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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
 
  þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year Ended September 30, 2007
 
  o   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)
 
     
New Jersey
(State or other jurisdiction of
incorporation or organization)
  13-1086010
(I.R.S. Employer
Identification No.)
     
6363 Main Street
Williamsville, New York
(Address of principal executive offices)
  14221
(Zip Code)
 
(716) 857-7000
Registrant’s telephone number, including area code
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
    Name of
    Each Exchange
    on Which
Title of Each Class
 
Registered
 
Common Stock, $1 Par Value, and
Common Stock Purchase Rights
  New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  þ      No  o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.  Yes  o      No  þ
 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer  þ      Accelerated Filer  o      Non-Accelerated Filer  o      
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o      No  þ
 
The aggregate market value of the voting stock held by nonaffiliates of the registrant amounted to $3,540,898,000 as of March 31, 2007.
 
Common Stock, $1 Par Value, outstanding as of October 31, 2007: 83,473,107 shares.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the registrant’s definitive Proxy Statement for its 2008 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.
 


Table of Contents

 
Glossary of Terms
 
Frequently used abbreviations, acronyms, or terms used in this report:
 
  National Fuel Gas Companies
 
 
Company The Registrant, the Registrant and its subsidiaries or the Registrant’s subsidiaries as appropriate in the context of the disclosure
 
Data-Track Data-Track Account Services, Inc.
 
Distribution Corporation National Fuel Gas Distribution Corporation
 
Empire Empire State Pipeline
 
ESNE Energy Systems North East, LLC
 
Highland Highland Forest Resources, Inc.
 
Horizon Horizon Energy Development, Inc.
 
Horizon B.V. Horizon Energy Development B.V.
 
Horizon LFG Horizon LFG, Inc.
 
Horizon Power Horizon Power, Inc.
 
Leidy Hub Leidy Hub, Inc.
 
Model City Model City Energy, LLC
 
National Fuel National Fuel Gas Company
 
NFR National Fuel Resources, Inc.
 
Registrant National Fuel Gas Company
 
SECI Seneca Energy Canada Inc.
 
Seneca Seneca Resources Corporation
 
Seneca Energy Seneca Energy II, LLC
 
Supply Corporation National Fuel Gas Supply Corporation
 
Toro Toro Partners, LP
 
U.E. United Energy, a.s.
 
  Regulatory Agencies
 
 
EPA United States Environmental Protection Agency
 
FASB Financial Accounting Standards Board
 
FERC Federal Energy Regulatory Commission
 
NTSB National Transportation Safety Board
 
NYDEC New York State Department of Environmental Conservation
 
NYPSC State of New York Public Service Commission
 
PaPUC Pennsylvania Public Utility Commission
 
SEC Securities and Exchange Commission
 
  Other
 
 
APB 18 Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock
 
APB 20 Accounting Principles Board Opinion No. 20, Accounting Changes
 
APB 25 Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
 
Bbl Barrel (of oil)
 
Bcf Billion cubic feet (of natural gas)
 
Bcfe (or Mcfe) — represents Bcf (or Mcf) Equivalent The total heat value (Btu) of natural gas and oil expressed as a volume of natural gas. National Fuel uses a conversion formula of 1 barrel of oil = 6 Mcf of natural gas.
 
Board foot A measure of lumber and/or timber equal to 12 inches in length by 12 inches in width by one inch in thickness.
 
Btu British thermal unit; the amount of heat needed to raise the temperature of one pound of water one degree Fahrenheit.
 
Capital expenditure 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.
 
Cashout revenues A cash resolution of a gas imbalance whereby a customer pays Supply Corporation for gas the customer receives in excess of amounts delivered into Supply Corporation’s system by the customer’s shipper.
 
CTA Cumulative Foreign Currency Translation Adjustment
 
Degree day 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 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 Costs incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering and storing the oil and gas.
 
Development well A well drilled to a known producing formation in a previously discovered field.
 
Dth 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.
 
Exchange Act Securities Exchange Act of 1934, as amended
 
Expenditures for long-lived assets Includes capital expenditures, stock acquisitions and/or investments in partnerships.
 
Exploitation Development of a field, including the location, drilling, completion and equipment of wells necessary to produce the commercially recoverable oil and gas in the field.
 
Exploration costs Costs incurred in identifying areas that may warrant examination, as well as costs incurred in examining specific areas, including drilling exploratory wells.
 
Exploratory well A well drilled in unproven or semi-proven territory for the purpose of ascertaining the presence underground of a commercial hydrocarbon deposit.
 
FIN  FASB Interpretation Number
 
FIN 47 FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations — an Interpretation of SFAS 143.
 
FIN 48 FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of SFAS 109.
 
Firm transportation and/or storage 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  Accounting principles generally accepted in the United States of America
 
Goodwill An intangible asset representing the difference between the fair value of a company and the price at which a company is purchased.
 
Grid The layout of the electrical transmission system or a synchronized transmission network.
 
Heavy oil A type of crude petroleum that usually is not economically recoverable in its natural state without being heated or diluted.
 
Hedging 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 Location where pipelines intersect enabling the trading, transportation, storage, exchange, lending and borrowing of natural gas.
 
Interruptible transportation and/or storage 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 London Interbank Offered Rate
 
LIFO Last-in, first-out
 
Mbbl Thousand barrels (of oil)
 
Mcf Thousand cubic feet (of natural gas)
 
MD&A Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
MDth Thousand decatherms (of natural gas)
 
MMcf Million cubic feet (of natural gas)
 
MMcfe Million cubic feet equivalent
 
NYMEX New York Mercantile Exchange. An exchange which maintains a futures market for crude oil and natural gas.
 
Order 636 An order issued by FERC entitled “Pipeline Service Obligations and Revisions to Regulations Governing Self-Implementing Transportation Under Part 284 of the Commission’s Regulations.”
 
Proved developed reserves Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods.
 
Proved undeveloped reserves 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 Potentially responsible party
 
PUHCA 1935 Public Utility Holding Company Act of 1935
 
PUHCA 2005 Public Utility Holding Company Act of 2005
 
Reserves The unproduced but recoverable oil and/or gas in place in a formation which has been proven by production.
 
Restructuring 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 “unbundled”) 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 Stock-settled stock appreciation right
 
SFAS  Statement of Financial Accounting Standards
 
SFAS 5 Statement of Financial Accounting Standards No. 5, Accounting for Contingencies
 
SFAS 43 Statement of Financial Accounting Standards No. 43, Accounting for Compensated Absences
 
SFAS 69 Statement of Financial Accounting Standards No. 69, Disclosures about Oil and Gas Producing Activities
 
SFAS 71 Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation
 
SFAS 87 Statement of Financial Accounting Standards No. 87, Employers’ Accounting for Pensions
 
SFAS 88 Statement of Financial Accounting Standards No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits
 
SFAS 106 Statement of Financial Accounting Standards No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions.
 
SFAS 109 Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes
 
SFAS 112 Statement of Financial Accounting Standards No. 112, Employers’ Accounting for Postemployment Benefits, an amendment of SFAS 5 and 43
 
SFAS 115 Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities
 
SFAS 123 Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
 
SFAS 123R Statement of Financial Accounting Standards No. 123R, Share-Based Payment
 
SFAS 132R Statement of Financial Accounting Standards No. 132R, Employers’ Disclosures about Pensions and Other Postretirement Benefits
 
SFAS 133 Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
 
SFAS 142 Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
SFAS 143 Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations
 
SFAS 157 Statement of Financial Accounting Standards No. 157, Fair Value Measurements
 
SFAS 158 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 Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of SFAS 115
 
Spot gas purchases The purchase of natural gas on a short-term basis.
 
Stock acquisitions Investments in corporations.
 
Unbundled service A service that has been separated from other services, with rates charged that reflect only the cost of the separated service.
 
VEBA Voluntary Employees’ Beneficiary Association
 
WNC 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.
 


Table of Contents

 
For the Fiscal Year Ended September 30, 2007
 
CONTENTS
 
                 
        Page
 
      BUSINESS     3  
          The Company and its Subsidiaries     3  
          Rates and Regulation     4  
          The Utility Segment     5  
          The Pipeline and Storage Segment     5  
          The Exploration and Production Segment     6  
          The Energy Marketing Segment     6  
          The Timber Segment     7  
          All Other Category and Corporate Operations     7  
          Discontinued Operations     7  
          Sources and Availability of Raw Materials     7  
          Competition     8  
          Seasonality     9  
          Capital Expenditures     10  
          Environmental Matters     10  
          Miscellaneous     10  
          Executive Officers of the Company     11  
      RISK FACTORS     12  
      UNRESOLVED STAFF COMMENTS     17  
      PROPERTIES     18  
          General Information on Facilities     18  
          Exploration and Production Activities     18  
      LEGAL PROCEEDINGS     22  
      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS     23  
 
      MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES     23  
      SELECTED FINANCIAL DATA     24  
      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     26  
      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     59  
      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA     60  
      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE     118  
      CONTROLS AND PROCEDURES     118  
      OTHER INFORMATION     118  


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        Page
 
      DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE     118  
      EXECUTIVE COMPENSATION     119  
      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS     119  
      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE     120  
      PRINCIPAL ACCOUNTANT FEES AND SERVICES     120  
 
      EXHIBITS AND FINANCIAL STATEMENT SCHEDULES     120  
    126  
  EX-4.1
  EX-10.1
  EX-10.2
  EX-10.3
  EX-10.4
  EX-10.5
  EX-12
  EX-21
  EX-23.1
  EX-23.2
  EX-31.1
  EX-31.2
  EX-32
  EX-99.1
  EX-99.2


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This Form 10-K contains “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements should be read with the cautionary statements included in this Form 10-K at Item 7, 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, performance and 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,” and “may” and similar expressions.
 
PART I
 
Item 1    Business
 
The Company and its Subsidiaries
 
National Fuel Gas Company (the Registrant), incorporated in 1902, is a holding company organized under the laws of the State of New Jersey. Except as otherwise indicated below, the Registrant owns directly or indirectly all of the outstanding securities of its subsidiaries. Reference to “the Company” in this report means the Registrant, the Registrant and its subsidiaries or the Registrant’s subsidiaries as appropriate in the context of the disclosure. Also, all references to a certain year in this report relate to the Company’s fiscal year ended September 30 of that year unless otherwise noted.
 
The Company is a diversified energy company consisting of five reportable business segments.
 
1. The Utility segment operations are carried out by National Fuel Gas Distribution Corporation (Distribution Corporation), a New York corporation. Distribution Corporation sells natural gas or provides natural gas transportation services to approximately 725,000 customers through a local distribution system located in western New York and northwestern Pennsylvania. The principal metropolitan areas served by Distribution Corporation include Buffalo, Niagara Falls and Jamestown, New York and Erie and Sharon, Pennsylvania.
 
2. The Pipeline and Storage segment operations are carried out by National Fuel Gas Supply Corporation (Supply Corporation), a Pennsylvania corporation, and Empire State Pipeline (Empire), a New York joint venture between two wholly owned subsidiaries of the Company. Supply Corporation provides interstate natural gas transportation and storage services for affiliated and nonaffiliated companies through (i) an integrated gas pipeline system extending from southwestern Pennsylvania to the New York-Canadian border at the Niagara River and eastward to Ellisburg and Leidy, Pennsylvania, and (ii) 28 underground natural gas storage fields owned and operated by Supply Corporation as well as four other underground natural gas storage fields owned and operated jointly with various other interstate gas pipeline companies. Supply Corporation is in the process of shutting down one of its smallest storage fields, which accounts for less than one percent of its marketable storage capacity. Empire, an intrastate pipeline company acquired by the Company in February 2003, transports natural gas for Distribution Corporation and for other utilities, large industrial customers and power producers in New York State. Empire owns a 157-mile pipeline that extends from the United States/Canadian border at the Niagara River near Buffalo, New York to near Syracuse, New York. Empire is constructing the Empire Connector project, which consists of a compressor station and a 78-mile pipeline extension from near Rochester, New York to an interconnection near Corning, New York with the unaffiliated Millennium Pipeline, which is also under construction. The Millennium Pipeline is expected to serve the New York City area upon its completion. Upon completion of the Empire and Millennium construction projects, which is currently expected to occur in November 2008, the Company expects that Empire will become an interstate pipeline company and will merge into Empire Pipeline, Inc. as described below.
 
3. The Exploration and Production segment operations are carried out by Seneca Resources Corporation (Seneca), a Pennsylvania corporation. Seneca is engaged in the exploration for, and the development and purchase of, natural gas and oil reserves in California, in the Appalachian region of the United States, in Wyoming, and in the Gulf Coast region of Texas, Louisiana, and Alabama, including offshore areas in federal waters and some state waters.


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In 2007, Seneca sold its subsidiary, Seneca Energy Canada Inc. (SECI), which conducted Exploration and Production operations in the provinces of Alberta, Saskatchewan and British Columbia in Canada. At September 30, 2007, the Company had U.S. reserves of 47,586 Mbbl of oil and 205,389 MMcf of natural gas.
 
4. The Energy Marketing segment operations are carried out by National Fuel Resources, Inc. (NFR), a New York corporation, which markets natural gas to industrial, commercial, public authority and residential end-users in western and central New York and northwestern Pennsylvania, offering competitively priced energy and energy management services for its customers.
 
5. The Timber segment operations are carried out by Highland Forest Resources, Inc. (Highland), a New York corporation, and by a division of Seneca known as its Northeast Division. This segment markets timber from its New York and Pennsylvania land holdings, owns two sawmill operations in northwestern Pennsylvania and processes timber consisting primarily of high quality hardwoods. At September 30, 2007, the Company owned 103,700 acres of timber property and managed an additional 3,105 acres of timber rights.
 
Financial information about each of the Company’s business segments can be found in Item 7, MD&A and also in Item 8 at Note J — Business Segment Information.
 
The Company’s other direct wholly owned subsidiaries are not included in any of the five reportable business segments and consist of the following:
 
  •  Horizon Energy Development, Inc. (Horizon), a New York corporation formed to engage in foreign and domestic energy projects through investments as a sole or substantial owner in various business entities. These entities include Horizon’s wholly owned subsidiary, Horizon Energy Holdings, Inc., a New York corporation, which owns 100% of Horizon Energy Development B.V. (Horizon B.V.). Horizon B.V. is a Dutch company that is in the process of winding up or selling certain power development projects in Europe;
 
  •  Horizon LFG, Inc. (Horizon LFG), a New York corporation engaged through subsidiaries in the purchase, sale and transportation of landfill gas in Ohio, Michigan, Kentucky, Missouri, Maryland and Indiana. Horizon LFG and one of its wholly owned subsidiaries own all of the partnership interests in Toro Partners, LP (Toro), a limited partnership which owns and operates short-distance landfill gas pipeline companies. The Company acquired Toro in June 2003;
 
  •  Leidy Hub, Inc. (Leidy Hub), a New York corporation formed to provide various natural gas hub services to customers in the eastern United States;
 
  •  Data-Track Account Services, Inc. (Data-Track), a New York corporation formed to provide collection services principally for the Company’s subsidiaries;
 
  •  Horizon Power, Inc. (Horizon Power), a New York corporation which is an “exempt wholesale generator” under PUHCA 2005 and is developing or operating mid-range independent power production facilities and landfill gas electric generation facilities; and
 
  •  Empire Pipeline, Inc., a New York corporation formed in 2005 to be the surviving corporation of a planned future merger with Empire, which is expected to occur after construction of the Empire Connector project (described below under the heading “Rates and Regulation” and under Item 7, MD&A under the headings “Investing Cash Flow” and “Rate and Regulatory Matters”).
 
