments Gulf Coast region
(1,080 MMcf), which is mainly the result of lingering shut-ins caused by Hurricane Ike in September 2008. While Senecas
properties sustained only superficial damage from the hurricanes, two significant producing
properties remained shut-in for the quarter ended December 31, 2008 due to repair work on third
party pipelines and onshore processing facilities. All pre-hurricane production is expected to be
back on line by the end of the quarter ended March 31, 2009. Appalachian production was slightly
lower due to compressor down time and pipeline constraints.
The Exploration and Production segments loss for the quarter ended December 31, 2008 was
$83.6 million compared with earnings of $34.0 million for the quarter ended December 31, 2007, a
decrease of $117.6 million. The decrease in earnings is primarily the result of an impairment charge of $108.2
million, as discussed above. Also, lower natural gas production and lower crude oil prices
decreased earnings by $5.9 million, and $4.4 million, respectively. Higher natural gas prices
slightly offset these decreases by $3.0 million. Higher general and administrative and other
operating expenses of $1.7 million and higher lease operating expenses of $1.3 million also
contributed to the decrease in earnings. Lower depletion expense of $0.6 million made a small
contribution to earnings. The increase in general and administrative and other operating expenses
is mainly due to a bad debt charge related to a customers bankruptcy filing combined with higher
personnel costs in the Appalachian region. The increase in lease operating expenses is primarily
due to higher production taxes related to increased production from the High Island 24L and 23L
fields in the Gulf Coast region, higher property taxes and increased well repair costs associated
with higher than normal activity in the West Coast region, and an increase in the number of
producing properties in the Appalachian region.
Energy Marketing
Energy Marketing Operating Revenues
Three Months Ended December 31 (Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Increase |
|
Natural Gas (after Hedging) |
|
$ |
114,984 |
|
|
$ |
86,735 |
|
|
$ |
28,249 |
|
Other |
|
|
23 |
|
|
|
(16 |
) |
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
115,007 |
|
|
$ |
86,719 |
|
|
$ |
28,288 |
|
|
|
|
|
|
|
|
|
|
|
Energy Marketing Volumes
Three Months Ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
Increase |
Natural Gas (MMcf) |
|
|
13,136 |
|
|
|
10,841 |
|
|
|
2,295 |
|
2008 Compared with 2007
Operating revenues for the Energy Marketing segment increased $28.3 million for the quarter
ended December 31, 2008 as compared with the quarter ended December 31, 2007. The increase
primarily reflects an increase in volumes, largely attributable to sales transactions undertaken to
offset certain basis risks that the Energy Marketing segment was exposed to under certain commodity
purchase contracts. These offsetting transactions had the effect of increasing revenue and volumes
sold with minimal impact to earnings.
-30-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Cont.)
The Energy Marketing segments earnings for the quarter ended December 31, 2008 were $0.6
million, a decrease of $0.4 million when compared with earnings of $1.0 million for the quarter
ended December 31, 2007. Despite colder weather, earnings decreased primarily due to lower
margins.
Corporate and All Other
2008 Compared with 2007
Corporate and All Other operations recorded earnings of $1.0 million for the quarter ended
December 31, 2008, a decrease of $1.6 million when compared to the earnings of $2.6 million
recorded for the quarter ended December 31, 2007. The decrease in earnings was due to lower
margins from log and lumber sales ($1.3 million), lower interest income ($1.2 million), lower
equity method income from Horizon Powers investments in unconsolidated subsidiaries ($0.8
million), and higher interest expense ($0.5 million). In addition, during the quarter ended
December 31, 2008, ESNE, an unconsolidated subsidiary of Horizon Power, recorded an impairment
charge of $3.6 million. Horizon Powers 50% share of the impairment was $1.8 million ($1.1 million
on an after tax basis). ESNE generates electricity from an 80-megawatt, combined cycle, natural
gas-fired power plant in North East, Pennsylvania. The impairment was driven by a significant
decrease in run time for the plant given the economic downturn and the resulting decrease in
demand for electric power. The decreases were partially offset by lower operating expenses ($1.1
million) and a gain resulting from a death benefit on corporate-owned life insurance policies held by the Company ($2.3 million).
Interest Income
Interest income was $1.2 million lower in the quarter ended December 31, 2008 as compared to
the quarter ended December 31, 2007. Interest income in the Exploration and Production segment was
$1.6 million lower during the quarter ended December 31,
2008 as compared to the quarter ended
December 31, 2007 as a result of lower interest rates and lower
average temporary cash investment balances.
Other Income
Other Income increased $4.1 million for the quarter ended December 31, 2008 as compared with
the quarter ended December 31, 2007. This increase is attributable to an increase in the allowance
for funds used during construction of $2.1 million in the Pipeline and Storage segment associated
with the Empire Connector project, as well as a death benefit gain on life insurance proceeds of
$2.3 million recognized in the Corporate category.
Interest Expense on Long-Term Debt
Interest on long-term debt increased $1.8 million for the quarter ended December 31, 2008 as
compared with the quarter ended December 31, 2007. This increase can be attributed to a higher
average amount of long-term debt outstanding. In April 2008, the Company issued $300 million of
6.5% senior, unsecured notes due in April 2018. This increase was partially offset by the
repayment of $200 million of 6.303% medium-term notes that matured on May 27, 2008.
CAPITAL RESOURCES AND LIQUIDITY
The Companys primary source of cash during the three-month periods ended December 31, 2008
and December 31, 2007 consisted of cash provided by operating activities. This source of cash was
supplemented by issuances of new shares of common stock as a result of stock option exercises and
by short-term borrowings (for the quarter ended December 31, 2008). During the three months ended
December 31, 2008 and December 31, 2007, the common stock used to fulfill the requirements of the
Companys 401(k) plans and Direct Stock Purchase and Dividend Reinvestment Plan was obtained via
open market purchases.
-31-
Item 2. Managements 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, impairment of oil
and gas producing properties, impairment of investment in partnerships, deferred income taxes, and
income or loss from unconsolidated subsidiaries net of cash distributions.
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, over- or
under-recovered purchased gas costs and weather may also significantly impact cash flow. The
impact of weather on cash flow is tempered in the Utility segments New York rate jurisdiction by
its WNC and in the Pipeline and Storage segment by Supply Corporations straight fixed-variable
rate design.
Because of the seasonal nature of the heating business in the Utility and Energy Marketing
segments, revenues in these segments are relatively high during the heating season, primarily the
first and second quarters of the fiscal year, and receivable balances historically increase during
these periods from the balances receivable at September 30.