No single customer, or group of customers under common control, accounted for more than 10% of the Company’s consolidated revenues in 2007.
 
Rates and Regulation
 
The Registrant is a holding company as defined under PUHCA 2005. PUHCA 2005 repealed PUHCA 1935, to which the Company was formerly subject, and granted the FERC and state public utility commissions access to certain books and records of companies in holding company systems. Pursuant to the FERC’s regulations under PUHCA 2005, the Company and its subsidiaries are exempt from the FERC’s books and records regulations under PUHCA 2005.


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The Utility segment’s rates, services and other matters are regulated by the NYPSC with respect to services provided within New York and by the PaPUC with respect to services provided within Pennsylvania. For additional discussion of the Utility segment’s rates and regulation, see Item 7, MD&A under the heading “Rate and Regulatory Matters” and Item 8 at Note C-Regulatory Matters.
 
The Pipeline and Storage segment’s rates, services and other matters are currently regulated by the FERC with respect to Supply Corporation and by the NYPSC with respect to Empire. The FERC has authorized Empire to construct and operate additional facilities (the Empire Connector project) and to become a FERC-regulated interstate pipeline company upon placement of those facilities into service, which is currently expected to occur in November 2008. For additional discussion of the Pipeline and Storage segment’s rates and regulation, see Item 7, MD&A under the heading “Rate and Regulatory Matters” and Item 8 at Note C-Regulatory Matters. For further discussion of the Empire Connector project, refer to Item 7, MD&A under the headings “Investing Cash Flow” and “Rate and Regulatory Matters.”
 
The discussion under Item 8 at Note C-Regulatory Matters includes a description of the regulatory assets and liabilities reflected on the Company’s Consolidated Balance Sheets in accordance with applicable accounting standards. To the extent that the criteria set forth in such accounting standards are not met by the operations of the Utility segment or the Pipeline and Storage segment, as the case may be, the related regulatory assets and liabilities would be eliminated from the Company’s Consolidated Balance Sheets and such accounting treatment would be discontinued.
 
In addition, the Company and its subsidiaries are subject to the same federal, state and local (including foreign) regulations on various subjects, including environmental matters, to which other companies doing similar business in the same locations are subject.
 
The Utility Segment
 
The Utility segment contributed approximately 25.2% of the Company’s 2007 income from continuing operations and 15.1% of the Company’s 2007 net income available for common stock.
 
Additional discussion of the Utility segment appears below in this Item 1 under the headings “Sources and Availability of Raw Materials,” “Competition: The Utility Segment” and “Seasonality,” in Item 7, MD&A and in Item 8, Financial Statements and Supplementary Data.
 
The Pipeline and Storage Segment
 
The Pipeline and Storage segment contributed approximately 28.0% of the Company’s 2007 income from continuing operations and 16.7% of the Company’s 2007 net income available for common stock.
 
Supply Corporation has service agreements for all of its firm storage capacity, which totals approximately 68,408 MDth. The Utility segment has contracted for 27,865 MDth or 40.7% of the total firm storage capacity, and the Energy Marketing segment accounts for another 3,888 MDth or 5.7% of the total firm storage capacity. Nonaffiliated customers have contracted for the remaining 36,655 MDth or 53.6% of the total firm storage capacity. A majority of Supply Corporation’s storage and transportation services is performed under contracts that allow Supply Corporation or the shipper to terminate the contract upon six or twelve months’ notice effective at the end of the contract term. The contracts also typically include “evergreen” language designed to allow the contracts to extend year-to-year at the end of the primary term. At the beginning of 2008, 66.9% of Supply Corporation’s total firm storage capacity was committed under contracts that, subject to 2007 shipper or Supply Corporation notifications, could have been terminated effective in 2008. Supply Corporation received one termination notice in 2007, for a 1.5 Bcf storage contract. Termination of that contract will be effective March 31, 2008, and Supply Corporation expects to remarket that capacity for service commencing April 1, 2008, at maximum tariff rates. The strong demand for market-area storage enabled Supply Corporation to eliminate its remaining storage service rate discounts in 2007. Supply Corporation anticipates that, effective April 1, 2008, all of its storage services will be contracted at the maximum tariff rates.
 
Supply Corporation’s firm transportation capacity is not a fixed quantity, due to the diverse weblike nature of its pipeline system, and is subject to change as the market identifies different transportation paths and receipt/delivery


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point combinations. Supply Corporation currently has firm transportation service agreements for approximately 2,001 MDth per day (contracted transportation capacity). The Utility segment accounts for approximately 1,093 MDth per day or 54.6% of contracted transportation capacity, and the Energy Marketing and Exploration and Production segments represent another 100 MDth per day or 5.0% of contracted transportation capacity. The remaining 808 MDth or 40.4% of contracted transportation capacity is subject to firm contracts with nonaffiliated customers.
 
At the beginning of 2008, 58.0% of Supply Corporation’s contracted transportation capacity was committed under affiliate contracts that were scheduled to expire in 2008 or, subject to 2007 shipper or Supply Corporation notifications, could have been terminated effective in 2008. Based on contract expirations and termination notices received in 2007 for 2008 termination, and taking into account any known contract additions, contracted transportation capacity with affiliates is expected to decrease 2.5% in 2008. Similarly, 24.3% of contracted transportation capacity was committed under unaffiliated shipper contracts that were scheduled to expire in 2008 or, subject to 2007 shipper or Supply Corporation notifications, could have been terminated effective in 2008. Based on contract expirations and termination notices received in 2007 for 2008 termination, and taking into account any known contract additions, contracted transportation capacity with unaffiliated shippers is expected to increase 2.1% in 2008. Supply Corporation previously has been successful in marketing and obtaining executed contracts for available transportation capacity (at discounted rates when necessary), and expects this success to continue.
 
Empire has service agreements for the 2007-2008 winter period for all of its firm transportation capacity, which totals approximately 565 MDth per day. Empire provides service under both annual contracts (service 12 months per year; contract term one or more years) and seasonal contracts (service during winter or summer only; contract term one or more partial years). Approximately 90.8% of Empire’s firm contracted capacity is under multi-year annual contracts that expire after 2008. Approximately 2.7% of Empire’s firm contracted capacity is under multi-year seasonal contracts that expire after 2008. The remaining capacity, which represents 6.5% of Empire’s firm contracted capacity, is under single season or annual contracts which will expire before the end of 2008. Empire expects that all of this expiring capacity will be re-contracted under seasonal and/or annual arrangements for future contracting periods. The Utility segment accounts for approximately 7.7% of Empire’s firm contracted capacity, and the Energy Marketing segment accounts for approximately 2.0% of Empire’s firm contracted capacity, with the remaining 90.3% of Empire’s firm contracted transportation capacity subject to contracts with nonaffiliated customers.
 
Additional discussion of the Pipeline and Storage segment appears below under the headings “Sources and Availability of Raw Materials,” “Competition: The Pipeline and Storage Segment” and “Seasonality,” in Item 7, MD&A and in Item 8, Financial Statements and Supplementary Data.
 
The Exploration and Production Segment
 
The Exploration and Production segment contributed approximately 37.1% of the Company’s 2007 income from continuing operations and 62.4% of the Company’s 2007 net income available for common stock.
 
Additional discussion of the Exploration and Production segment appears below under the headings “Discontinued Operations,” “Sources and Availability of Raw Materials” and “Competition: The Exploration and Production Segment,” in Item 7, MD&A and in Item 8, Financial Statements and Supplementary Data.
 
The Energy Marketing Segment
 
The Energy Marketing segment contributed approximately 3.8% of the Company’s 2007 income from continuing operations and 2.3% of the Company’s 2007 net income available for common stock.
 
Additional discussion of the Energy Marketing segment appears below under the headings “Sources and Availability of Raw Materials,” “Competition: The Energy Marketing Segment” and “Seasonality,” in Item 7, MD&A and in Item 8, Financial Statements and Supplementary Data.


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The Timber Segment
 
The Timber segment contributed approximately 1.9% of the Company’s 2007 income from continuing operations and 1.1% of the Company’s 2007 net income available for common stock.
 
Additional discussion of the Timber segment appears below under the headings “Sources and Availability of Raw Materials,” “Competition: The Timber Segment” and “Seasonality,” in Item 7, MD&A and in Item 8, Financial Statements and Supplementary Data.
 
All Other Category and Corporate Operations
 
The All Other category and Corporate operations contributed approximately 4.0% of the Company’s 2007 income from continuing operations and 2.4% of the Company’s 2007 net income available for common stock.
 
Additional discussion of the All Other category and Corporate operations appears below in Item 7, MD&A and in Item 8, Financial Statements and Supplementary Data.
 
Discontinued Operations
 
In August 2007, Seneca sold all of the issued and outstanding shares of SECI. SECI’s operations are presented in the Company’s financial statements as discontinued operations.
 
In July 2005, Horizon B.V. sold its entire 85.16% interest in United Energy, a.s. (U.E.), a district heating and electric generation business in the Czech Republic. United Energy’s operations are presented in the Company’s financial statements as discontinued operations.
 
Additional discussion of the Company’s discontinued operations appears in Item 7, MD&A and in Item 8, Financial Statements and Supplementary Data.
 
Sources and Availability of Raw Materials
 
Natural gas is the principal raw material for the Utility segment. In 2007, the Utility segment purchased 79.6 Bcf of gas for core market demand. Gas purchased from producers and suppliers in the southwestern United States and Canada under firm contracts (seasonal and longer) accounted for 85% of these purchases. Purchases of gas on the spot market (contracts for one month or less) accounted for 15% of the Utility segment’s 2007 purchases. Purchases from Chevron Natural Gas (21%), ConocoPhillips Company (15%) and Total Gas & Power North America Inc. (14%) accounted for 50% of the Utility’s 2007 gas purchases. No other producer or supplier provided the Utility segment with more than 10% of its gas requirements in 2007.
 
Supply Corporation transports and stores gas owned by its customers, whose gas originates in the southwestern, mid-continent and Appalachian regions of the United States as well as in Canada. Empire transports gas owned by its customers, whose gas originates in the southwestern and mid-continent regions of the United States as well as in Canada. Additional discussion of proposed pipeline projects appears below under “Competition: The Pipeline and Storage Segment” and in Item 7, MD&A.
 
The Exploration and Production segment seeks to discover and produce raw materials (natural gas, oil and hydrocarbon liquids) as further described in this report in Item 7, MD&A and Item 8 at Note J-Business Segment Information and Note O-Supplementary Information for Oil and Gas Producing Activities.
 
With respect to the Timber segment, Highland requires an adequate supply of timber to process in its sawmill and kiln operations. Forty-nine percent of the timber processed during 2007 in Highland’s sawmill operations came from land owned by the Company’s subsidiaries, and 51% came from outside sources. Timber cut for gas well drilling locations, access roads, and pipelines constituted an increasing portion of Highland’s timber supply, both from land owned by the Company’s subsidiaries and from outside sources. In addition, Highland purchased approximately 6.5 million board feet of green lumber to augment lumber supply for its kiln operations.
 
The Energy Marketing segment depends on an adequate supply of natural gas to deliver to its customers. In 2007, this segment purchased 53 Bcf of natural gas, of which 51 Bcf served core market demands. The remaining


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2 Bcf largely represents gas used in operations. The gas purchased by the Energy Marketing segment originates in either the Appalachian or mid-continent regions of the United States or in Canada.
 
Competition
 
Competition in the natural gas industry exists among providers of natural gas, as well as between natural gas and other sources of energy. The natural gas industry has gone through various stages of regulation. Apart from environmental and state utility commission regulation, the natural gas industry has experienced considerable deregulation. This has enhanced the competitive position of natural gas relative to other energy sources, such as fuel oil or electricity, since some of the historical regulatory impediments to adding customers and responding to market forces have been removed. In addition, management believes that the environmental advantages of natural gas have enhanced its competitive position relative to other fuels.
 
The electric industry has been moving toward a more competitive environment as a result of changes in federal law in 1992 and initiatives undertaken by the FERC and various states. It remains unclear what the impact of any further restructuring in response to legislation or other events may be.
 
The Company competes on the basis of price, service and reliability, product performance and other factors. Sources and providers of energy, other than those described under this “Competition” heading, do not compete with the Company to any significant extent.
 
Competition: The Utility Segment
 
The changes precipitated by the FERC’s restructuring of the natural gas industry in Order No. 636, which was issued in 1992, continue to reshape the roles of the gas utility industry and the state regulatory commissions. In both New York and Pennsylvania, Distribution Corporation has retained substantial numbers of residential and small commercial customers as sales customers. However, for many years almost all the industrial and a substantial number of commercial customers have purchased their gas supplies from marketers and utilized Distribution Corporation’s gas transportation services. Regulators in both New York and Pennsylvania have adopted retail competition programs for natural gas supply purchases by the remaining utility sales customers. To date, the Utility segment’s traditional distribution function remains largely unchanged; however, in New York, the Utility segment has instituted a number of programs to accommodate more widespread customer choice. In Pennsylvania, the PaPUC issued a report in October 2005 that concluded “effective competition” does not exist in the retail natural gas supply market statewide. In 2006, the PaPUC reconvened a stakeholder group to explore ways to increase the participation of retail customers in choice programs. A decision by the PaPUC on retail competition matters remains pending.
 
Competition for large-volume customers continues with local producers or pipeline companies attempting to sell or transport gas directly to end-users located within the Utility segment’s service territories without use of the utility’s facilities (i.e., bypass). In addition, competition continues with fuel oil suppliers and may increase with electric utilities making retail energy sales.
 
The Utility segment competes in its most vulnerable markets (the large commercial and industrial markets) by offering unbundled, flexible services. The Utility segment continues to develop or promote new sources and uses of natural gas or new services, rates and contracts. The Utility segment also emphasizes and provides high quality service to its customers.
 
Competition: The Pipeline and Storage Segment
 
Supply Corporation competes for market growth in the natural gas market with other pipeline companies transporting gas in the northeast United States and with other companies providing gas storage services. Supply Corporation has some unique characteristics which enhance its competitive position. Its facilities are located adjacent to Canada and the northeastern United States and provide part of the link between gas-consuming regions of the eastern United States and gas-producing regions of Canada and the southwestern, southern and other continental regions of the United States. This location offers the opportunity for increased transportation and storage services in the future.


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Empire competes for market growth in the natural gas market with other pipeline companies transporting gas in the northeast United States and upstate New York in particular. Empire is well situated to provide transportation from Canadian sourced gas, and its facilities are readily expandable. These characteristics provide Empire the opportunity to compete for an increased share of the gas transportation markets. As noted above, Empire is constructing the Empire Connector project, which will expand its natural gas pipeline and enable Empire to serve new markets in New York and elsewhere in the Northeast. For further discussion of this project, refer to Item 7, MD&A under the headings “Investing Cash Flow” and “Rate and Regulatory Matters.”
 
Competition: The Exploration and Production Segment
 
The Exploration and Production segment competes with other oil and natural gas producers and marketers with respect to sales of oil and natural gas. The Exploration and Production segment also competes, by competitive bidding and otherwise, with other oil and natural gas producers with respect to exploration and development prospects.
 
To compete in this environment, Seneca originates and acts as operator on certain of its prospects, seeks to minimize the risk of exploratory efforts through partnership-type arrangements, utilizes technology for both exploratory studies and drilling operations, and seeks market niches based on size, operating expertise and financial criteria.
 
Competition: The Energy Marketing Segment
 
The Energy Marketing segment competes with other marketers of natural gas and with other providers of energy management services. Competition in this area is well developed with regard to price and services from local, regional and, more recently, national marketers.
 
Competition: The Timber Segment
 
With respect to the Timber segment, Highland competes with other sawmill operations and with other suppliers of timber, logs and lumber. These competitors may be local, regional, national or international in scope. This competition, however, is primarily limited to those entities which either process or supply high quality hardwoods species such as cherry, oak and maple as veneer logs, saw logs, export logs or lumber ultimately used in the production of high-end furniture, cabinetry and flooring. The Timber segment sells its products in domestic and international markets.
 
Seasonality
 
Variations in weather conditions can materially affect the volume of gas delivered by the Utility segment, as virtually all of its residential and commercial customers use gas for space heating. The effect that this has on Utility segment margins in New York is mitigated by a WNC, which covers the eight-month period from October through May. Weather that is more than 2.2% warmer than normal results in a surcharge being added to customers’ current bills, while weather that is more than 2.2% colder than normal results in a refund being credited to customers’ current bills.
 
Volumes transported and stored by Supply Corporation may vary materially depending on weather, without materially affecting its revenues. Supply Corporation’s allowed rates are based on a straight fixed-variable rate design which allows recovery of fixed costs in fixed monthly reservation charges. Variable charges based on volumes are designed to recover only the variable costs associated with actual transportation or storage of gas.
 
Volumes transported by Empire may vary materially depending on weather, which can have a moderate effect on its revenues. Empire’s allowed rates currently are based on a modified fixed-variable rate design, which allows recovery of most fixed costs in fixed monthly reservation charges. Variable charges based on volumes are designed to recover variable costs associated with actual transportation of gas, to recover return on equity, and to recover income taxes. When Empire becomes a FERC-regulated interstate pipeline company (which is currently expected to occur in November 2008), Empire’s allowed rates, like Supply Corporation’s, will be based on a


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straight fixed-variable design. Under that rate design, weather-related variations in transportation volumes will not materially affect revenues.
 
Variations in weather conditions materially affect the volume of gas consumed by customers of the Energy Marketing segment. Volume variations have a corresponding impact on revenues within this segment.
 
The activities of the Timber segment vary on a seasonal basis and are subject to weather constraints. Traditionally, the timber harvesting season occurs when timber growth is dormant and runs from approximately September to March. The operations conducted in the summer months typically focus on pulpwood and on thinning lower-grade or lower value trees from timber stands to encourage the growth of higher-grade or higher value trees.
 
Capital Expenditures
 
A discussion of capital expenditures by business segment is included in Item 7, MD&A under the heading “Investing Cash Flow.”
 
Environmental Matters
 
A discussion of material environmental matters involving the Company is included in Item 7, MD&A under the heading “Environmental Matters” and in Item 8, Note H — Commitments and Contingencies.
 
Miscellaneous
 
The Company and its wholly owned or majority-owned subsidiaries had a total of 1,952 full-time employees at September 30, 2007. Excluding the 23 employees the Company had in its Canadian operations at SECI, this is a decrease of approximately one percent from the 1,970 employees in the Company’s U.S. operations at September 30, 2006.
 
Agreements covering employees in collective bargaining units in New York are scheduled to expire in February 2008. The Company has reached new agreements with the local leadership of those collective bargaining units, and the members of each collective bargaining unit have either approved their respective new agreement or are scheduled to vote on their respective new agreement in December 2007. The new agreements provide for an effective date of February 2008 and an expiration date of February 2013. Certain agreements covering employees in collective bargaining units in Pennsylvania are scheduled to expire in April 2009, and other agreements covering employees in collective bargaining units in Pennsylvania are scheduled to expire in May 2009.
 
The Utility segment has numerous municipal franchises under which it uses public roads and certain other rights-of-way and public property for the location of facilities. When necessary, the Utility segment renews such franchises.
 
The Company makes its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, available free of charge on the Company’s internet website, www.nationalfuelgas.com, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. The information available at the Company’s internet website is not part of this Form 10-K or any other report filed with or furnished to the SEC.


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Executive Officers of the Company as of November 15, 2007 (except as otherwise noted)(1)
 
     
    Current Company
    Positions and
    Other Material
    Business Experience
Name and Age (as of
  During Past
November 15, 2007)
  Five Years
 
Philip C. Ackerman
(63)
  Chairman of the Board of Directors since January 2002; Chief Executive Officer since October 2001; and President of Horizon since September 1995. Mr. Ackerman has served as a Director of the Company since March 1994, and previously served as President of the Company from July 1999 through January 2006.
David F. Smith
(54)
  President of the Company since February 2006; Chief Operating Officer of the Company since February 2006; President of Supply Corporation since April 2005; President of Empire since April 2005. Mr. Smith previously served as Vice President of the Company from April 2005 through January 2006; President of Distribution Corporation from July 1999 to April 2005; and Senior Vice President of Supply Corporation from July 2000 to April 2005.
Ronald J. Tanski
(55)
  Treasurer and Principal Financial Officer of the Company since April 2004; President of Distribution Corporation since February 2006; Treasurer of Distribution Corporation since April 2004; Treasurer of Horizon since February 1997. Mr. Tanski previously served as Controller of the Company from February 2003 through March 2004; Senior Vice President of Distribution Corporation from July 2001 through January 2006; and Controller of Distribution Corporation from February 1997 through March 2004.
Matthew D. Cabell
(49)
  President of Seneca since December 2006. Prior to joining Seneca, Mr. Cabell served as Executive Vice President and General Manager of Marubeni Oil & Gas (USA) Inc., an exploration and production company, from June 2003 to December 2006. From January 2002 to June 2003, Mr. Cabell served as a consultant assisting oil companies in upstream acquisition and divestment transactions as well as Gulf of Mexico entry strategy, first as an independent consultant and then as Vice President of Randall & Dewey, Inc., a major oil and gas transaction advisory firm. Mr. Cabell’s prior employers are not subsidiaries or affiliates of the Company.
Karen M. Camiolo
(48)
  Controller and Principal Accounting Officer of the Company since April 2004; Controller of Distribution Corporation and Supply Corporation since April 2004; and Chief Auditor of the Company from July 1994 through March 2004.
Anna Marie Cellino
(54)
  Secretary of the Company since October 1995; Secretary of Distribution Corporation since September 1999; Senior Vice President of Distribution Corporation since July 2001.
Paula M. Ciprich
(47)
  General Counsel of the Company since January 2005; Assistant Secretary of Distribution Corporation since February 1997.
Donna L. DeCarolis
(48)
  Vice President Business Development of the Company since October 2007. Ms. DeCarolis previously served as President of NFR from January 2005 to October 2007; Secretary of NFR from March 2002 to October 2007; and Vice President of NFR from May 2001 to January 2005.
John R. Pustulka
(55)
  Senior Vice President of Supply Corporation since July 2001.
James D. Ramsdell
(52)
  Senior Vice President of Distribution Corporation since July 2001.
 
 
(1) The executive officers serve at the pleasure of the Board of Directors. The information provided relates to the Company and its principal subsidiaries. Many of the executive officers also have served or currently serve as officers or directors of other subsidiaries of the Company.


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Item 1A    Risk Factors
 
As a holding company, National Fuel depends on its operating subsidiaries to meet its financial obligations.
 
National Fuel is a holding company with no significant assets other than the stock of its operating subsidiaries. In order to meet its financial needs, National Fuel relies exclusively on repayments of principal and interest on intercompany loans made by National Fuel to its operating subsidiaries and income from dividends and other cash flow from the subsidiaries. Such operating subsidiaries may not generate sufficient net income to pay upstream dividends or generate sufficient cash flow to make payments of principal or interest on such intercompany loans.
 
National Fuel is dependent on bank credit facilities and continued access to capital markets to successfully execute its operating strategies.
 
In addition to its longer term debt that is issued to the public under its indentures, National Fuel relies upon shorter term bank borrowings and commercial paper to finance a portion of its operations. National Fuel is dependent on these capital sources to provide capital to its subsidiaries to allow them to acquire, maintain and develop their properties. The availability and cost of these credit sources is cyclical and these capital sources may not remain available to National Fuel or National Fuel may not be able to obtain money at a reasonable cost in the future. National Fuel’s ability to borrow under its credit facilities and commercial paper agreements depends on National Fuel’s compliance with its obligations under the facilities and agreements. In addition, all of National Fuel’s short-term bank loans are in the form of floating rate debt or debt that may have rates fixed for very short periods of time. At present, National Fuel has no active interest rate hedges in place to protect against interest rate fluctuations on short-term bank debt. In addition, the interest rates on National Fuel’s short-term bank loans and the ability of National Fuel to issue commercial paper are affected by its debt credit ratings published by Standard & Poor’s Ratings Service, Moody’s Investors Service and Fitch Ratings Service. A ratings downgrade could increase the interest cost of this debt and decrease future availability of money from banks, commercial paper purchasers and other sources. National Fuel believes it is important to maintain investment grade credit ratings to conduct its business.
 
National Fuel’s credit ratings may not reflect all the risks of an investment in its securities.
 
National Fuel’s credit ratings are an independent assessment of its ability to pay its obligations. Consequently, real or anticipated changes in the Company’s credit ratings will generally affect the market value of the specific debt instruments that are rated, as well as the market value of the Company’s common stock. National Fuel’s credit ratings, however, may not reflect the potential impact on the value of its common stock of risks related to structural, market or other factors discussed in this Form 10-K.
 
National Fuel’s 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 Fuel’s 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.
 
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


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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 have not resulted 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. The PaPUC has reconvened a stakeholder group to explore ways to increase the participation of retail customers in choice programs. 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 Corporation’s 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 Corporation’s 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 Corporation’s business profitably.
 
In its Pipeline and Storage segment, National Fuel is subject to the jurisdiction of the FERC with respect to Supply Corporation, and to the jurisdiction of the NYPSC with respect to Empire. (The FERC has authorized Empire to construct and operate additional facilities (the Empire Connector project). When Empire completes construction and commences operations of the Empire Connector, Empire will at that time become a FERC-regulated pipeline company.) The FERC and the NYPSC, among other things, approve the rates that Supply Corporation and Empire, respectively, 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 Corporation’s 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 Corporation’s or Empire’s earnings may decrease.
 
National Fuel’s liquidity, and in certain circumstances, its earnings, could be adversely affected by the cost of purchasing natural gas during periods in which natural gas prices are rising significantly.
 
Tariff rate schedules in each of the Utility segment’s service territories contain purchased gas adjustment clauses which permit Distribution Corporation to file with state regulators for rate adjustments to recover increases in the cost of purchased gas. Assuming those rate adjustments are granted, increases in the cost of purchased gas have no direct impact on profit margins. Nevertheless, increases in the cost of purchased gas affect cash flows and can therefore impact the amount or availability of National Fuel’s capital resources. National Fuel has issued commercial paper and used short-term borrowings in the past to temporarily finance storage inventories and purchased gas costs, and although National Fuel expects to do so in the future, it may not be able to access the markets for such borrowings at attractive interest rates or at all. Distribution Corporation is required to file an accounting reconciliation with the regulators in each of the Utility segment’s service territories regarding the costs of purchased gas. Due to the nature of the regulatory process, there is a risk of a disallowance of full recovery of these costs during any period in which there has been a substantial upward spike in these costs. Any material disallowance of purchased gas costs could have a material adverse effect on cash flow and earnings. In addition, even when Distribution Corporation is allowed full recovery of these purchased gas costs, during periods when natural gas prices are significantly higher than historical levels, customers may


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have trouble paying the resulting higher bills, and Distribution Corporation’s bad debt expenses may increase and ultimately reduce earnings.
 
Uncertain economic conditions may affect National Fuel’s ability to finance capital expenditures and to refinance maturing debt.
 
National Fuel’s ability to finance capital expenditures and to refinance maturing debt will depend upon general economic conditions in the capital markets. The direction in which interest rates may move is uncertain. Declining interest rates have generally been believed to be favorable to utilities, while rising interest rates are generally believed to be unfavorable, because of the levels of debt that utilities may have outstanding. In addition, National Fuel’s authorized rate of return in its regulated businesses is based upon certain assumptions regarding interest rates. If interest rates are lower than assumed rates, National Fuel’s authorized rate of return could be reduced. If interest rates are higher than assumed rates, National Fuel’s ability to earn its authorized rate of return may be adversely impacted.
 
Decreased oil and natural gas prices could adversely affect revenues, cash flows and profitability.
 
National Fuel’s exploration and production operations are materially dependent on prices received for its oil and natural gas production. Both short-term and long-term price trends affect the economics of exploring for, developing, producing, gathering and processing oil and natural gas. Oil and natural gas prices can be volatile and can be affected by: weather conditions, including natural disasters; the supply and price of foreign oil and natural gas; the level of consumer product demand; national and worldwide economic conditions, including economic disruptions caused by terrorist activities, acts of war or major accidents; political conditions in foreign countries; the price and availability of alternative fuels; the proximity to, and availability of capacity on transportation facilities; regional levels of supply and demand; energy conservation measures; and government regulations, such as regulation of natural gas transportation, royalties, and price controls. National Fuel sells most of its oil and natural gas at current market prices rather than through fixed-price contracts, although as discussed below, National Fuel frequently hedges the price of a significant portion of its future production in the financial markets. The prices National Fuel receives depend upon factors beyond National Fuel’s control, including the factors affecting price mentioned above. National Fuel believes that any prolonged reduction in oil and natural gas prices would restrict its ability to continue the level of exploration and production activity National Fuel otherwise would pursue, which could have a material adverse effect on its revenues, cash flows and results of operations.
 
National Fuel has significant transactions involving price hedging of its oil and natural gas production as well as its fixed price purchase and sale commitments.
 
In order to protect itself to some extent against unusual price volatility and to lock in fixed pricing on oil and natural gas production for certain periods of time, National Fuel periodically enters into commodity price derivatives contracts (hedging arrangements) with respect to a portion of its expected production. These contracts may at any time cover as much as approximately 80% of National Fuel’s expected energy production during the upcoming 12-month period. These contracts reduce exposure to subsequent price drops but can also limit National Fuel’s ability to benefit from increases in commodity prices. In addition, the Energy Marketing segment enters into certain hedging arrangements, primarily with respect to its fixed price purchase and sales commitments and its volumes of gas stored underground. National Fuel’s Pipeline and Storage segment enters into hedging arrangements with respect to certain sales of efficiency gas, and the All Other category has hedging arrangements in place with respect to certain volumes of landfill gas committed for sale.
 
Under the applicable accounting rules, the Company’s hedging arrangements are subject to quarterly effectiveness tests. Inherent within those effectiveness tests are assumptions concerning the long-term price differential between different types of crude oil, assumptions concerning the difference between published natural gas price indexes established by pipelines in which hedged natural gas production is delivered and the reference price established in the hedging arrangements, assumptions regarding the levels of production that will be achieved and, with regard to fixed price commitments, assumptions regarding the creditworthiness of certain customers and their forecasted consumption of natural gas. Depending on market conditions for natural


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gas and crude oil and the levels of production actually achieved, it is possible that certain of those assumptions may change in the future, and, depending on the magnitude of any such changes, it is possible that a portion of the Company’s hedges may no longer be considered highly effective. In that case, gains or losses from the ineffective derivative financial instruments would be marked-to-market on the income statement without regard to an underlying physical transaction. Gains would occur to the extent that hedge prices exceed market prices, and losses would occur to the extent that market prices exceed hedge prices.
 