The storage gas inventory normally declines during the first and second quarters of the fiscal
year and is replenished during the third and fourth quarters. For storage gas inventory accounted
for under the LIFO method, the current cost of replacing gas withdrawn from storage is recorded in
the Consolidated Statements of Income and a reserve for gas replacement is recorded in the
Consolidated Balance Sheets under the caption Other Accruals and Current Liabilities. Such
reserve is reduced as the inventory is replenished.
Cash provided by operating activities in the Exploration and Production segment may vary from
period to period as a result of changes in the commodity prices of natural gas and crude oil. The
Company uses various derivative financial instruments, including price swap agreements and futures
contracts in an attempt to manage this energy commodity price risk.
Net cash provided by operating activities totaled $100.1 million for the three months ended
December 31, 2008, an increase of $24.8 million when compared with the $75.3 million provided by
operating activities for the three months ended December 31, 2007. The increase is primarily due
to higher cash provided by operating activities in the Exploration and Production segment. Despite
lower crude oil prices and lower natural gas production, this segment experienced an increase in
cash provided by operating activities due to the receipt of hedging collateral deposits from some
of the counterparties to its derivative financial instruments.
Investing Cash Flow
Expenditures for Long-Lived Assets
The Companys expenditures for long-lived assets totaled $119.2 million for the three months
ended December 31, 2008 and $69.7 million for the three months ended December 31, 2007. The table
below presents these expenditures:
-32-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Cont.)
Total Expenditures for Long-Lived Assets
Three Months Ended December 31,
(Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
2008 |
|
2007 |
|
(Decrease) |
|
Utility |
|
$ |
13.6 |
|
|
$ |
12.7 |
|
|
$ |
0.9 |
|
Pipeline and Storage (1) |
|
|
19.5 |
|
|
|
25.3 |
|
|
|
(5.8 |
) |
Exploration and Production (2) |
|
|
86.4 |
|
|
|
30.7 |
|
|
|
55.7 |
|
All Other |
|
|
|
|
|
|
1.0 |
|
|
|
(1.0 |
) |
Eliminations (3) |
|
|
(0.3 |
) |
|
|
|
|
|
|
(0.3 |
) |
|
|
|
$ |
119.2 |
|
|
$ |
69.7 |
|
|
$ |
49.5 |
|
|
|
|
|
(1) |
|
Amount for the three months ended December 31, 2008 excludes $16.8 million of
capital expenditures related to the Empire Connector project accrued at September 30, 2008 and paid
during the three months ended December 31, 2008. This amount was excluded from the Consolidated
Statement of Cash Flows at September 30, 2008 since it represented a non-cash investing activity at
that date. The amount has been included in the Consolidated Statement of Cash Flows at December
31, 2008. |
|
(2) |
|
Amount includes $51.7 million of accrued capital expenditures at December 31, 2008,
the majority of which was for lease acquisitions in the Appalachian region. This amount has been
excluded from the Consolidated Statement of Cash Flows at December 31, 2008 since it represents a
non-cash investing activity at that date. |
|
(3) |
|
Represents $0.3 million of capital expenditures in the Pipeline and Storage segment
for the purchase of pipeline facilities from the Appalachian region of the Exploration and
Production segment during the quarter ended December 31, 2008. |
Utility
The majority of the Utility capital expenditures for the three months ended December 31, 2008
and December 31, 2007 were made for replacement of mains and main extensions, as well as for the
replacement of service lines.
Pipeline and Storage
The majority of the Pipeline and Storage capital expenditures for the three months ended
December 31, 2008 and December 31, 2007 were related to the Empire Connector project, which was
placed into service on December 10, 2008.
As of December 31, 2008, the Company had incurred approximately $181.7 million in costs
related to this project. Of this amount, $17.0 million and $25.1 million (including an accrued
allowance for funds used during construction of $2.6 million and $0.5 million, respectively) were
incurred during the quarters ended December 31, 2008 and 2007, respectively.
In light of the growing demand for pipeline capacity to move natural gas from new wells being
drilled in Appalachia specifically in the Marcellus Shale producing area Supply Corporation is
actively pursuing development of its Appalachian Lateral pipeline project. The Appalachian Lateral
is expected to be routed through areas in Pennsylvania where producers are actively drilling and
are seeking market access for their newly discovered reserves. The Appalachian Lateral will
complement Supply Corporations original West to East (W2E) project, which was designed to
transport Rockies gas supply from Clarington, Ohio to the Ellisburg/Leidy/Corning area and includes
the Tuscarora-to-Corning facilities previously referred to as the Tuscarora Extension. The
Appalachian Lateral will transport gas supply from Pennsylvanias producing area to the Overbeck
area of Supply Corporations existing system, where the facilities associated with the W2E project
will move the gas to eastern market points, including Leidy, and to interconnections with
Millennium and Empire at Corning. Engineering analyses to evaluate routing options and the
development of an updated project cost estimate are under way.
In conjunction with the Appalachian Lateral/W2E transportation projects, Supply Corporation
has plans to develop new storage capacity by expansion of certain of its existing storage
facilities. The expansion of these fields, which Supply Corporation is pursuing concurrent with the
Appalachian Lateral/W2E transportation projects, could provide approximately 8.5 MMDth of
incremental storage
-33-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Cont.)
capacity with incremental withdrawal deliverability of up to 121 MDth of natural gas per day, with
service commencing as early as 2011. Supply Corporation expects that the availability of this
incremental storage capacity will complement the Appalachian Lateral/W2E pipeline transportation
projects and help balance the increasing flow of Appalachian and Rockies gas supply into the
western Pennsylvania area, and the growing demand for gas on the east coast.
The timeline associated with Supply Corporations pipeline and storage projects depends on
market development. The capital cost of the Appalachian Lateral/W2E transportation projects is
estimated to be in the range of $750 million to $1 billion, and is expected to be financed by a
combination of debt and equity. As of December 31, 2008, $0.2 million has been spent to study the
Appalachian Lateral/W2E transportation projects, and approximately $0.8 million has been spent
to study the storage expansion project. Costs associated with these projects have been included in
preliminary survey and investigation charges and have been fully reserved for at December 31, 2008.
Supply Corporation has not yet filed an application with the FERC for the authority to build
either pipeline project or the storage expansion.
Exploration and Production
The Exploration and Production segment capital expenditures for the three months ended
December 31, 2008 were primarily well drilling and completion expenditures and included
approximately $11.9 million for the Gulf Coast region, substantially all of which was for the
off-shore program in the shallow waters of the Gulf of Mexico, $10.4 million for the West Coast
region and $64.1 million for the Appalachian region. These amounts included approximately $10.2
million spent to develop proved undeveloped reserves. For all of 2009, the Company expects to spend
$244 million on Exploration and Production segment capital expenditures.
Previously reported 2009 capital expenditures for the Exploration and Production segment were $285 million. The
decrease in estimated capital expenditures is primarily due to low commodity prices. Estimated capital expenditures
in the Gulf Coast region will decrease from $35.0 million to $19.0 million. Estimated
capital expenditures in the West Coast region will decrease from $54.0 million to $35.0 million.
In the Appalachian region, estimated capital expenditures
will decrease from $196.0 million to $190.0 million.
The Exploration and Production segment capital expenditures for the three months ended
December 31, 2007 included approximately $6.8 million for the Gulf Coast region, substantially all
of which was for the off-shore program in the Gulf of Mexico, $12.8 million for the West Coast
region and $11.1 million for the Appalachian region. These amounts included $4.5 million spent to
develop proved undeveloped reserves.
The Company continuously evaluates capital expenditures and investments in corporations,
partnerships, and other business entities. The amounts are subject to modification for
opportunities such as the acquisition of attractive oil and gas properties, timber or natural gas
storage facilities and the expansion of natural gas 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 Companys other business segments depends, to a large degree, upon
market conditions.
Financing Cash Flow
Consolidated short-term debt increased $66.0 million during the three months ended December
31, 2008. The Company continues to consider short-term debt (consisting of short-term notes
payable to banks and commercial paper) an important source of cash for temporarily financing
capital expenditures and investments in corporations and/or partnerships, gas-in-storage inventory,
unrecovered purchased gas costs, margin calls on derivative financial instruments, exploration and
development expenditures, and other working capital needs. Fluctuations in these items can have a
significant impact on the amount and timing of short-term debt. At December 31, 2008, the Company
had outstanding short-term notes payable to banks of $66.0 million. There was no outstanding
commercial paper at December 31, 2008. As for bank loans, the Company maintains a number of
individual uncommitted or discretionary lines of credit with certain financial institutions for
general corporate purposes. Borrowings under these lines of credit are made at competitive market
rates. These credit lines, which aggregate to $420.0 million, are revocable at the option of the
financial institutions and are reviewed on an annual basis. The Company anticipates that these
lines of credit will continue to be renewed, or replaced by similar lines. The total amount
available to be issued under the
Companys commercial paper program is $300.0 million. The commercial paper program is backed by a
syndicated committed credit facility totaling $300.0 million, which commitment extends through September 30,
2010.
-34-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Cont.)
Under the Companys committed credit facility, the Company has agreed that its debt to
capitalization ratio will not exceed .65 at the last day of any fiscal quarter through September
30, 2010. At December 31, 2008, the Companys debt to capitalization ratio (as calculated under
the facility) was .42. The constraints specified in the committed credit facility would permit an
additional $1.79 billion in short-term and/or long-term debt to be outstanding (further limited by
the indenture covenants discussed below) before the Companys debt to capitalization ratio would
exceed .65. If a downgrade in any of the Companys credit ratings were to occur, access to the
commercial paper markets might not be possible. However, the Company expects that it could borrow
under its committed credit facility, uncommitted bank lines of credit or rely upon other liquidity
sources, including cash provided by operations.
Under the Companys existing indenture covenants, at December 31, 2008, the Company would have
been permitted to issue up to a maximum of $0.9 billion in additional long-term unsecured
indebtedness at then current market interest rates in addition to being able to issue new
indebtedness to replace maturing debt. The Companys present liquidity position is believed to be
adequate to satisfy known demands. However, if the Company was to experience another impairment of
oil and gas properties this year, it is possible that these indenture covenants would restrict the
Companys ability to issue additional long-term unsecured indebtedness. This would not preclude
the Company from issuing new indebtedness to replace maturing debt.
The Companys 1974 indenture, pursuant to which $199.0 million (or 18%) of the Companys
long-term debt (as of December 31, 2008) was issued, contains a cross-default provision whereby the
failure by the Company to perform certain obligations under other borrowing arrangements could
trigger an obligation to repay the debt outstanding under the indenture. In particular, a
repayment obligation could be triggered if the Company fails (i) to pay any scheduled principal or
interest on any debt under any other indenture or agreement or (ii) to perform any other term in
any other such indenture or agreement, and the effect of the failure causes, or would permit the
holders of the debt to cause, the debt under such indenture or agreement to become due prior to its
stated maturity, unless cured or waived.
The Companys $300.0 million committed credit facility also contains a cross-default provision
whereby the failure by the Company or its significant subsidiaries to make payments under other
borrowing arrangements, or the occurrence of certain events affecting those other borrowing
arrangements, could trigger an obligation to repay any amounts outstanding under the committed
credit facility. In particular, a repayment obligation could be triggered if (i) the Company or
any of its significant subsidiaries fail to make a payment when due of any principal or interest on
any other indebtedness aggregating $20.0 million or more or (ii) an event occurs that causes, or
would permit the holders of any other indebtedness aggregating $20.0 million or more to cause, such
indebtedness to become due prior to its stated maturity. As of December 31, 2008, the Company had
no debt outstanding under the committed credit facility.
In April 2008, the Company issued $300.0 million of 6.50% senior, unsecured notes in a private
placement exempt from registration under the Securities Act of 1933. The notes have a term of
10 years, with a maturity date in April 2018. The holders of the notes may require the Company to
repurchase their notes in the event of a change in control at a price equal to 101% of the
principal amount. In addition, the Company was required to either offer to exchange the notes for
substantially similar notes as are registered under the Securities Act of 1933 or, in certain
circumstances, register the resale of the notes. In November 2008, the Company filed a
registration statement with the SEC in connection with the Companys plan to offer to exchange the
notes for substantially similar registered notes. The Company used $200.0 million of the proceeds
to refund $200.0 million of 6.303% medium-term notes that subsequently matured on May 27, 2008. In
January 2009, the SEC declared the registration statement, as amended, effective, and the Company
commenced the exchange offer. The Company expects the exchange offer to expire on February 18,
2009.
The Company may issue debt or equity securities in a public offering or a private placement
from time to time. The amounts and timing of the issuance and sale of debt or equity securities
will depend on market conditions, indenture requirements, regulatory authorizations and the capital
requirements of the Company.
-35-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Cont.)
OFF-BALANCE SHEET ARRANGEMENTS
The Company has entered into certain off-balance sheet financing arrangements. These
financing arrangements are primarily operating and capital leases. The Companys consolidated
subsidiaries have operating leases, the majority of which are with the Utility and the Pipeline and
Storage segments, having a remaining lease commitment of approximately $30.5 million. These leases
have been entered into for the use of buildings, vehicles, construction tools, meters and other
items and are accounted for as operating leases. The Companys unconsolidated subsidiaries, which
are accounted for under the equity method, have capital leases of electric generating equipment
having a remaining lease commitment of approximately $2.8 million. The Company has guaranteed 50%
or $1.4 million of these capital lease commitments.