Use of energy commodity price hedges also exposes National Fuel to the risk of non-performance by a contract counterparty. These parties might not be able to perform their obligations under the hedge arrangements.
 
It is National Fuel’s policy that the use of commodity derivatives contracts comply with various restrictions in effect in respective business segments. For example, in the Exploration and Production segment, commodity derivatives contracts must be confined to the price hedging of existing and forecast production, and in the Energy Marketing segment, commodity derivatives with respect to fixed price purchase and sales commitments must be matched against commitments reasonably certain to be fulfilled. Similar restrictions apply in the Pipeline and Storage segment and the All Other category. National Fuel maintains a system of internal controls to monitor compliance with its policy. However, unauthorized speculative trades, if they were to occur, could expose National Fuel to substantial losses to cover positions in its derivatives contracts. In addition, in the event the Company’s actual production of oil and natural gas falls short of hedged forecast production, the Company may incur substantial losses to cover its hedges.
 
You should not place undue reliance on reserve information because such information represents estimates.
 
This Form 10-K contains estimates of National Fuel’s proved oil and natural gas reserves and the future net cash flows from those reserves that were prepared by National Fuel’s petroleum engineers and audited by independent petroleum engineers. Petroleum engineers consider many factors and make assumptions in estimating National Fuel’s oil and natural gas reserves and future net cash flows. These factors include: historical production from the area compared with production from other producing areas; the assumed effect of governmental regulation; and assumptions concerning oil and natural gas prices, production and development costs, severance and excise taxes, and capital expenditures. Lower oil and natural gas prices generally cause estimates of proved reserves to be lower. Estimates of reserves and expected future cash flows prepared by different engineers, or by the same engineers at different times, may differ substantially. Ultimately, actual production, revenues and expenditures relating to National Fuel’s reserves will vary from any estimates, and these variations may be material. Accordingly, the accuracy of National Fuel’s reserve estimates is a function of the quality of available data and of engineering and geological interpretation and judgment.
 
If conditions remain constant, then National Fuel is reasonably certain that its reserve estimates represent economically recoverable oil and natural gas reserves and future net cash flows. If conditions change in the future, then subsequent reserve estimates may be revised accordingly. You should not assume that the present value of future net cash flows from National Fuel’s proved reserves is the current market value of National Fuel’s estimated oil and natural gas reserves. In accordance with SEC requirements, National Fuel bases the estimated discounted future net cash flows from its proved reserves on prices and costs as of the date of the estimate. Actual future prices and costs may differ materially from those used in the net present value estimate. Any significant price changes will have a material effect on the present value of National Fuel’s reserves.
 
Petroleum engineering is a subjective process of estimating underground accumulations of natural gas and other hydrocarbons that cannot be measured in an exact manner. The process of estimating oil and natural gas reserves is complex. The process involves significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each reservoir. Future economic and operating conditions are uncertain, and changes in those conditions could cause a revision to National Fuel’s future reserve estimates. Estimates of economically recoverable oil and natural gas reserves and of future net cash flows depend upon a number of variable factors and assumptions, including historical production from the area compared with production from other comparable producing areas, and the assumed effects of regulations by


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governmental agencies. Because all reserve estimates are to some degree subjective, each of the following items may differ materially from those assumed in estimating reserves: the quantities of oil and natural gas that are ultimately recovered, the timing of the recovery of oil and natural gas reserves, the production and operating costs incurred, the amount and timing of future development and abandonment expenditures, and the price received for the production.
 
The amount and timing of actual future oil and natural gas production and the cost of drilling are difficult to predict and may vary significantly from reserves and production estimates, which may reduce National Fuel’s earnings.
 
There are many risks in developing oil and natural gas, including numerous uncertainties inherent in estimating quantities of proved oil and natural gas reserves and in projecting future rates of production and timing of development expenditures. The future success of National Fuel’s Exploration and Production segment depends on its ability to develop additional oil and natural gas reserves that are economically recoverable, and its failure to do so may reduce National Fuel’s earnings. The total and timing of actual future production may vary significantly from reserves and production estimates. National Fuel’s drilling of development wells can involve significant risks, including those related to timing, success rates, and cost overruns, and these risks can be affected by lease and rig availability, geology, and other factors. Drilling for oil and natural gas can be unprofitable, not only from dry wells, but from productive wells that do not produce sufficient revenues to return a profit. Also, title problems, weather conditions, governmental requirements, and shortages or delays in the delivery of equipment and services can delay drilling operations or result in their cancellation. The cost of drilling, completing, and operating wells is often uncertain, and new wells may not be productive or National Fuel may not recover all or any portion of its investment. Without continued successful exploitation or acquisition activities, National Fuel’s reserves and revenues will decline as a result of its current reserves being depleted by production. National Fuel cannot assure you that it will be able to find or acquire additional reserves at acceptable costs.
 
Financial accounting requirements regarding exploration and production activities may affect National Fuel’s profitability.
 
National Fuel accounts for its exploration and production activities under the full cost method of accounting. Each quarter, on a country-by-country basis, 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 Fuel’s Exploration and Production segment last recorded an impairment charge under the full cost method of accounting in 2006. Because of the variability in National Fuel’s investment in oil and natural gas properties and the volatile nature of commodity prices, National Fuel cannot predict when in the future it may again be affected by such an impairment calculation.
 
Environmental regulation significantly affects National Fuel’s business.
 
National Fuel’s business operations are subject to federal, state, and local laws and regulations relating to environmental protection. These laws and regulations concern the generation, storage, transportation, disposal or discharge of contaminants into the environment and the general protection of public health, natural resources, wildlife and the environment. Costs of compliance and liabilities could negatively affect National Fuel’s results of operations, financial condition and cash flows. In addition, compliance with environmental laws and regulations could require unexpected capital expenditures at National Fuel’s facilities. Because the costs of complying with environmental regulations are significant, additional regulation could negatively affect National Fuel’s business. Although National Fuel cannot predict the impact of the interpretation or enforcement


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of EPA standards or other federal, state and local regulations, National Fuel’s costs could increase if environmental laws and regulations become more strict.
 
The nature of National Fuel’s operations presents inherent risks of loss that could adversely affect its results of operations, financial condition and cash flows.
 
National Fuel’s operations in its various segments are subject to inherent hazards and risks such as: fires; natural disasters; explosions; geological formations with abnormal pressures; blowouts during well drilling; collapses of wellbore casing or other tubulars; pipeline ruptures; spills; and other hazards and risks that may cause personal injury, death, property damage, environmental damage or business interruption losses. Additionally, National Fuel’s facilities, machinery, and equipment may be subject to sabotage. Any of these events could cause a loss of hydrocarbons, environmental pollution, claims for personal injury, death, property damage or business interruption, or governmental investigations, recommendations, claims, fines or penalties. As protection against operational hazards, National Fuel maintains insurance coverage against some, but not all, potential losses. In addition, many of the agreements that National Fuel executes with contractors provide for the division of responsibilities between the contractor and National Fuel, and National Fuel seeks to obtain an indemnification from the contractor for certain of these risks. National Fuel is not always able, however, to secure written agreements with its contractors that contain indemnification, and sometimes National Fuel is required to indemnify others.
 
Insurance or indemnification agreements when obtained may not adequately protect National Fuel against liability from all of the consequences of the hazards described above. The occurrence of an event not fully insured or indemnified against, the imposition of fines, penalties or mandated programs by governmental authorities, the failure of a contractor to meet its indemnification obligations, or the failure of an insurance company to pay valid claims could result in substantial losses to National Fuel. In addition, insurance may not be available, or if available may not be adequate, to cover any or all of these risks. It is also possible that insurance premiums or other costs may rise significantly in the future, so as to make such insurance prohibitively expensive.
 
Due to the significant cost of insurance coverage for named windstorms in the Gulf of Mexico, National Fuel determined that it was not economical to purchase insurance to fully cover its exposures related to such storms. It is possible that named windstorms in the Gulf of Mexico could have a material adverse effect on National Fuel’s results of operations, financial condition and cash flows.
 
Hazards and risks faced by National Fuel, and insurance and indemnification obtained or provided by National Fuel, may subject National Fuel to litigation or administrative proceedings from time to time. Such litigation or proceedings could result in substantial monetary judgments, fines or penalties against National Fuel or be resolved on unfavorable terms, the result of which could have a material adverse effect on National Fuel’s results of operations, financial condition and cash flows.
 
National Fuel may be adversely affected by economic conditions.
 
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 Fuel’s revenues and cash flows or restrict its future growth. Economic conditions in National Fuel’s utility service territories also impact its collections of accounts receivable.
 
Item 1B    Unresolved Staff Comments
 
None


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Item 2    Properties
 
General Information on Facilities
 
The net investment of the Company in property, plant and equipment was $2.9 billion at September 30, 2007. Approximately 62% of this investment was in the Utility and Pipeline and Storage segments, which are primarily located in western and central New York and northwestern Pennsylvania. The Exploration and Production segment, which has the next largest investment in net property, plant and equipment (34%), is primarily located in California, in the Appalachian region of the United States, in Wyoming, and in the Gulf Coast region of Texas, Louisiana, and Alabama. The remaining net investment in property, plant and equipment consisted of the Timber segment (3%) which is located primarily in northwestern Pennsylvania, and All Other and Corporate operations (1%). During the past five years, the Company has made additions to property, plant and equipment in order to expand and improve transmission and distribution facilities for both retail and transportation customers. Net property, plant and equipment has increased $33.7 million, or 1.2%, since 2002. During 2007, the Company sold SECI, Seneca’s wholly owned subsidiary that operated in Canada. The net property, plant and equipment of SECI at the date of sale was $107.7 million. In addition, during 2005, the Company sold its majority interest in U.E., a district heating and electric generation business in the Czech Republic. The net property, plant and equipment of U.E. at the date of sale was $223.9 million.
 
The Utility segment had a net investment in property, plant and equipment of $1.1 billion at September 30, 2007. The net investment in its gas distribution network (including 14,813 miles of distribution pipeline) and its service connections to customers represent approximately 53% and 33%, respectively, of the Utility segment’s net investment in property, plant and equipment at September 30, 2007.
 
The Pipeline and Storage segment had a net investment of $681.9 million in property, plant and equipment at September 30, 2007. Transmission pipeline represents 33% of this segment’s total net investment and includes 2,495 miles of pipeline required to move large volumes of gas throughout its service area. Storage facilities represent 24% of this segment’s total net investment and consist of 32 storage fields, four of which are jointly owned and operated with certain pipeline suppliers, and 441 miles of pipeline. Net investment in storage facilities includes $89.8 million of gas stored underground-noncurrent, representing the cost of the gas required to maintain pressure levels for normal operating purposes as well as gas maintained for system balancing and other purposes, including that needed for no-notice transportation service. The Pipeline and Storage segment has 28 compressor stations with 75,404 installed compressor horsepower that represent 14% of this segment’s total net investment in property, plant and equipment.
 
The Exploration and Production segment had a net investment in property, plant and equipment of $982.7 million at September 30, 2007.
 
The Timber segment had a net investment in property, plant and equipment of $89.9 million at September 30, 2007. Located primarily in northwestern Pennsylvania, the net investment includes two sawmills, 103,700 acres of land and timber, and 3,105 acres of timber rights.
 
The Utility and Pipeline and Storage segments’ facilities provided the capacity to meet the Company’s 2007 peak day sendout, including transportation service, of 1,743 MMcf, which occurred on February 5, 2007. Withdrawals from storage of 779.3 MMcf provided approximately 44.7% of the requirements on that day.
 
Company maps are included in exhibit 99.2 of this Form 10-K and are incorporated herein by reference.
 
Exploration and Production Activities
 
The Company is engaged in the exploration for, and the development and purchase of, natural gas and oil reserves in California, in the Appalachian region of the United States, in Wyoming, and in the Gulf Coast region of Texas, Louisiana, and Alabama. Also, Exploration and Production operations were conducted in the provinces of Alberta, Saskatchewan and British Columbia in Canada, until the sale of these properties on August 31, 2007. Further discussion of the sale of the Canadian oil and gas properties is included in Item 8, Note-I-Discontinued Operations. Further discussion of oil and gas producing activities is included in Item 8, Note O-Supplementary Information for Oil and Gas Producing Activities. Note O sets forth proved developed


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and undeveloped reserve information for Seneca. Seneca’s proved developed and undeveloped natural gas reserves decreased from 233 Bcf at September 30, 2006 to 205 Bcf at September 30, 2007. This decrease is attributed primarily to the sale of the Canadian gas properties (40.1 Bcf) and production of 26.3 Bcf. These decreases were partially offset by extensions and discoveries of 34.6 Bcf, primarily in the Appalachian region (29.7 Bcf). Seneca’s proved developed and undeveloped oil reserves decreased from 58,018 Mbbl at September 30, 2006 to 47,586 Mbbl at September 30, 2007. This decrease is attributed to revisions of previous estimates (5,963 Mbbl), primarily occurring in California, production (3,450 Mbbl) and the sale of the Canadian oil properties (1,458 Mbbl). Seneca’s proved developed and undeveloped natural gas reserves decreased from 238 Bcf at September 30, 2005 to 233 Bcf at September 30, 2006. This decrease is attributed primarily to production and downward reserve revisions related primarily to the Canadian properties. These decreases were partially offset by extensions and discoveries. The downward reserve revisions were largely a function of a significant decrease in gas prices during the fourth quarter of 2006. Seneca’s proved developed and undeveloped oil reserves decreased from 60,257 Mbbl at September 30, 2005 to 58,018 Mbbl at September 30, 2006. This decrease is attributed mostly to production.
 
Seneca’s oil and gas reserves reported in Item 8 at Note O as of September 30, 2007 were estimated by Seneca’s geologists and engineers and were audited by independent petroleum engineers from Netherland, Sewell & Associates, Inc. Seneca reports its oil and gas reserve information on an annual basis to the Energy Information Administration (EIA), a statistical agency of the U.S. Department of Energy. The oil and gas reserve information reported to the EIA showed 211 Bcf and 59,246 Mbbl of gas and oil reserves, respectively, which differs from the reserve information summarized in Item 8 at Note O. The reasons for this difference are as follows: (a) reserves are reported to the EIA on a calendar year basis, while reserves disclosed in Item 8 at Note O are shown on a fiscal year basis; (b) reserves reported to the EIA include only properties operated by Seneca, while reserves disclosed in Item 8 at Note O included both Seneca operated properties and non-operated properties in which Seneca has an interest; and (c) reserves are reported to the EIA on a gross basis verses the reserves disclosed in Item 8 at Note O, which are reported on a net revenue interest basis.
 
The following is a summary of certain oil and gas information taken from Seneca’s records. All monetary amounts are expressed in U.S. dollars.
 