OTHER MATTERS
In addition to the legal proceedings disclosed in Part II, Item 1 of this report, the Company
is involved in other litigation and regulatory matters arising in the normal course of business.
These other matters may include, for example, negligence claims and tax, regulatory or other
governmental audits, inspections, investigations or other proceedings. These matters may involve
state and federal taxes, safety, compliance with regulations, rate base, cost of service and
purchased gas cost issues, among other things. While these normal-course matters could have a
material effect on earnings and cash flows in the quarterly and annual period in which they are
resolved, they are not expected to change materially the Companys present liquidity position, nor
are they expected to 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 Companys 2008 Form 10-K. There have been no subsequent
material changes to the Companys exposure to market risk sensitive instruments.
Rate and Regulatory Matters
Utility Operation
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.
New York Jurisdiction
On January 29, 2007, Distribution Corporation commenced a rate case by filing proposed tariff
amendments and supporting testimony requesting approval to increase its annual revenues by
$52.0 million. Following standard procedure, the NYPSC suspended the proposed tariff amendments to
enable its staff and intervenors to conduct a routine investigation and hold hearings. Distribution
Corporation explained in the filing that its request for rate relief was necessitated by decreased
revenues resulting from customer conservation efforts and increased customer uncollectibles, among
other things. The rate filing also included a proposal for an efficiency and conservation
initiative with a revenue decoupling mechanism designed to render the Company indifferent to
throughput reductions resulting from conservation. On September 20, 2007, the NYPSC issued an order
approving, with
modifications, Distribution Corporations conservation program for implementation on an
accelerated basis. Associated ratemaking issues, however, were reserved for consideration in the
rate.
On December 21, 2007, the NYPSC issued a rate order providing for an annual rate increase of
$1.8 million, together with a monthly bill surcharge that would collect up to $10.8 million to
recover expenses for implementation of the conservation program. The rate increase and bill
surcharge became effective December 28, 2007. The rate order further provided for a return on
equity of 9.1%. The rate
-36-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Cont.)
order also adopted Distribution Corporations proposed revenue decoupling mechanism. The revenue
decoupling mechanism, like others, decouples revenues from throughput by enabling the Company to
collect from small volume customers its allowed margin on average weather normalized usage per
customer. The effect of the revenue decoupling mechanism is to render the Company financially
indifferent to throughput decreases resulting from conservation. The Company surcharges or credits
any difference from the average weather normalized usage per customer account. The surcharge or
credit is calculated to recover total margin for the most recent twelve-month period ending
December 31, and applied to customer bills annually, beginning March 1st.
On April 18, 2008, Distribution Corporation filed an appeal with Supreme Court, Albany County,
seeking review of the rate order. The appeal contends that portions of the rate order should be
invalidated because they fail to meet the applicable legal standard for agency decisions. Among the
issues challenged by the Company are the reasonableness of the NYPSCs disallowance of expense
items, including health care costs, and the methodology used for calculating rate of return, which
the appeal contends understated the Companys cost of equity. The Company cannot predict the
outcome of the appeal at this time.
In a proposed budget delivered on December 16, 2008, the Governor of the State of New York
included revenue from a planned amendment to the Public Service Law increasing the utility
assessment from the current rate of 1/3 of one percent to one percent of a utilitys in-state gross
operating revenue, together with a temporary surcharge equal to an additional one percent of the
utilitys gross operating revenue. If adopted into law, the Governors proposal would increase the
assessment charged to Distributions New York Division, based on the most current calculation, from
$2.3 million to approximately $14 million, all other things being equal. The Company is unable to
ascertain the outcome of the Governors proposed increase to the assessment at this time. Should
it become law, the Company would seek to recover the increased expense by petitioning the Public
Service Commission for an increase in rates or such other means of recovery as is available under
the law.
The increase in the utility assessment would also impact marketing
companies. If adopted into law, the Governors proposal would
establish a new assessment charged to NFR for the first time. While the
proposed legislation mandates that such assessment be added as a
separate item to
bills rendered by marketing companies to their customers, NFR management is evaluating
the proposed legislation to determine the extent to which, and the details of how it will pass
along this cost increase to its customers. NFR management is also evaluating potential legal
challenges to certain aspects of the assessment.
Based on managements most recent estimates, the annual assessment imposed on NFR
could range from approximately $4.4 million to approximately $8.3 million. It is the
opinion of NFR management that the proposed legislation fails to adequately define
key language necessary to compute the assessment, leading to a certain degree of
uncertainty concerning the impact and size of the assessment.
Pennsylvania Jurisdiction
On June 1, 2006, Distribution Corporation filed proposed tariff amendments with PaPUC to
increase annual revenues by $25.9 million to cover increases in the cost of service to be effective
July 30, 2006. The rate request was filed to address increased costs associated with Distribution
Corporations ongoing construction program as well as increases in operating costs, particularly
uncollectible accounts. Following standard regulatory procedure, the PaPUC issued an order on
July 20, 2006 instituting a rate proceeding and suspending the proposed tariff amendments until
March 2, 2007. On October 2, 2006, the parties, including Distribution Corporation, Staff of the
PaPUC and intervenors, executed an agreement (Settlement) proposing to settle all issues in the
rate proceeding. The Settlement included an increase in annual revenues of $14.3 million to non-gas
revenues, an agreement not to file a rate case until January 28, 2008 at the earliest and an early
implementation
date. The Settlement was approved by the PaPUC at its meeting on November 30, 2006, and the
new rates became effective January 1, 2007.
Pipeline and Storage
Supply Corporation currently does not have a rate case on file with the FERC. The rate
settlement approved by the FERC on February 9, 2007 requires Supply Corporation to make a general
rate filing to be effective December 1, 2011, and bars Supply Corporation from making a general
rate filing before then, with some exceptions specified in the settlement.
-37-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Cont.)
On December 21, 2006, the FERC issued an order granting a Certificate of Public Convenience
and Necessity authorizing the construction and operation of the Empire Connector and various other
related pipeline projects by other unaffiliated companies. The Empire Certificate contains various
environmental and other conditions. Empire accepted that Certificate and received additional
environmental permits from the U.S. Army Corps of Engineers and state environmental agencies.
Empire also received, from all six upstate New York counties in which it built the Empire
Connector project, final approval of sales tax exemptions and temporary partial property tax
abatements. In June 2007, Empire signed a firm transportation service agreement with KeySpan Gas
East Corporation, under which Empire is obligated to provide transportation service that required
construction of this project. The new facilities were placed into service on December 10, 2008.
As of that date, Empire became an interstate pipeline subject to FERC regulation. The order
described above requires Empire to make a filing at the FERC, within three years after the
in-service date, justifying Empires existing recourse rates or proposing alternative rates.
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 Companys 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.
The Company has
agreed with the NYDEC to remediate a former manufactured gas plant site located in New York. The Company has submitted a Remedial Design/Remedial
Action work plan to the NYDEC and has recorded an estimated minimum
liability for remediation of this site of
$16.4 million.
At December 31, 2008, the Company has estimated its remaining clean-up costs related to former
manufactured gas plant sites and third party waste disposal sites (including the former
manufactured gas plant site discussed above) will be in the range of $19.3 million to $23.5
million. The minimum estimated liability of $19.3 million, which includes the $16.4 million
discussed above, has been recorded on the Consolidated Balance Sheet at December 31, 2008. The
Company expects to recover its environmental clean-up costs from a combination of rate recovery and
deferred insurance proceeds that are currently recorded as a regulatory liability on the
Consolidated Balance Sheet.
The Company is currently not aware of any material additional exposure to environmental
liabilities. However, changes in environmental regulations or other factors could adversely
impact the Company.
New Accounting Pronouncements
In September 2006, the FASB issued SFAS 157. SFAS 157 provides guidance for using fair value
to measure assets and liabilities. The pronouncement serves to clarify the extent to which
companies measure assets and liabilities at fair value, the information used to measure fair value,
and the effect that fair-value measurements have on earnings. SFAS 157 is to be applied whenever
another standard requires or allows assets or liabilities to be measured at fair value. In
accordance with FASB Staff Position FAS No. 157-2, on October 1, 2008, the Company adopted SFAS 157
for financial assets and financial liabilities that are recognized or disclosed at fair value on a
recurring basis. The same FASB Staff Position delays the effective date for nonfinancial assets
and nonfinancial liabilities, except for items that are recognized or disclosed at fair value on a
recurring basis, until the Companys first quarter of fiscal 2010. For further discussion of the
impact of the adoption of SFAS 157 for financial assets and financial liabilities, refer to Part I,
Item 1 at Note 2 Fair Value Measurements. The Company is currently evaluating the impact that
the adoption of SFAS 157 for nonfinancial assets and nonfinancial liabilities will have on its
consolidated financial statements. The Company has identified
Goodwill as being the major nonfinancial asset that will be impacted
by SFAS 157 and Asset Retirement Obligations as being
the major nonfinancial liability that will be impacted by SFAS 157.
-38-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Cont.)
In September 2006, the FASB issued SFAS 158, an amendment of SFAS 87, SFAS 88, SFAS 106, and
SFAS 132R. SFAS 158 requires that companies recognize a net liability or asset to report the
underfunded or overfunded status of their defined benefit pension and other post-retirement benefit
plans
on their balance sheets, as well as recognize changes in the funded status of a defined
benefit post-retirement plan in the year in which the changes occur through comprehensive income.
The pronouncement also specifies that a plans assets and obligations that determine its funded
status be measured as of the end of the Companys fiscal year, with limited exceptions. In
accordance with SFAS 158, the Company has recognized the funded status of its benefit plans and
implemented the disclosure requirements of SFAS 158 at September 30, 2007. The requirement to
measure the plan assets and benefit obligations as of the Companys fiscal year-end date will be
fully adopted by the Company by the end of fiscal 2009. The Company has historically measured its
plan assets and benefit obligations using a June 30th measurement date. In anticipation of
changing to a September 30th measurement date, the Company will be recording fifteen months of
pension and other post-retirement benefit costs during fiscal 2009. In accordance with the
provisions of SFAS 158, these costs have been calculated using June 30, 2008 measurement date data.
Three of those months pertain to the period of July 1, 2008 to September 30, 2008. The pension
and other post-retirement benefit costs for that period amounted to $5.1 million and have been
recorded by the Company during the quarter ended December 31, 2008 as a $3.8 million increase to
Other Regulatory Assets in the Companys Utility and Pipeline and Storage segments and a $1.3
million ($0.8 million after tax) adjustment to earnings reinvested in the business. For further
discussion of the impact of adopting the measurement date provisions of SFAS 158, refer to Part I,
Item 1 at Note 8 Retirement Plan and Other Post-Retirement Benefits.
In February 2007, the FASB issued SFAS 159. SFAS 159 permits entities to choose to measure
many financial instruments at fair value that are not otherwise required to be measured at fair
value under GAAP. A company that elects the fair value option for an eligible item will be required
to recognize in current earnings any changes in that items fair value in reporting periods
subsequent to the date of adoption. SFAS 159 became effective for the Company on October 1, 2008.
The Company did not elect the fair value measurement option for any of its financial instruments
other than those that are already being measured at fair value.
In December 2007, the FASB issued SFAS 141R. SFAS 141R will significantly change the
accounting for business combinations in a number of areas including the treatment of contingent
consideration, contingencies, acquisition costs, in process research and development and
restructuring costs. In addition, under SFAS 141R, changes in deferred tax asset valuation
allowances and acquired income tax uncertainties in a business combination after the measurement
period will impact income tax expense. SFAS 141R is effective as of the Companys first quarter of
fiscal 2010.
In December 2007, the FASB issued SFAS 160. SFAS 160 will change the accounting and reporting
for minority interests, which will be recharacterized as noncontrolling interests (NCI) and
classified as a component of equity. This new consolidation method will significantly change the
accounting for transactions with minority interest holders. SFAS 160 is effective as of the
Companys first quarter of fiscal 2010. The Company currently does not have any NCI.
In March 2008, the FASB issued SFAS 161. SFAS 161 requires entities to provide enhanced
disclosures related to an entitys derivative instruments and hedging activities in order to enable
investors to better understand how derivative instruments and hedging activities impact an entitys
financial reporting. The additional disclosures include how and why an entity uses derivative
instruments, how derivative instruments and related hedged items are accounted for under SFAS 133
and its related interpretations, and how derivative instruments and related hedged items affect an
entitys financial position, financial performance, and cash flows. SFAS 161 is effective as of the
Companys second quarter of fiscal 2009. The Company is currently evaluating the impact that the
adoption of SFAS 161 will have on its disclosures in the notes to the consolidated financial
statements.
On December 31, 2008, the SEC issued a final rule on Modernization of Oil and Gas Reporting.
The final rule modifies the SECs reporting and disclosure rules for oil and gas reserves and
aligns the full cost accounting rules with the revised disclosures. The most notable changes of
the final rule include the replacement of the single day period-end pricing to value oil and gas
reserves to a 12-month average of the first day of the month price for each month within the
reporting period. The final rule also permits
-39-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Cont.)
voluntary
disclosure of probable and possible reserves, a disclosure previously prohibited by SEC rules. The
revised reporting and disclosure requirements are effective for the Companys Form 10-K for the
period ended September 30, 2010. Early adoption is not permitted. The Company is currently
evaluating the impact that adoption of these rules will have on its consolidated financial
statements and MD&A disclosures.