Production
 
                         
    For The Year Ended September 30  
    2007     2006     2005  
 
United States
                       
Gulf Coast Region
                       
Average Sales Price per Mcf of Gas
  $ 6.58     $ 8.01     $ 7.05  
Average Sales Price per Barrel of Oil
  $ 63.04     $ 64.10     $ 49.78  
Average Sales Price per Mcf of Gas (after hedging)
  $ 6.87     $ 5.89     $ 6.01  
Average Sales Price per Barrel of Oil (after hedging)
  $ 64.09     $ 47.46     $ 35.03  
Average Production (Lifting) Cost per Mcf Equivalent of Gas and Oil Produced
  $ 1.08     $ 0.86     $ 0.71  
Average Production per Day (in MMcf Equivalent of Gas and Oil Produced)
    40       36       50  
West Coast Region
                       
Average Sales Price per Mcf of Gas
  $ 6.54     $ 7.93     $ 6.85  
Average Sales Price per Barrel of Oil
  $ 56.86     $ 56.80     $ 42.91  
Average Sales Price per Mcf of Gas (after hedging)
  $ 6.82     $ 7.19     $ 6.15  
Average Sales Price per Barrel of Oil (after hedging)
  $ 47.43     $ 37.69     $ 23.01  
Average Production (Lifting) Cost per Mcf Equivalent of Gas and Oil Produced
  $ 1.54     $ 1.35     $ 1.15  


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    For The Year Ended September 30  
    2007     2006     2005  
 
Average Production per Day (in MMcf Equivalent of Gas and Oil Produced)
    50       53       53  
Appalachian Region
                       
Average Sales Price per Mcf of Gas
  $ 7.48     $ 9.53     $ 7.60  
Average Sales Price per Barrel of Oil
  $ 62.26     $ 65.28     $ 48.28  
Average Sales Price per Mcf of Gas (after hedging)
  $ 8.25     $ 8.90     $ 7.01  
Average Sales Price per Barrel of Oil (after hedging)
  $ 62.26     $ 65.28     $ 48.28  
Average Production (Lifting) Cost per Mcf Equivalent of Gas and Oil Produced
  $ 0.69     $ 0.69     $ 0.63  
Average Production per Day (in MMcf Equivalent of Gas and Oil Produced)
    17       15       13  
Total United States
                       
Average Sales Price per Mcf of Gas
  $ 6.82     $ 8.42     $ 7.13  
Average Sales Price per Barrel of Oil
  $ 58.43     $ 58.47     $ 44.87  
Average Sales Price per Mcf of Gas (after hedging)
  $ 7.25     $ 7.02     $ 6.26  
Average Sales Price per Barrel of Oil (after hedging)
  $ 51.68     $ 40.26     $ 26.59  
Average Production (Lifting) Cost per Mcf Equivalent of Gas and Oil Produced
  $ 1.23     $ 1.09     $ 0.90  
Average Production per Day (in MMcf Equivalent of Gas and Oil Produced)
    108       104       117  
Canada — Discontinued Operations
                       
Average Sales Price per Mcf of Gas
  $ 6.09     $ 7.14     $ 6.15  
Average Sales Price per Barrel of Oil
  $ 50.06     $ 51.40     $ 42.97  
Average Sales Price per Mcf of Gas (after hedging)
  $ 6.17     $ 7.47     $ 6.14  
Average Sales Price per Barrel of Oil (after hedging)
  $ 50.06     $ 51.40     $ 42.97  
Average Production (Lifting) Cost per Mcf Equivalent of Gas and Oil Produced
  $ 1.94     $ 1.57     $ 1.29  
Average Production per Day (in MMcf Equivalent of Gas and Oil Produced)
    21       26       27  
Total Company
                       
Average Sales Price per Mcf of Gas
  $ 6.64     $ 8.04     $ 6.86  
Average Sales Price per Barrel of Oil
  $ 57.93     $ 57.94     $ 44.72  
Average Sales Price per Mcf of Gas (after hedging)
  $ 6.98     $ 7.15     $ 6.23  
Average Sales Price per Barrel of Oil (after hedging)
  $ 51.58     $ 41.10     $ 27.86  
Average Production (Lifting) Cost per Mcf Equivalent of Gas and Oil Produced
  $ 1.35     $ 1.18     $ 0.98  
Average Production per Day (in MMcf Equivalent of Gas and Oil Produced)
    129       130       144  
 
Productive Wells
 
                                                                 
    Gulf Coast
    West Coast
    Appalachian
       
    Region     Region     Region     Total Company  
At September 30, 2007
  Gas     Oil     Gas     Oil     Gas     Oil     Gas     Oil  
 
Productive Wells — Gross
    33       37             1,313       2,347       7       2,380       1,357  
Productive Wells — Net
    19       16             1,305       2,274       6       2,293       1,327  

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Developed and Undeveloped Acreage
 
                                 
    Golf
    West
             
    Coast
    Coast
    Appalachian
    Total
 
At September 30, 2007
  Region     Region     Region     Company  
 
Developed Acreage
                               
— Gross
    141,425       11,058       515,400       667,883  
— Net
    97,756       10,688       488,907       597,351  
Undeveloped Acreage
                               
— Gross
    148,960             472,407       621,367  
— Net
    89,921             447,802       537,723  
 
As of September 30, 2007, the aggregate amount of gross undeveloped acreage expiring in the next three years and thereafter are as follows: 23,332 acres in 2008 (12,707 net acres), 38,741 acres in 2009 (23,219 net acres), 23,038 acres in 2010 (11,491 net acres), and 536,256 acres thereafter (490,306 net acres).
 
Drilling Activity
 
                                                 
    Productive     Dry  
For the Year Ended September 30
  2007     2006     2005     2007     2006     2005  
 
United States
                                               
Gulf Coast Region
                                               
Net Wells Completed
                                               
— Exploratory
    1.31       2.94       1.30       1.42       0.85       0.47  
— Development
    1.00       0.78       0.23       0.67              
West Coast Region
                                               
Net Wells Completed
                                               
— Exploratory
    0.50                                
— Development
    58.99       92.98       116.97       2.00       1.00        
Appalachian Region
                                               
Net Wells Completed
                                               
— Exploratory
    8.10       3.88       3.00                   4.00  
— Development
    184.00       140.58       45.00       2.00       1.75       1.00  
Total United States
                                               
Net Wells Completed
                                               
— Exploratory
    9.91       6.82       4.30       1.42       0.85       4.47  
— Development
    243.99       234.34       162.20       4.67       2.75       1.00  
Canada — Discontinued Operations
                                               
Net Wells Completed
                                               
— Exploratory
    6.38       12.60       21.14             1.35       2.00  
— Development
    1.80       2.50       3.50             1.00        
Total
                                               
Net Wells Completed
                                               
— Exploratory
    16.29       19.42       25.44       1.42       2.20       6.47  
— Development
    245.79       236.84       165.70       4.67       3.75       1.00  


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Present Activities
 
                                 
    Gulf
    West
             
    Coast
    Coast
    Appalachian
    Total
 
At September 30, 2007
  Region     Region     Region     Company  
 
Wells in Process of Drilling(1)
                               
— Gross
    2.00       4.00       90.00       96.00  
— Net
    1.30       4.00       88.00       93.30  
 
 
(1) Includes wells awaiting completion.
 
Item 3    Legal Proceedings
 
In an action instituted in the New York State Supreme Court, Kings County on February 18, 2003 against Distribution Corporation and Paul J. Hissin, an unaffiliated third party, plaintiff Donna Fordham-Coleman, as administratrix of the estate of Velma Arlene Fordham, alleges that Distribution Corporation’s failure to initiate natural gas service, despite an attempt to do so, at an apartment leased to the plaintiff’s decedent, Velma Arlene Fordham, caused the decedent’s death in February 2001. The plaintiff sought damages for wrongful death and pain and suffering, plus punitive damages. Distribution Corporation denied plaintiff’s material allegations, asserted seven affirmative defenses and asserted a cross-claim against the co-defendant. Distribution Corporation believes, and has vigorously asserted, that plaintiff’s allegations lack merit. The court changed venue of the action to New York State Supreme Court, Erie County. Trial was scheduled to begin October 15, 2007. However, the parties resolved the action.
 
On June 8, 2006, the NTSB issued safety recommendations to Distribution Corporation, the PaPUC and certain others as a result of its investigation of a natural gas explosion that occurred on Distribution Corporation’s system in Dubois, Pennsylvania in August 2004. For a discussion of this matter, refer to Part II, Item 7 — MD&A of this report under the heading “Other Matters — Rate and Regulatory Matters.”
 
On November 8, 2007, Distribution Corporation filed a complaint with the PaPUC requesting that the PaPUC commence an investigation to determine whether New Mountain Vantage GP, L.L.C. (New Mountain), and others acting in concert with it, have violated Pennsylvania law by acquiring control of Distribution Corporation without the prior approval of the PaPUC. In the event the PaPUC finds that New Mountain and others acting in concert with it have not yet acquired control of Distribution Corporation, Distribution Corporation petitioned the PaPUC for an order requiring New Mountain to show cause why it should not be required to apply for and receive a certificate of public convenience prior to acquiring control of Distribution Corporation, and requiring that the certificate of public convenience be obtained prior to any vote of stockholders of the Company which could result in the acquisition of control over Distribution Corporation. According to a November 6, 2007 filing with the SEC, New Mountain and certain other holders acknowledging acting with New Mountain as part of a group for purposes of the federal securities laws collectively own 9.7% of the outstanding shares of the Company. Distribution Corporation alleges in its filing with the PaPUC that New Mountain and others acting in concert with it have acquired or are seeking to acquire control of the Company, which results or would result in the acquisition of indirect control over Distribution Corporation. On November 21, 2007, New Mountain filed preliminary objections to Distribution Corporation’s complaint and petition and requested that the PaPUC rule on the preliminary objections at its December 20, 2007 public meeting. In addition, two agencies of the Commonwealth of Pennsylvania, the Office of Consumer Advocate and the Office of Small Business Advocate, petitioned the PaPUC to intervene in the proceeding, and the Office of Small Business Advocate requested evidentiary hearings. Distribution Corporation anticipates that its response to New Mountain’s preliminary objections will request that the PaPUC, at its December 20, 2007 public meeting, initiate an investigation by issuing an order for New Mountain to show cause why it should not be required to apply for and receive a certificate of public convenience prior to acquiring control of Distribution Corporation.
 
The resolution of the Fordham-Coleman action described above will not have a material effect on the consolidated financial condition, results of operations, or cash flow of the Company. The Company believes, based on the information presently known, that the ultimate resolution of the matters before the PaPUC


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described above will not be material to the consolidated financial condition, results of operations, or cash flow of the Company. No assurances can be given, however, as to the ultimate outcomes of those matters, and it is possible that the outcomes could be material to the consolidated financial condition, results of operations or cash flow of the Company.
 
For a discussion of various environmental and other matters, refer to Part II, Item 7, MD&A and Item 8 at Note H — Commitments and Contingencies.
 
In addition to the matters disclosed above, 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 Company’s present liquidity position, nor to have a material adverse effect on the financial condition of the Company.
 
Item 4    Submission of Matters to a Vote of Security Holders
 
No matter was submitted to a vote of security holders during the quarter ended September 30, 2007.
 
PART II
 
Item 5    Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Information regarding the market for the Company’s common equity and related stockholder matters appears under Item 12 at Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, Item 8 at Note E-Capitalization and Short-Term Borrowings and Note N-Market for Common Stock and Related Shareholder Matters (unaudited).
 
On July 2, 2007, the Company issued a total of 2,400 unregistered shares of Company common stock to the eight non-employee directors of the Company serving on the Board of 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 September 30, 2007, pursuant to the Company’s Retainer Policy for Non-Employee Directors. 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
    Maximum Number
 
                of Shares
    of Shares
 
                Purchased as
    that May
 
                Part of
    Yet Be
 
                Publicly Announced
    Purchased Under
 
    Total Number
    Average Price
    Share Repurchase
    Share Repurchase
 
    of Shares
    Paid per
    Plans or
    Plans or
 
Period
  Purchased(a)     Share     Programs     Programs(b)  
 
July 1-31, 2007
    7,317     $ 44.75             4,278,122  
Aug. 1-31, 2007
    124,254     $ 41.93       113,000       4,165,122  
Sept. 1-30, 2007
    22,622     $ 44.97             4,165,122  
                                 
Total
    154,193     $ 42.51       113,000       4,165,122  
                                 
 
 
(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 Company’s 401(k) plans, (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, and (iii) shares of common


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stock of the Company purchased on the open market pursuant to the Company’s publicly announced share repurchase program. Shares purchased other than through a publicly announced share repurchase program totaled 7,317 in July 2007, 11,254 in August 2007 and 22,622 in September 2007 (a three-month total of 41,193). Of those shares, 23,498 were purchased for the Company’s 401(k) plans and 17,695 were purchased as a result of shares tendered to the Company by holders of stock options or shares of restricted stock.
 
(b) On December 8, 2005, the Company’s Board of Directors authorized the repurchase of up to eight million shares of the Company’s common stock. Repurchases may be made from time to time in the open market or through private transactions.
 
Item 6    Selected Financial Data(1)
 
                                         
    Year Ended September 30  
    2007     2006     2005     2004     2003  
    (Thousands)  
 
Summary of Operations
                                       
Operating Revenues
  $ 2,039,566     $ 2,239,675     $ 1,860,774     $ 1,867,875     $ 1,821,899  
                                         
Operating Expenses:
                                       
Purchased Gas
    1,018,081       1,267,562       959,827       949,452       963,567  
Operation and Maintenance
    396,408       395,289       388,094       374,010       330,316  
Property, Franchise and Other Taxes
    70,660       69,202       68,164       68,378       72,073  
Depreciation, Depletion and Amortization
    157,919       151,999       156,502       159,184       154,634  
                                         
      1,643,068       1,884,052       1,572,587       1,551,024       1,520,590  
Gain (Loss) on Sale of Timber Properties
                      (1,252 )     168,787  
Operating Income
    396,498       355,623       288,187       315,599       470,096  
Other Income (Expense):
                                       
Income from Unconsolidated Subsidiaries
    4,979       3,583       3,362       805       535  
Impairment of Investment in Partnership
                (4,158 )            
Interest Income
    1,550       9,409       6,236       1,771       2,427  
Other Income
    4,936       2,825       12,744       2,908       2,204  
Interest Expense on Long-Term Debt
    (68,446 )     (72,629 )     (73,244 )     (82,989 )     (91,381 )
Other Interest Expense
    (6,029 )     (5,952 )     (9,069 )     (6,354 )     (11,010 )
                                         
Income from Continuing Operations Before Income Taxes
    333,488       292,859       224,058       231,740       372,871  
Income Tax Expense
    131,813       108,245       85,621       89,820       116,795  
                                         
Income from Continuing Operations
    201,675       184,614       138,437       141,920       256,076  
                                         
Discontinued Operations:
                                       
Income (Loss) from Operations, Net of Tax
    15,479       (46,523 )     25,277       24,666       (68,240 )
Gain on Disposal, Net of Tax
    120,301             25,774              
                                         
Income (Loss) from Discontinued Operations, Net of Tax
    135,780       (46,523 )     51,051       24,666       (68,240 )
                                         


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    Year Ended September 30  
    2007     2006     2005     2004     2003  
    (Thousands)  
 
Income Before Cumulative Effect of Changes in Accounting
    337,455       138,091       189,488       166,586       187,836  
Cumulative Effect of Changes in Accounting
                            (8,892 )
                                         