Safe Harbor for Forward-Looking Statements
The Company is including the following cautionary statement in this Form 10-Q to make
applicable and take advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 for any forward-looking statements made by, or on behalf of, the Company.
Forward-looking statements include statements concerning plans, objectives, goals, projections,
strategies, future events or performance, and underlying assumptions and other statements which
are other than statements of
historical facts. From time to time, the Company may publish or otherwise make available
forward-looking statements of this nature. All such subsequent forward-looking statements, whether
written or oral and whether made by or on behalf of the Company, are also expressly qualified by
these cautionary statements. Certain statements contained in this report, including, without
limitation, statements regarding future prospects, plans, objectives, goals, projections,
strategies, future events or performance and underlying assumptions, capital structure, anticipated
capital expenditures, completion of construction projects, projections for pension and other
post-retirement benefit obligations, impacts of the adoption of new accounting rules, and possible
outcomes of litigation or regulatory proceedings, as well as statements that are identified by the
use of the words anticipates, estimates, expects, forecasts, intends, plans,
predicts, projects, believes, seeks, will, may, and similar expressions, are
forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 and
accordingly involve risks and uncertainties which could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. The forward-looking statements
contained herein are based on various assumptions, many of which are based, in turn, upon further
assumptions. The Companys expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including, without limitation, managements
examination of historical operating trends, data contained in the Companys records and other data
available from third parties, but there can be no assurance that managements expectations, beliefs
or projections will result or be achieved or accomplished. In addition to other factors and matters
discussed elsewhere herein, the following are important factors that, in the view of the Company,
could cause actual results to differ materially from those discussed in the forward-looking
statements:
|
1. |
|
Financial and economic conditions, including the availability of credit, and their effect on
the Companys ability to obtain financing on acceptable terms for working capital, capital
expenditures and other investments; |
|
|
2. |
|
Occurrences affecting the Companys ability to obtain financing under credit lines or other
credit facilities or through the issuance of commercial paper, other short-term notes or debt
or equity securities, including any downgrades in the Companys credit ratings and changes in
interest rates and other capital market conditions; |
|
|
3. |
|
Changes in economic conditions, including global, national or regional recessions, and their
effect on the demand for, and customers ability to pay for, the Companys products and
services; |
|
|
4. |
|
The creditworthiness or performance of the Companys key suppliers, customers and
counterparties; |
|
|
5. |
|
Economic disruptions or uninsured losses resulting from terrorist activities, acts of war,
major accidents, fires, hurricanes, other severe weather, pest infestation or other natural
disasters; |
|
|
6. |
|
Changes in actuarial assumptions, the interest rate environment and the return on plan/trust
assets related to the Companys pension and other post-retirement benefits, which can affect
future funding obligations and costs and plan liabilities; |
|
|
7. |
|
Changes in demographic patterns and weather conditions; |
-40-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Cont.)
|
8. |
|
Changes in the availability and/or price of natural gas or oil and the effect of such changes
on the accounting treatment of derivative financial instruments or the valuation of the
Companys natural gas and oil reserves; |
|
|
9. |
|
Impairments under the SECs full cost ceiling test for natural gas and oil reserves; |
|
|
10. |
|
Uncertainty of oil and gas reserve estimates; |
|
|
11. |
|
Ability to successfully identify, drill for and produce economically viable natural gas and
oil reserves, including shortages, delays or unavailability of equipment and services required
in drilling operations; |
|
|
12. |
|
Significant changes from expectations in the Companys actual production levels for natural
gas or oil; |
|
|
13. |
|
Changes in the availability and/or price of derivative financial instruments; |
|
|
14. |
|
Changes in the price differentials between various types of oil; |
|
|
15. |
|
Inability to obtain new customers or retain existing ones; |
|
|
16. |
|
Significant changes in competitive factors affecting the Company; |
|
|
17. |
|
Changes in laws and regulations to which the Company is subject, including tax,
environmental, safety and employment laws and regulations; |
|
|
18. |
|
Governmental/regulatory actions, initiatives and proceedings, including those involving
acquisitions, financings, rate cases (which address, among other things, allowed rates of
return, rate design and retained natural gas), affiliate relationships, industry structure,
franchise renewal, and environmental/safety requirements; |
|
|
19. |
|
Unanticipated impacts of restructuring initiatives in the natural gas and electric
industries; |
|
|
20. |
|
Significant changes from expectations in actual capital expenditures and operating expenses
and unanticipated project delays or changes in project costs or plans; |
|
|
21. |
|
The nature and projected profitability of pending and potential projects and other
investments, and the ability to obtain necessary governmental approvals and permits; |
|
|
22. |
|
Ability to successfully identify and finance acquisitions or other investments and ability to
operate and integrate existing and any subsequently acquired business or properties; |
|
|
23. |
|
Significant changes in tax rates or policies or in rates of inflation or interest; |
|
|
24. |
|
Significant changes in the Companys relationship with its employees or contractors and the
potential adverse effects if labor disputes, grievances or shortages were to occur; |
|
|
25. |
|
Changes in accounting principles or the application of such principles to the Company; |
|
|
26. |
|
The cost and effects of legal and administrative claims against the Company or activist
shareholder campaigns to effect changes at the Company; |
|
|
27. |
|
Increasing health care costs and the resulting effect on health insurance premiums and on the
obligation to provide other post-retirement benefits; or |
|
|
28. |
|
Increasing costs of insurance, changes in coverage and the ability to obtain insurance. |
-41-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Concl.)
The Company disclaims any obligation to update any forward-looking statements to reflect
events or circumstances after the date hereof.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Refer to the Market Risk Sensitive Instruments section in Item 2 MD&A.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The term disclosure controls and procedures is defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act. These rules refer to the controls and other procedures of a company that
are designed to ensure that information required to be disclosed by a company in the reports that
it files or submits under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SECs rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required
to be disclosed is accumulated and communicated to the companys management, including its
principal executive and principal financial officers, as appropriate to allow timely decisions
regarding required disclosure. The Companys management, including the Chief Executive Officer and
Principal Financial Officer, evaluated the effectiveness of the Companys disclosure controls and
procedures as of the end of the period covered by this report. Based upon that evaluation, the
Companys Chief Executive Officer and Principal Financial Officer concluded that the Companys
disclosure controls and procedures were effective as of December 31, 2008.