Net Income Available for Common Stock
  $ 337,455     $ 138,091     $ 189,488     $ 166,586     $ 178,944  
                                         
Per Common Share Data
                                       
Basic Earnings from Continuing Operations per Common Share
  $ 2.43     $ 2.20     $ 1.66     $ 1.73     $ 3.17  
Diluted Earnings from Continuing Operations per Common Share
  $ 2.37     $ 2.15     $ 1.63     $ 1.71     $ 3.15  
Basic Earnings per Common Share(2)
  $ 4.06     $ 1.64     $ 2.27     $ 2.03     $ 2.21  
Diluted Earnings per Common Share(2)
  $ 3.96     $ 1.61     $ 2.23     $ 2.01     $ 2.20  
Dividends Declared
  $ 1.22     $ 1.18     $ 1.14     $ 1.10     $ 1.06  
Dividends Paid
  $ 1.21     $ 1.17     $ 1.13     $ 1.09     $ 1.05  
Dividend Rate at Year-End
  $ 1.24     $ 1.20     $ 1.16     $ 1.12     $ 1.08  
At September 30:
                                       
Number of Registered Shareholders
    16,989       17,767       18,369       19,063       19,217  
                                         
Net Property, Plant and Equipment
                                       
Utility
  $ 1,099,280     $ 1,084,080     $ 1,064,588     $ 1,048,428     $ 1,028,393  
Pipeline and Storage
    681,940       674,175       680,574       696,487       705,927  
Exploration and Production(3)
    982,698       1,002,265       974,806       923,730       925,833  
Energy Marketing
    102       59       97       80       171  
Timber
    89,902       90,939       94,826       82,838       87,600  
All Other
    16,735       17,394       18,098       21,172       22,042  
Corporate(4)
    7,748       8,814       6,311       234,029       221,082  
                                         
Total Net Plant
  $ 2,878,405     $ 2,877,726     $ 2,839,300     $ 3,006,764     $ 2,991,048  
                                         
Total Assets
  $ 3,888,412     $ 3,763,748     $ 3,749,753     $ 3,738,103     $ 3,740,944  
                                         
Capitalization
                                       
Comprehensive Shareholders’ Equity
  $ 1,630,119     $ 1,443,562     $ 1,229,583     $ 1,253,701     $ 1,137,390  
Long-Term Debt, Net of Current Portion
    799,000       1,095,675       1,119,012       1,133,317       1,147,779  
                                         
Total Capitalization
  $ 2,429,119     $ 2,539,237     $ 2,348,595     $ 2,387,018     $ 2,285,169  
                                         
 
 
(1) Certain prior year amounts have been reclassified to conform with current year presentation.
 
(2) Includes discontinued operations and cumulative effect of changes in accounting.
 
(3) Includes net plant of SECI discontinued operations as follows: $0 for 2007, $88,023 for 2006, $170,929 for 2005, $142,860 for 2004, and $116,487 for 2003.
 
(4) Includes net plant of the former international segment as follows: $38 for 2007, $27 for 2006, $20 for 2005, $227,905 for 2004, and $219,199 for 2003.

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Item 7    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
OVERVIEW
 
The Company is a diversified energy company consisting of five reportable business segments. Refer to Item 1, Business, for a more detailed description of each of the segments. This Item 7, MD&A, provides information concerning:
 
1. The critical accounting estimates of the Company;
 
2. Changes in revenues and earnings of the Company under the heading, “Results of Operations;”
 
3. Operating, investing and financing cash flows under the heading “Capital Resources and Liquidity;”
 
4. Off-Balance Sheet Arrangements;
 
5. Contractual Obligations; and
 
  6.  Other Matters, including: (a) 2007 and 2008 funding to the Company’s defined benefit retirement plan and post-retirement benefit plan, (b) realizability of deferred tax assets, (c) disclosures and tables concerning market risk sensitive instruments, (d) rate and regulatory matters in the Company’s New York, Pennsylvania and FERC regulated jurisdictions, (e) environmental matters, and (f) new accounting pronouncements.
 
The information in MD&A should be read in conjunction with the Company’s financial statements in Item 8 of this report.
 
The event that had the most significant earnings impact in 2007, and the main reason for the significant earnings increase over 2006, was the Company’s sale of SECI, Seneca’s wholly owned subsidiary that operated in Canada. SECI was engaged in the exploration for, and the development and purchase of, natural gas and oil reserves in the provinces of Alberta, Saskatchewan and British Columbia in Canada. This sale resulted in a $120.3 million gain, net of tax. The decision to sell SECI was based on lower than expected returns from the Canadian oil and gas properties combined with difficulty in finding significant new reserves. As a result of the decision to sell SECI, the Company began presenting all SECI operations as discontinued operations in September 2007. Also contributing to the increase in earnings over 2006 was the non-recurrence of impairment charges of $68.6 million related to the Exploration and Production segment’s Canadian oil and gas assets recognized during 2006 under the full cost method of accounting, which is discussed below under Critical Accounting Estimates. Seneca intends to continue its exploration and development activities in the Gulf of Mexico, in California and in Appalachia, subject to regular re-evaluation of its efforts and opportunities in each region.
 
The Company spent $247.6 million on capital expenditures related to continuing operations during 2007, with approximately 59% being spent in the Exploration and Production segment. This was in line with the Company’s expectations. As mentioned above, Seneca will continue its exploration and development activities in Appalachia, in California and in the Gulf of Mexico. In Appalachia, drilling will be accelerated. Seneca intends to commence drilling of 280 wells for shallow tight sand targets in fiscal 2008, a 20% increase over the 233 such wells drilled in 2007. In addition, Seneca anticipates continued drilling in the deeper Marcellus Shale formation in Appalachia with its joint venture partner, EOG Resources, Inc. Seneca expects that as many as eighteen Marcellus Shale wells will be drilled on its acreage in 2008, ten of which are expected to be horizontal wells. In the Gulf of Mexico, Seneca’s strategy will be to follow a focused drilling plan in the specific areas where the Company has expertise and past success.
 
The Company took a significant step forward this year regarding the Empire Connector project. In June 2007, Empire signed a firm transportation service agreement with KeySpan Gas East Corporation, thereby obligating Empire to provide transportation service that will require construction of the Empire Connector project. Construction of the Empire Connector began in September 2007 and 20 miles will be completed by December 2007. The Company expects to complete the project by November 1, 2008. The total cost to the Company of the Empire Connector project is estimated at $177 million, after giving effect to sales tax


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exemptions. The Company expects the expansion of the Pipeline and Storage segment to remain a major strategic priority. Supply Corporation has verified that there is substantial market interest in transporting gas produced in the Rocky Mountain area to the Northeast. In order to serve this anticipated demand, Supply Corporation has proposed a new 324-mile pipeline that would commence at Clarington, Ohio, the proposed terminus of the Rockies Express pipeline, and extend to the Millennium Pipeline under construction at Corning, New York. From Corning, Rocky Mountain gas will be able to get to the New York City area and to New England. The proposed pipeline would be designed to move approximately 550 to 750 MDth of gas per day, as well as accommodate volumes from local production areas. These projects are discussed further in the Capital Resources and Liquidity and Rates and Regulatory Matters sections that follow.
 
The Company is currently evaluating the appropriateness of establishing a Master Limited Partnership (MLP) for its pipeline and storage assets, and another MLP for certain of its exploration and production assets. If this evaluation determined that the MLP structure is sound and in the shareholders’ interest, the Company would pursue the MLP structure for the appropriate Company assets. Potential impediments to establishing MLPs include: (a) the low tax basis of our pipeline and storage assets, which substantially mitigates the tax advantages of an MLP structure; (b) the highly integrated operations of the Company’s Pipeline and Storage and Utility business segments; and (c) the sustainability of an exploration and production MLP given the natural decline curve of production from all oil and gas properties. As a result, new long-lived reserves must be constantly added to an exploration and production MLP in order to sustain the MLP’s cash distributions. Acquisitions of long-lived reserves could be very costly given the significant premiums that are currently being paid for long-lived reserves.
 
The Company also began repurchasing outstanding shares of common stock during fiscal 2006 under a share repurchase program authorized by the Company’s Board of Directors. The program authorizes the Company to repurchase up to an aggregate amount of 8 million shares. Through September 30, 2007, the Company had repurchased 3,834,878 shares for $133.2 million under this program, including 1,308,328 shares for $48.1 million during the year ended September 30, 2007. These matters are discussed further in the Capital Resources and Liquidity section that follows.
 
On January 29, 2007, the Company commenced a rate case in the New York jurisdiction of the Utility segment by filing proposed tariff amendments and supporting testimony requesting approval to increase its annual revenues by $52.0 million annually. The Company explained in the filing that its request for rate relief is necessitated by decreased revenues resulting from customer conservation efforts and increased customer uncollectibles, among other things. The rate filing also includes a proposal for an aggressive efficiency and conservation initiative with a revenue decoupling mechanism designed to render the Company indifferent to throughput reductions resulting from conservation. In September 2007, the NYPSC issued an order approving the Company’s conservation program, and the administrative law judge assigned to the proceeding issued a recommended decision, which recommends a rate increase designed to provide additional annual revenues of $2.5 million as well as a bill surcharge that would collect up to $10.8 million to recover expenses arising from the conservation program. The recommended decision also recommends approval of the unopposed revenue decoupling mechanism. The NYPSC is not bound to accept the recommended decision. This matter is discussed more fully in the Rate and Regulatory Matters section that follows.
 
CRITICAL ACCOUNTING ESTIMATES
 
The Company has prepared its consolidated financial statements in conformity with GAAP. The preparation of these financial statements 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. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. The following is a summary of the Company’s most critical accounting estimates, which are defined as those estimates whereby judgments or uncertainties could affect the application of accounting policies and materially different amounts could be reported under different conditions or using different assumptions. For a complete discussion of the


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Company’s significant accounting policies, refer to Item 8 at Note A — Summary of Significant Accounting Policies.
 
Oil and Gas Exploration and Development Costs.   In the Company’s Exploration and Production segment, oil and gas property acquisition, exploration and development costs are capitalized under the full cost method of accounting. Under this accounting 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.
 
The Company believes that determining the amount of the Company’s proved reserves is a critical accounting estimate. Proved reserves are estimated quantities of reserves that, based on geologic and engineering data, appear with reasonable certainty to be producible under existing economic and operating conditions. Such estimates of proved reserves are inherently imprecise and may be subject to substantial revisions as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. The estimates involved in determining proved reserves are critical accounting estimates because they serve as the basis over which capitalized costs are depleted under the full cost method of accounting (on a units-of-production basis). Unproved properties are excluded from the depletion calculation 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.
 
In addition to depletion under the units-of-production method, proved reserves are a major component in the SEC full cost ceiling test. The full cost ceiling test is an impairment test prescribed by SEC Regulation S-X Rule 4-10. The ceiling test , which is performed each quarter, determines a limit, or ceiling, on a country-by-country basis 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. The estimates of future production and future expenditures are based on internal budgets that reflect planned production from current wells and expenditures necessary to sustain such future production. The amount of the ceiling can fluctuate significantly from period to period because of additions or subtractions to proved reserves and significant fluctuations in oil and gas prices. The ceiling is then compared to the capitalized cost of oil and gas properties less accumulated depletion and related deferred income taxes. If the capitalized costs of oil and gas properties less accumulated depletion and related deferred taxes exceeds the ceiling at the end of any fiscal quarter, a non-cash impairment must be recorded to write down the book value of the reserves to their present value. This non-cash impairment cannot be reversed at a later date if the ceiling increases. It should also be noted that a non-cash impairment to write down the book value of the reserves to their present value in any given period causes a reduction in future depletion expense. Because of the decline in the price of natural gas during the third and fourth quarters of 2006, the book value of the Company’s Canadian oil and gas properties exceeded the ceiling at both June 30, 2006 and September 30, 2006. Consequently, SECI recorded impairment charges of $62.4 million ($39.5 million after-tax) in the third quarter of 2006 and $42.3 million ($29.1 million after-tax) in the fourth quarter of 2006. These impairment charges are now included in the loss from discontinued operations for 2006 due to the sale of SECI during 2007.
 
It is difficult to predict what factors could lead to future impairments under the SEC’s full cost ceiling test. As discussed above, fluctuations or subtractions to proved reserves and significant fluctuations in oil and gas prices have an impact on the amount of the ceiling at any point in time.


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Upon the adoption of SFAS 143 on October 1, 2002, the Company recorded an asset retirement obligation representing plugging and abandonment costs associated with the Exploration and Production segment’s crude oil and natural gas wells and capitalized such costs in property, plant and equipment (i.e. the full cost pool). Prior to the adoption of SFAS 143, plugging and abandonment costs were accounted for solely through the Company’s units-of-production depletion calculation. An estimate of such costs was added to the depletion base, which also included capitalized costs in the full cost pool and estimated future expenditures to be incurred in developing proved reserves. With the adoption of SFAS 143, plugging and abandonment costs are already included in capitalized costs and the units-of-production depletion calculation has been modified to exclude from the depletion base any estimate of future plugging and abandonment costs that are already recorded in the full cost pool.
 
Prior to the adoption of SFAS 143, in calculating the full cost ceiling, the Company reduced the future net cash flows from proved oil and gas reserves by the estimated plugging and abandonment costs. Such future net cash flows would then be compared to capitalized costs in the full cost pool, with any excess capitalized costs being expensed. With the adoption of SFAS 143, since the full cost pool now includes an amount associated with plugging and abandoning the wells, the calculation of the full cost ceiling has been changed so that future net cash flows from proved oil and gas reserves are no longer reduced by the estimated plugging and abandonment costs.
 
Regulation.   The Company is subject to regulation by certain state and federal authorities. The Company, in its Utility and Pipeline and Storage segments, has accounting policies which conform to SFAS 71, and which are in accordance with the accounting requirements and ratemaking practices of the regulatory authorities. The application of these accounting policies allows the Company to defer expenses and income on the balance sheet as regulatory assets and liabilities when it is probable that those expenses and income will be allowed in the ratesetting process in a period different from the period in which they would have been reflected in the income statement by an unregulated company. These deferred regulatory assets and liabilities are then flowed through the income statement in the period in which the same amounts are reflected in rates. Management’s assessment of the probability of recovery or pass through of regulatory assets and liabilities requires judgment and interpretation of laws and regulatory commission orders. If, for any reason, the Company ceases to meet the criteria for application of regulatory accounting treatment for all or part of its operations, the regulatory assets and liabilities related to those portions ceasing to meet such criteria would be eliminated from the balance sheet and included in the income statement for the period in which the discontinuance of regulatory accounting treatment occurs. Such amounts would be classified as an extraordinary item. For further discussion of the Company’s regulatory assets and liabilities, refer to Item 8 at Note C — Regulatory Matters.
 
Accounting for Derivative Financial Instruments.   The Company, in its Exploration and Production segment, Energy Marketing segment, Pipeline and Storage segment and All Other category, 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, no cost collars and futures contracts. The Company, in its Pipeline and Storage segment, previously used an interest rate collar to limit interest rate fluctuations on certain variable rate debt. In accordance with the provisions of SFAS 133, the Company accounted for these instruments as effective cash flow hedges or fair value hedges. In 2007, the Company discontinued hedge accounting for the interest rate collar, which resulted in a gain being recognized. 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. As discussed below, the Company was required to discontinue hedge accounting for a portion of its derivative financial instruments in the Exploration and Production segment, resulting in a charge to earnings in 2005.
 