Changes in Internal Control Over Financial Reporting
There were no changes in the Companys internal control over financial reporting that occurred
during the quarter ended December 31, 2008 that have materially affected, or are reasonably likely
to materially affect, the Companys internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
For a discussion of various environmental and other matters, refer to Part I, Item 1 at
Note 5 Commitments and Contingencies, and Part I, Item 2 MD&A of this report under the heading
Other Matters Environmental Matters.
In addition to these matters, the Company is involved in other litigation and regulatory
matters arising in the normal course of business. These other matters may include, for example,
negligence claims and tax, regulatory or other governmental audits, inspections, investigations or
other proceedings. These matters may involve state and federal taxes, safety, compliance with
regulations, rate base, cost of service, and purchased gas cost issues, among other things. While
these normal-course matters could have a material effect on earnings and cash flows in the
quarterly and annual period in which they are resolved, they are not expected to change materially
the Companys present liquidity position, nor are they expected to have a material adverse effect
on the financial condition of the Company.
Item 1A. Risk Factors
The risk factors in Item 1A of the Companys 2008 Form 10-K have not materially changed other
than as set forth below. The risk factors presented below supersede the risk factors having the
same captions in the 2008 Form 10-K and should otherwise be read in conjunction with all of the
risk factors disclosed in the 2008 Form 10-K.
-42-
Item 1A. Risk Factors (Cont.)
National Fuel may be adversely affected by economic conditions and their impact on our suppliers
and customers.
Periods of slowed economic activity generally result in decreased energy consumption,
particularly by industrial and large commercial companies. As a consequence, national or regional
recessions or other downturns in economic activity could adversely affect National Fuels revenues
and cash flows or restrict its future growth. Economic conditions in National Fuels utility
service territories and energy marketing territories also impact its collections of accounts
receivable. All of National Fuels segments are exposed to risks associated with the
creditworthiness or performance of key suppliers and customers, many of which may be adversely
affected by volatile conditions in the financial markets. These conditions could result in
financial instability or other adverse effects at any of our suppliers or customers. For example,
counterparties to National Fuels commodity hedging arrangements or commodity sales contracts might
not be able to perform their obligations under these arrangements or contracts. Customers of
National Fuels Utility and Energy Marketing segments may have particular trouble paying their
bills during periods of declining economic activity and high commodity prices, potentially
resulting in increased bad debt expense and reduced earnings. Any of these events could have a
material adverse effect on National Fuels results of operations, financial condition and cash
flows.
National Fuels need to comply with comprehensive, complex, and sometimes unpredictable government
regulations may increase its costs and limit its revenue growth, which may result in reduced
earnings.
While National Fuel generally refers to its Utility segment and its Pipeline and Storage
segment as its regulated segments, there are many governmental regulations that have an impact on
almost every aspect of National Fuels businesses. Existing statutes and regulations may be revised
or reinterpreted and new laws and regulations may be adopted or become applicable to the Company,
which may affect its business in ways that the Company cannot predict.
A December 2008 New York State budget proposal to
increase the assessment on utility companies
gross operating revenues from intrastate utility operations, and to
extend, for the first time, that assessment to
energy marketing companies, such as NFR, could have a material adverse effect on the Companys
results of operations, financial condition or cash flows. The risk of
an adverse effect is greatest if Distribution Corporation is unable
to recover any increase in its assessment in the regulated rates it
charges to its New York utility customers, or if NFR, which does not
have regulated rates, is unable to collect any assessment against it
from its customers.
In its Utility segment, the operations of Distribution Corporation are subject to the
jurisdiction of the NYPSC and the PaPUC. The NYPSC and the PaPUC, among other things, approve the
rates that Distribution Corporation may charge to its utility customers. Those approved rates also
impact the returns that Distribution Corporation may earn on the assets that are dedicated to those
operations. If Distribution Corporation is required in a rate proceeding to reduce the rates it
charges its utility customers, or if Distribution Corporation is unable to obtain approval for rate
increases from these regulators, particularly when necessary to cover increased costs (including
costs that may be incurred in connection with governmental investigations or proceedings or
mandated infrastructure inspection, maintenance or replacement programs), earnings may decrease.
In addition to their historical methods of utility regulation, both the PaPUC and NYPSC have
sought to establish competitive markets in which customers may purchase supplies of gas from
marketers, rather than from utility companies. In June 1999, the Governor of Pennsylvania signed
into law the Natural Gas Choice and Competition Act. The Act revised the Public Utility Code
relating to the restructuring of the natural gas industry, to permit consumer choice of natural gas
suppliers. The early programs instituted to comply with the Act did not result in significant
change, and many residential customers currently continue to purchase natural gas from the utility
companies. In October 2005, the PaPUC concluded that effective competition does not exist in the
retail natural gas supply market statewide. On September 11, 2008, the PaPUC adopted a Final Order
and Action Plan designed to increase effective competition in the retail market for natural gas
services. The plan sets forth a schedule of action items for utilities and the PaPUC in order to
remove barriers in the market structure that, in the opinion of the PaPUC, prevented the full
participation of unregulated natural gas suppliers in
-43-
Item 1A. Risk Factors (Concl.)
Pennsylvania retail markets. In New York, in August 2004, the NYPSC issued its Statement of Policy
on Further Steps Toward Competition in Retail Energy Markets. This policy statement has a similar
goal of encouraging customer choice of alternative natural gas providers. In 2005, the NYPSC
stepped up its efforts to encourage customer choice at the retail residential level, and customer
choice activities increased in Distribution Corporations New York service territory. In April
2007, the NYPSC, noting that the retail energy marketplace in New York is established and
continuing to expand, commenced a review to determine if existing programs initially designed to
promote competition had outlived their usefulness and whether the cost of programs currently funded
by utility rate payers should be shifted to market competitors. Increased retail choice activities,
to the extent they occur, may increase Distribution Corporations cost of doing business, put an
additional portion of its business at regulatory risk, and create uncertainty for the future, all
of which may make it more difficult to manage Distribution Corporations business profitably.
Both the NYPSC and the PaPUC have instituted proceedings for the purpose of promoting
conservation of energy commodities, including natural gas. In New York, Distribution Corporation
implemented a Conservation Incentive Program that promotes conservation and efficient use of
natural gas by offering customer rebates for high-efficiency appliances, among other things. The
intent of conservation and efficiency programs is to reduce customer usage of natural gas. Under
traditional volumetric rates, reduced usage by customers results in decreased revenues to the
Utility. To prevent revenue erosion caused by conservation, the NYPSC approved a revenue
decoupling mechanism that renders Distribution Corporations New York division financially
indifferent to the effects of conservation. In Pennsylvania, although a proceeding is pending, the
PaPUC has not yet directed Distribution Corporation to implement conservation measures. If the
NYPSC were to revoke the revenue decoupling mechanism in a future proceeding or the PaPUC were to
adopt a conservation program without a revenue decoupling mechanism or other changes in rate
design, reduced customer usage could decrease revenues, forcing Distribution Corporation to file
for rate relief.
In its Pipeline and Storage segment, National Fuel is subject to the jurisdiction of the FERC
with respect to Supply Corporation and Empire. The FERC, among other things, approves the rates
that Supply Corporation and Empire may charge to their natural gas transportation and/or storage
customers. Those approved rates also impact the returns that Supply Corporation and Empire may earn
on the assets that are dedicated to those operations. State commissions can also petition the FERC
to investigate whether Supply Corporations and Empires rates are still just and reasonable, and
if not, to reduce those rates prospectively. If Supply Corporation or Empire is required in a rate
proceeding to reduce the rates it charges its natural gas transportation and/or storage customers,
or if Supply Corporation or Empire is unable to obtain approval for rate increases, particularly
when necessary to cover increased costs, Supply Corporations or Empires earnings may decrease.
Financial accounting requirements regarding exploration and production activities may affect
National Fuels profitability.
National Fuel accounts for its exploration and production activities under the full cost
method of accounting. Each quarter, National Fuel must compare the level of its unamortized
investment in oil and natural gas properties to the present value of the future net revenue
projected to be recovered from those properties according to methods prescribed by the SEC. In
determining present value, the Company uses quarter-end spot prices for oil and natural gas (as
adjusted for hedging). If, at the end of any quarter, the amount of the unamortized investment
exceeds the net present value of the projected future cash flows, such investment may be considered
to be impaired, and the full cost accounting rules require that the investment must be written
down to the calculated net present value. Such an instance would require National Fuel to recognize
an immediate expense in that quarter, and its earnings would be reduced. National Fuels
Exploration and Production segment recorded an impairment charge under the full cost method of
accounting in the quarter ended December 31, 2008. If spot market prices at a subsequent quarter
end are lower than prices at December 31, 2008, absent any changes in other factors affecting the
present value of the future net revenue projected to be recovered from the Companys oil and
natural gas properties, the Company would be required to record an additional impairment charge.
Depending on the magnitude of the decrease in prices, that charge could be material.
-44-
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On October 1, 2008, the Company issued a total of 2,100 unregistered shares of Company common
stock to the seven non-employee directors of the Company then serving on the Board of Directors of
the Company and receiving compensation under the Companys Retainer Policy for Non-Employee
Directors, 300 shares to each such director. All of these unregistered shares were issued as
partial consideration for such directors services during the quarter ended December 31, 2008.
These transactions were exempt from registration under Section 4(2) of the Securities Act of 1933,
as transactions not involving a public offering.
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Maximum Number |
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
of Shares that May |
|
|
|
|
|
|
|
|
|
|
as Part of Publicly |
|
Yet Be Purchased |
|
|
Total Number of |
|
|
|
|
|
Announced Share |
|
Under Share |
|
|
Shares |
|
Average Price |
|
Repurchase Plans |
|
Repurchase Plans |
Period |
|
Purchased (a) |
|
Paid per Share |
|
or Programs |
|
or Programs (b) |
Oct. 1-31, 2008 |
|
|
10,929 |
|
|
|
$35.07 |
|
|
|
|
|
|
|
6,971,019 |
|
Nov. 1-30, 2008 |
|
|
11,005 |
|
|
|
$32.31 |
|
|
|
|
|
|
|
6,971,019 |
|
Dec. 1-31, 2008 |
|
|
309,344 |
|
|
|
$29.79 |
|
|
|
|
|
|
|
6,971,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
331,278 |
|
|
|
$30.05 |
|
|
|
|
|
|
|
6,971,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents (i) shares of common stock of the Company purchased on the open market
with Company matching contributions for the accounts of participants in the Companys 401(k)
plans, and (ii) shares of common stock of the Company tendered to the Company by holders of
stock options or shares of restricted stock for the payment of option exercise prices or
applicable withholding taxes. During the quarter ended December 31, 2008, the Company did not
purchase any shares of its common stock pursuant to its publicly announced share repurchase
program. Of the 331,278 shares
purchased other than through a publicly announced share repurchase program, 34,170 were purchased
for the Companys 401(k) plans and 297,108 were purchased as a result of shares tendered to the
Company by holders of stock options or shares of restricted stock. |
|
(b) |
|
In December 2005, the Companys Board of Directors authorized the repurchase of up
to eight million shares of the Companys common stock. The Company completed the repurchase
of the eight million shares during 2008. In September 2008, the Companys Board of Directors
authorized the repurchase of an additional eight million shares of the Companys common stock.
The Company had, however, stopped repurchasing shares after September 17, 2008 in light of
the unsettled nature of the credit markets. However, such repurchases may be made in the
future if conditions improve. Such repurchases would be made in the open market or through
private transactions. |
Item 6. Exhibits
(a) Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
|
|
|
|
Amended and Restated Rights Agreement, dated as of December 4, 2008,
between National Fuel Gas Company and The Bank of New York (incorporated
herein by reference to Exhibit 4.1, Form 8-K dated December 4, 2008). |
|
|
|
10.1
|
|
Description of long-term performance incentives under the
National Fuel Gas Company Performance Incentive Program. |
|
|
|
10.2
|
|
Form of Stock Appreciation Right Award Notice under the
National Fuel Gas Company 1997 Award and Option Plan. |
-45-
Item 6. Exhibits (Concl.)
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
10.3
|
|
Description of performance goals under the Amended and Restated
National Fuel Gas Company 2007 Annual At Risk Compensation Incentive Program
and the National Fuel Gas Company Executive Annual Cash Incentive Program. |
|
|
|
12
|
|
Statements regarding Computation of Ratios: |
|
|
|
|
|
Ratio of Earnings to Fixed Charges for the Twelve Months Ended
December 31, 2008 and the Fiscal Years Ended September 30, 2004
through 2008. |
|
|
|
31.1
|
|
Written statements of Chief Executive Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934. |
|
|
|
31.2
|
|
Written statements of Principal Financial Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934. |
|
|
|
32
|
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
99
|
|
National Fuel Gas Company Consolidated Statement of Income for the
Twelve Months Ended December 31, 2008 and 2007. |
|
|
|
|
|
Incorporated herein by reference as
indicated. |
-46-
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/ R. J. Tanski
|
|
|
R. J. Tanski |
|
|
Treasurer and Principal Financial Officer |
|
|
|
|
|
|
/s/ K. M. Camiolo
|
|
|
K. M. Camiolo |
|
|
Controller and Principal Accounting Officer |
|
|
Date: February 6, 2009
-47-