The Company uses both exchange-traded and non exchange-traded derivative financial instruments. The fair values of the non exchange-traded derivative financial instruments are based on valuations determined by the counterparties. Refer to the “Market Risk Sensitive Instruments” section below for further discussion of the Company’s derivative financial instruments.


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Pension and Other Post-Retirement Benefits.   The amounts reported in the Company’s financial statements related to its pension and other post-retirement benefits are determined on an actuarial basis, which uses many assumptions in the calculation of such amounts. These assumptions include the discount rate, the expected return on plan assets, the rate of compensation increase and, for other post-retirement benefits, the expected annual rate of increase in per capita cost of covered medical and prescription benefits. The discount rate used by the Company is equal to the Moody’s Aa Long-Term Corporate Bond index, rounded to the nearest 25 basis points. The duration of the securities underlying that index (approximately 13 years) reasonably matches the expected timing of anticipated future benefit payments (approximately 12 years). The Company also utilizes a yield curve model to determine the discount rate. The yield curve is a spot rate yield curve that provides a zero-coupon interest rate for each year into the future. Each year’s anticipated benefit payments are discounted at the associated spot interest rate back to the measurement date. The discount rate is then determined based on the spot interest rate that results in the same present value when applied to the same anticipated benefit payments. The expected return on plan assets assumption used by the Company reflects the anticipated long-term rate of return on the plan’s current and future assets. The Company utilizes historical investment data, projected capital market conditions, and the plan’s target asset class and investment manager allocations to set the assumption regarding the expected return on plan assets. Changes in actuarial assumptions and actuarial experience could have a material impact on the amount of pension and post-retirement benefit costs and funding requirements experienced by the Company. However, the Company expects to recover substantially all of its net periodic pension and other post-retirement benefit costs attributable to employees in its Utility and Pipeline and Storage segments in accordance with the applicable regulatory commission authorization. For financial reporting purposes, the difference between the amounts of pension cost and post-retirement benefit cost recoverable in rates and the amounts of such costs as determined under applicable accounting principles is recorded as either a regulatory asset or liability, as appropriate, as discussed above under “Regulation.” Pension and post-retirement benefit costs for the Utility and Pipeline and Storage segments represented 93% and 94%, respectively, of the Company’s total pension and post-retirement benefit costs as determined under SFAS 87 and SFAS 106 for the years ended September 30, 2007 and 2006.
 
Changes in actuarial assumptions and actuarial experience could also have an impact on the benefit obligation and the funded status related to the Company’s pension and post-retirement benefit plans and could impact the Company’s equity. For example, while the discount rate used to determine benefit obligations did not change from 2006 to 2007, the discount rate was changed from 5.0% in 2005 to 6.25% in 2006. The change in the discount rate from 2005 to 2006 reduced the pension plan projected benefit obligation by $113.1 million and the accumulated post-retirement benefit obligation by $77.5 million. Other examples include actual versus expected return on plan assets, which has an impact on the funded status of the plans, and actual versus expected benefit payments, which has an impact on the pension plan projected benefit obligations and the accumulated post-retirement benefit obligation for the Post-Retirement Plan. For 2007, actual versus expected return on plan assets resulted in an increase to the funded status of the Retirement Plan and the Post-Retirement Plan of $68.4 million and $38.6 million, respectively. The actual versus expected benefit payments for 2007 caused a decrease of $1.3 million and $1.8 million to the projected benefit obligation and accumulated post-retirement benefit obligation, respectively. In calculating the projected benefit obligation for the Retirement Plan and the accumulated post-retirement obligation for the Post-Retirement Plan, the actuary takes into account the average remaining service life of active participants. The average remaining service life of active participants is 9 years for both the Retirement Plan and the Post-Retirement Plan. For further discussion of the Company’s pension and other post-retirement benefits, refer to Other Matters in this Item 7, which includes a discussion of funding for the current year and the adoption of SFAS 158, and to Item 8 at Note G — Retirement Plan and Other Post Retirement Benefits.


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RESULTS OF OPERATIONS
 
EARNINGS
 
2007 Compared with 2006
 
The Company’s earnings were $337.5 million in 2007 compared with earnings of $138.1 million in 2006. As previously discussed, the Company has presented its Canadian operations in the Exploration and Production segment (in conjunction with the sale of SECI) as discontinued operations. The Company’s earnings from continuing operations were $201.7 million in 2007 compared with $184.6 million in 2006. The Company’s earnings from discontinued operations were $135.8 million in 2007 compared with a loss of $46.5 million in 2006. The increase in earnings from continuing operations of $17.1 million is primarily the result of higher earnings in the Exploration and Production, Utility, Pipeline and Storage, and Energy Marketing segments and the Corporate and All Other categories, slightly offset by lower earnings in the Timber segment, as shown in the table below. The increase in earnings from discontinued operations primarily resulted from the gain on the sale of SECI recognized in 2007 as well as the non-recurrence of $68.6 million of impairment charges recognized in 2006 related to the Exploration and Production segment’s Canadian oil and gas assets. In the discussion that follows, note that all amounts used in the earnings discussions are after-tax amounts, unless otherwise noted. Earnings from continuing operations and discontinued operations were impacted by several events in 2007 and 2006, including:
 
2007 Events
 
  •  A $120.3 million gain on the sale of SECI, which was completed in August 2007. This amount is included in earnings from discontinued operations;
 
  •  A $4.8 million benefit to earnings in the Pipeline and Storage segment due to the reversal of a reserve established for all costs incurred related to the Empire Connector project recognized during June 2007;
 
  •  A $1.9 million benefit to earnings in the Pipeline and Storage segment associated with the discontinuance of hedge accounting for Empire’s interest rate collar; and
 
  •  A $2.3 million benefit to earnings in the Energy Marketing segment related to the resolution of a purchased gas contingency.
 
2006 Events
 
  •  $68.6 million of impairment charges related to the Exploration and Production segment’s Canadian oil and gas assets under the full cost method of accounting using natural gas pricing at June 30, 2006 and September 30, 2006;
 
  •  An $11.2 million benefit to earnings in the Exploration and Production segment ($6.1 million in continuing operations and $5.1 million in discontinued operations) related to income tax adjustments recognized during 2006; and
 
  •  A $2.6 million benefit to earnings in the Utility segment related to the correction of Distribution Corporation’s calculation of the symmetrical sharing component of New York’s gas adjustment rate.
 
2006 Compared with 2005
 
The Company’s earnings were $138.1 million in 2006 compared with earnings of $189.5 million in 2005. As previously discussed, the Company has presented its Canadian operations in the Exploration and Production segment (in conjunction with the sale of SECI) as well as for its Czech Republic operations (in conjunction with the sale of U.E.) as discontinued operations. The Company’s earnings from continuing operations were $184.6 million in 2006 compared with $138.4 million in 2005. The Company recorded a loss from discontinued operations of $46.5 million in 2006 compared with earnings from discontinued operations of $51.1 million in 2005. The increase in earnings from continuing operations of $46.2 million is primarily the result of higher earnings in the Exploration and Production, Utility, Energy Marketing, and Timber segments, combined with


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higher earnings in the All Other category and a lower loss in the Corporate category. These were offset somewhat by lower earnings in the Pipeline and Storage segment, as shown in the table below. The loss from discontinued operations in 2006 compared to earnings from discontinued operations in 2005 reflects the recognition of $68.6 million of impairment charges in 2006 related to the Exploration and Production segment’s Canadian oil and gas assets as well as the non-recurrence of the gain on the sale of U.E. recognized in 2005. Earnings from continuing operations and discontinued operations were impacted by several events discussed above and the following 2005 events:
 
2005 Events
 
  •  A $25.8 million gain on the sale of U.E., which was completed in July 2005. This amount is included in earnings from discontinued operations;
 
  •  A $2.6 million gain in the Pipeline and Storage segment associated with a FERC approved sale of base gas;
 
  •  A $3.9 million gain in the Pipeline and Storage segment associated with insurance proceeds received in prior years for which a contingency was resolved during 2005;
 
  •  A $3.3 million loss related to certain derivative financial instruments that no longer qualified as effective hedges;
 
  •  A $2.7 million impairment in the value of the Company’s 50% investment in ESNE (recorded in the All Other category), a limited liability company that owns an 80-megawatt, combined cycle, natural gas-fired power plant in the town of North East, Pennsylvania; and
 
  •  A $1.8 million impairment of a gas-powered turbine in the All Other category that the Company had planned to use in the development of a co-generation plant.
 
Additional discussion of earnings in each of the business segments can be found in the business segment information that follows.
 
Earnings (Loss) by Segment
 
                         
    Year Ended September 30  
    2007     2006     2005  
    (Thousands)  
 
Utility
  $ 50,886     $ 49,815     $ 39,197  
Pipeline and Storage
    56,386       55,633       60,454  
Exploration and Production
    74,889       67,494       35,581  
Energy Marketing
    7,663       5,798       5,077  
Timber
    3,728       5,704       5,032  
                         
Total Reportable Segments
    193,552       184,444       145,341  
All Other
    2,564       359       (2,616 )
Corporate(1)
    5,559       (189 )     (4,288 )
                         
Total Earnings from Continuing Operations
    201,675       184,614       138,437  
Earnings (Loss) from Discontinued Operations
    135,780       (46,523 )     51,051  
                         
Total Consolidated
  $ 337,455     $ 138,091     $ 189,488  
                         
          
                       
 
 
(1) Includes earnings from the former International segment’s activity other than the activity from the Czech Republic operations included in Earnings from Discontinued Operations.


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UTILITY
 
Revenues
 
Utility Operating Revenues
 
                         
    Year Ended September 30  
    2007     2006     2005  
    (Thousands)  
 
Retail Revenues:
                       
Residential
  $ 848,693     $ 993,928     $ 868,292  
Commercial
    136,863       166,779       145,393  
Industrial
    8,271       13,484       13,998  
                         
      993,827       1,174,191       1,027,683  
                         
Off-System Sales
    9,751              
Transportation
    102,534       92,569       83,669  
Other
    14,612       14,003       5,715  
                         
    $ 1,120,724     $ 1,280,763     $ 1,117,067  
                         
 
Utility Throughput — million cubic feet (MMcf)
 
                         
    Year Ended September 30  
    2007     2006     2005  
 
Retail Sales:
                       
Residential
    60,236       59,443       66,903  
Commercial
    10,713       10,681       11,984  
Industrial
    727       985       1,387  
                         
      71,676       71,109       80,274  
                         
Off-System Sales
    1,355              
Transportation
    62,240       57,950       59,770  
                         
      135,271       129,059       140,044  
                         
 
Degree Days
 
                                         
                      Percent (Warmer)
 
                      Colder Than  
Year Ended September 30
        Normal     Actual     Normal     Prior Year  
 
2007:
    Buffalo       6,692       6,271       (6.3 )%     5.1 %
      Erie       6,243       6,007       (3.8 )%     5.6 %
2006:
    Buffalo       6,692       5,968       (10.8 )%     (9.4 )%
      Erie       6,243       5,688       (8.9 )%     (8.9 )%
2005:
    Buffalo       6,692       6,587       (1.6 )%     0.2 %
      Erie       6,243       6,247       0.1 %     2.6 %
 
2007 Compared with 2006
 
Operating revenues for the Utility segment decreased $160.0 million in 2007 compared with 2006. This decrease largely resulted from a $180.4 million decrease in retail gas sales revenues. This decrease was primarily offset by a $10.0 million increase in transportation revenues and a $9.8 million increase in off-system sales revenues.


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The decrease in retail gas sales revenues for the Utility segment was largely a function of the recovery of lower gas costs (gas costs are recovered dollar for dollar in revenues), which more than offset the revenue impact of higher retail sales volumes, as shown in the table above. See further discussion of purchased gas below under the heading “Purchased Gas.” This decrease was offset slightly by a base rate increase in the Pennsylvania jurisdiction, effective January 2007, which increased operating revenues by $8.5 million for 2007. The increase is included within both retail and transportation revenues in the table above.
 
The increase in transportation revenues was primarily due to a 4.3 Bcf increase in transportation throughput, largely due to the migration of retail sales customers to transportation service. The corresponding $10.0 million increase in transportation revenues would have been greater if not for a $3.9 million out-of-period adjustment recorded in the first quarter of 2006 to correct Distribution Corporation’s calculation of the symmetrical sharing component of New York’s gas adjustment rate.
 
As reported in 2006, on November 17, 2006 the U.S. Court of Appeals vacated and remanded FERC’s Order No. 2004, its latest affiliate standards of conduct, with respect to natural gas pipelines. The court’s decision became effective on January 5, 2007, and on January 9, 2007, FERC issued Order No. 690, its Interim Rule, designed to respond to the court’s decision. In Order No. 690, as clarified by FERC on March 21, 2007, the FERC readopted, on an interim basis, certain provisions that existed prior to the issuance of Order No. 2004 that had made it possible for the Utility to engage in certain off-system sales without triggering the adverse consequences that would otherwise arise under the standards of conduct. As such, the Utility resumed engaging in off-system sales on non-affiliated pipelines as of May 2007, resulting in total off-system sales revenues of $9.8 million for 2007. Due to profit sharing with retail customers, the margins resulting from off-system sales are minimal and there was not a material impact to margins in 2007.
 
2006 Compared with 2005
 
Operating revenues for the Utility segment increased $163.7 million in 2006 compared with 2005. This increase largely resulted from a $146.5 million increase in retail gas sales revenues. Transportation revenues and other revenues also increased by $8.9 million and $8.3 million, respectively.
 
The increase in retail gas sales revenues for the Utility segment was largely a function of the recovery of higher gas costs (gas costs are recovered dollar for dollar in revenues), which more than offset the revenue impact of lower retail sales volumes, as shown in the table above. See further discussion of purchased gas below under the heading “Purchased Gas.” Warmer weather, as shown in the table above, and greater conservation by customers due to higher natural gas commodity prices, were the principal reasons for the decrease in retail sales volumes.
 
The increase in transportation revenues was primarily due to a $5.9 million increase in the New York jurisdiction’s calculation of the symmetrical sharing component of the gas adjustment rate. The symmetrical sharing component is a mechanism included in Distribution Corporation’s New York rate agreement that shares with customers 90% of the difference between actual revenues received from large volume customers and the level of revenues that were projected to be received during the rate year. Of the $5.9 million increase, $3.9 million was due to an out-of-period adjustment recorded in fiscal year 2006 when it was determined that certain credits that had been included in the calculation should have been removed during the implementation of a previous rate case. The adjustment related to fiscal years 2002 through 2005.
 
The impact of the August 2005 New York rate agreement was to increase operating revenues by $19.1 million (of which $12.4 million was an increase to other operating revenues). This increase consisted of a base rate increase, the implementation of a merchant function charge, the elimination of certain bill credits, and the elimination of the gross receipts tax surcharge. The rate agreement also allowed Distribution Corporation to continue to utilize certain refunds from upstream pipeline companies and certain other credits (referred to as the “cost mitigation reserve”) to offset certain specific expense items. In 2005, Distribution Corporation utilized $7.8 million of the cost mitigation reserve, which increased other operating revenues, to recover previous under-collections of pension and post-retirement expenses. The impact of that increase in other operating revenues was offset by an equal amount of operation and maintenance expense (thus there was no earnings impact). Distribution Corporation did not record any entries involving the cost mitigation reserve


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in 2006. Other operating revenues were also impacted by two out-of-period regulatory adjustments recorded during 2005. The first adjustment related to the final settlement with the Staff of the NYPSC of the earnings sharing liability for the 2001 to 2003 time period. As a result of that settlement, the New York rate jurisdiction recorded additional earnings sharing expense (as an offset to other operating revenues) of $0.9 million. The second adjustment related to a regulatory liability recorded for previous over-collections of New York State gross receipts tax. In preparing for the implementation of the rate agreement in New York, the Company determined that it needed to adjust that regulatory liability by $3.1 million (of which $1.0 million was recorded as a reduction of other operating revenues and $2.1 million was recorded as additional interest expense) related to fiscal years 2004 and prior. These adjustments did not recur in 2006.
 
In the Pennsylvania jurisdiction, the impact of the base rate increase, which became effective in mid-April 2005, was to increase operating revenues by $7.5 million. This increase is included within both retail and transportation revenues in the table above.
 
Purchased Gas
 
The cost of purchased gas is the Company’s single largest operating expense. Annual variations in purchased gas costs are attributed directly to changes in gas sales volumes, the price of gas purchased and the operation of purchased gas adjustment clauses.
 
Currently, Distribution Corporation has contracted for long-term firm transportation capacity with Supply Corporation and six other upstream pipeline companies, for long-term gas supplies with a combination of producers and marketers, and for storage service with Supply Corporation and three nonaffiliated companies. In addition, Distribution Corporation satisfies a portion of its gas requirements through spot market purchases. Changes in wellhead prices have a direct impact on the cost of purchased gas. Distribution Corporation’s average cost of purchased gas, including the cost of transportation and storage, was $10.04 per Mcf in 2007, a decrease of 17% from the average cost of $12.07 per Mcf in 2006. The average cost of purchased gas in 2006 was 31% higher than the average cost of $9.19 per Mcf in 2005. Additional discussion of the Utility segment’s gas purchases appears under the heading “Sources and Availability of Raw Materials” in Item 1.
 
Earnings
 
2007 Compared with 2006
 
The Utility segment’s earnings in 2007 were $50.9 million, an increase of $1.1 million when compared with earnings of $49.8 million in 2006.
 
In the New York jurisdiction, earnings decreased by $6.2 million. This was primarily due to lower interest income ($4.5 million). The New York division’s current rate agreement with the NYPSC allows the Company to accrue interest on a pension-related regulatory asset. The amount of interest that can be accrued is reduced as the funded status of the pension plan improves. The fair market value of the pension plan assets exceeded the accumulated benefit obligation at September 30, 2007 resulting in a significant reduction in the interest accrual on this regulatory asset. The out-of-period symmetrical sharing adjustment discussed above ($2.6 million), higher bad debt and other operating costs ($0.8 million), higher property taxes ($0.6 million) and higher interest expense ($0.5 million) also contributed to this decrease. The positive impact associated with a lower effective tax rate ($1.9 million) and increased usage per account ($1.9 million) partially offset the overall decrease.
 
In the Pennsylvania jurisdiction, earnings increased by $7.3 million. This was primarily due to a base rate increase ($5.5 million) that became effective January 2007, colder weather ($2.5 million), and the positive impact associated with a lower effective tax rate ($1.1 million). Higher intercompany and other interest expense ($0.8 million), coupled with a decrease in normalized usage ($0.3 million), partially offset these increases.
 
The impact of weather on the Utility segment’s New York rate jurisdiction is tempered by a WNC. The WNC, which covers the eight-month period from October through May, has had a stabilizing effect on earnings for the New York rate jurisdiction. In addition, in periods of colder than normal weather, the WNC benefits the


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Utility segment’s New York customers. In 2007 and 2006, the WNC preserved earnings of approximately $2.3 million and $6.2 million, respectively, as the weather was warmer than normal.
 
2006 Compared with 2005
 
The Utility segment’s earnings in 2006 were $49.8 million, an increase of $10.6 million when compared with earnings of $39.2 million in 2005.
 
In the New York jurisdiction, earnings increased by $9.2 million, primarily due to the positive impact of the rate agreement in this jurisdiction that became effective August 2005 ($13.7 million). In addition, the increase in the New York jurisdiction’s calculation of the symmetrical sharing component of the gas adjustment rate, including the out-of-period adjustment discussed above, contributed $3.9 million to earnings. Two out-of-period regulatory adjustments recorded during fiscal year 2005 that did not recur during 2006, as discussed above, also contributed an additional $2.6 million to earnings. The first adjustment, related to the final settlement with the Staff of the NYPSC of the earnings sharing liability for the fiscal 2001 through 2003 time period, increased earnings in fiscal 2006 by $0.6 million. The second adjustment, related to a regulatory liability recorded for previous over-collections of New York State gross receipts tax, increased earnings in fiscal 2006 by $2.0 million. The increase in earnings due to the New York rate agreement, the symmetrical sharing component of the gas adjustment rate, and the two out-of-period regulatory adjustments recorded in 2005, was partially offset by a decline in margin associated with lower weather-normalized usage by customers ($2.3 million), higher operation expenses ($2.5 million), higher interest expense ($2.7 million), and a higher effective income tax rate ($3.2 million). The higher effective income tax rate is due to positive tax adjustments recorded in 2005 that did not recur in 2006. The increase in operation expenses consisted primarily of higher pension expense offset by lower bad debt expense.
 
In the Pennsylvania jurisdiction, earnings increased by $1.4 million, due to the positive impact of the rate case settlement in this jurisdiction that became effective April 2005 ($4.9 million), and lower operation expenses ($1.8 million). The decrease in operation expenses consisted primarily of lower bad debt expense offset partially by higher pension expense. These increases to earnings were partially offset by the impact of warmer than normal weather in Pennsylvania ($3.0 million), lower weather-normalized usage by customer ($0.6 million), higher interest expense ($0.8 million), and a higher effective tax rate ($1.3 million).
 
The decrease in bad debt expense reflects the fact that in the fourth quarter of 2005, the New York and Pennsylvania jurisdictions increased the allowance for uncollectible accounts to reflect the increase in final billed account balances and the increased aging of outstanding active receivables heading into the heating season. A similar adjustment was not required in 2006.
 
In 2006, the WNC preserved earnings of approximately $6.2 million because it was warmer than normal in the New York service territory. In 2005, the WNC did not have a significant impact on earnings.


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PIPELINE AND STORAGE
 
Revenues
 
Pipeline and Storage Operating Revenues
 
                         
    Year Ended September 30  
    2007     2006     2005  
    (Thousands)  
 
Firm Transportation
  $ 118,771     $ 118,551     $ 117,146  
Interruptible Transportation
    4,161       4,858       4,413  
                         
      122,932       123,409       121,559  
                         
Firm Storage Service
    66,966       66,718       65,320  
Interruptible Storage Service
    169       39       267  
                         
      67,135       66,757       65,587  
                         
Other
    21,899       24,186       28,713  
                         
    $ 211,966     $ 214,352     $ 215,859  
                         
 
Pipeline and Storage Throughput — (MMcf)
 
                         
    Year Ended September 30  
    2007     2006     2005  
 
Firm Transportation
    351,113       363,379       357,585  
Interruptible Transportation
    4,975       11,609       14,794  
                         
      356,088       374,988       372,379  
                         
 
2007 Compared with 2006
 
Operating revenues for the Pipeline and Storage segment decreased $2.4 million in 2007 as compared with 2006, which was due mostly to a decrease in other revenues ($2.3 million). The decrease in other revenues is primarily due to a $4.2 million decrease in efficiency gas revenues. This decrease was due to the Company’s recent settlement with the FERC, which decreased efficiency gas retainage allowances. Offsetting this decrease, there was a $1.4 million increase in other revenues attributable to the lease termination fee adjustment in 2006 (an intercompany transaction) for the Company’s former headquarters, which did not recur in 2007. While Supply Corporation’s transportation volumes decreased during the year, volume fluctuations generally do not have a significant impact on revenues as a result of Supply Corporation’s straight-fixed variable rate design.
 
2006 Compared with 2005
 
Operating revenues for the Pipeline and Storage segment decreased $1.5 million in 2006 as compared with 2005. This decrease consisted of a $4.5 million decrease in other revenues offset by a $1.8 million increase in firm and interruptible transportation revenues and a $1.2 million increase in firm and interruptible storage service revenues. The decrease in other revenues is primarily due to a $2.6 million decrease in efficiency gas revenues due to lower natural gas prices, a $0.7 million decrease in cashout revenues, and a $1.4 million decrease in revenue attributable to a lease termination fee adjustment (an intercompany transaction) for the Company’s former headquarters. Cashout revenues are completely offset by purchased gas expense. The increase in firm and interruptible transportation revenues is due to additional contracts with customers and the renewal of contracts at higher rates, both of which reflect the increased demand for transportation services due to market conditions resulting from the effects of hurricane damage to production and pipeline infrastructure in the Gulf of Mexico during the fall of 2005. While Supply Corporation’s transportation volumes increased during the year, volume fluctuations generally do not have a significant impact on revenues as a result of Supply


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Corporation’s straight fixed-variable rate design. The increase in storage revenues reflects the renewal of storage contracts at higher rates.
 
Earnings
 
2007 Compared with 2006
 
The Pipeline and Storage segment’s earnings in 2007 were $56.4 million, an increase of $0.8 million when compared with earnings of $55.6 million in 2006. The main factor contributing to this increase was the reversal of a reserve for preliminary survey costs ($4.8 million) related to the Empire Connector project. Based on the signing of a service agreement with KeySpan Gas East Corporation during the quarter ended June 30, 2007, management determined that it was probable that the project would go forward and that such preliminary survey costs were properly capitalizable in accordance with the FERC’s Uniform System of Accounts and SFAS 71. In addition, there was a $2.5 million increase in earnings associated with the decrease in depreciation expense as a result of the most recent settlement with the FERC, which reduced depreciation rates. There was also a $1.9 million positive earnings impact associated with the discontinuance of hedge accounting for Empire’s interest rate collar. On December 8, 2006, Empire repaid $22.8 million of secured debt. The interest costs of this secured debt were hedged by the interest rate collar. Since the hedged transaction was settled and there will be no future cash flows associated with the secured debt, the unrealized gain in accumulated other comprehensive income associated with the interest rate collar was reclassified to the income statement. These earnings increases were offset by higher interest expense ($3.2 million), lower efficiency gas revenues ($2.7 million), a $1.5 million increase in operating costs (primarily post-retirement benefit costs), and the earnings decrease associated with a higher effective tax rate ($0.9 million).
 
2006 Compared with 2005
 
The Pipeline and Storage segment’s earnings in 2006 were $55.6 million, a decrease of $4.9 million when compared with earnings of $60.5 million in 2005. The decrease reflects the non-recurrence of two events, a $2.6 million gain on a FERC approved sale of base gas in 2005 and a $3.9 million gain associated with insurance proceeds received in prior years for which a contingency was resolved in 2005. Both of these items were recorded in Other Income. It also reflects the earnings impact associated with lower efficiency gas revenues ($1.7 million) and higher operation expenses ($0.6 million). These earnings decreases were offset by the positive earnings impact of higher transportation and storage revenues ($2.0 million), lower depreciation due to the non-recurrence of a write-down of the Company’s former corporate office in 2005 ($0.9 million), and the earnings benefit associated with a lower effective tax rate ($1.7 million).
 
EXPLORATION AND PRODUCTION
 
Revenues
 
Exploration and Production Operating Revenues
 
                         
    Year Ended September 30  
    2007     2006     2005  
    (Thousands)  
 
Gas (after Hedging) from Continuing Operations
  $ 143,785     $ 126,969     $ 132,528  
Oil (after Hedging) from Continuing Operations
    167,627       134,307       94,925  
Gas Processing Plant from Continuing Operations
    37,528       42,252       36,350  
Other from Continuing Operations
    1,147       3,072       (3,447 )
Intrasegment Elimination from Continuing Operations(1)
    (26,050 )     (31,704 )     (29,706 )
                         
Operating Revenues from Continuing Operations
  $ 324,037     $ 274,896     $ 230,650  
                         
Operating Revenues from Canada — Discontinued Operations
  $ 50,495     $ 71,984     $ 62,775  
                         


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(1) Represents the elimination of certain West Coast gas production revenue included in “Gas (after Hedging) from Continuing Operations” in the table above that is sold to the gas processing plant shown in the table above. An elimination for the same dollar amount was made to reduce the gas processing plant’s Purchased Gas expense.
 
Production Volumes
 
                         
    Year Ended September 30  
    2007     2006     2005  
 
Gas Production (MMcf)
                       
Gulf Coast
    10,356       9,110       12,468  
West Coast
    3,929       3,880       4,052  
Appalachia
    5,555       5,108       4,650  
                         
Total Production from Continuing Operations
    19,840       18,098       21,170  
Canada — Discontinued Operations
    6,426       7,673       8,009  
                         
Total Production
    26,266       25,771       29,179  
                         
Oil Production (Mbbl)
                       
Gulf Coast
    717       685       989  
West Coast
    2,403       2,582       2,544  
Appalachia
    124       69       36  
                         
Total Production from Continuing Operations
    3,244       3,336       3,569  
Canada — Discontinued Operations
    206       272       300  
                         
Total Production
    3,450       3,608       3,869  
                         
 
Average Prices
 
                         
    Year Ended September 30  
    2007     2006     2005  
 
Average Gas Price/Mcf
                       
Gulf Coast
  $ 6.58     $ 8.01     $ 7.05  
West Coast
  $ 6.54     $ 7.93     $ 6.85  
Appalachia
  $ 7.48     $ 9.53     $ 7.60  
Weighted Average for Continuing Operations
  $ 6.82     $ 8.42     $ 7.13  
Weighted Average After Hedging for Continuing Operations(1)
  $ 7.25     $ 7.02     $ 6.26  
Canada — Discontinued Operations
  $ 6.09     $ 7.14     $ 6.15  
Average Oil Price/Barrel (bbl)
                       
Gulf Coast
  $ 63.04     $ 64.10     $ 49.78  
West Coast(2)
  $ 56.86     $ 56.80     $ 42.91  
Appalachia
  $ 62.26     $ 65.28     $ 48.28  
Weighted Average for Continuing Operations
  $ 58.43     $ 58.47     $ 44.87  
Weighted Average After Hedging for Continuing Operations(1)
  $ 51.68     $ 40.26     $ 26.59  
Canada — Discontinued Operations
  $ 50.06     $ 51.40     $ 42.97  
 
 
(1) Refer to further discussion of hedging activities below under “Market Risk Sensitive Instruments” and in Note F — Financial Instruments in Item 8 of this report.
 
(2) Includes low gravity oil which generally sells for a lower price.


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2007 Compared with 2006
 
Operating revenues from continuing operations for the Exploration and Production segment increased $49.1 million in 2007 as compared with 2006. Oil production revenue after hedging increased $33.3 million due primarily to an $11.42 per barrel increase in weighted average prices after hedging, which more than offset a slight decrease in oil production of 92,000 barrels. Gas production revenue after hedging increased $16.8 million in 2007 as compared with 2006. An increase in gas production of 1,742 MMcf and an increase in weighted average prices after hedging of $0.23 per Mcf both contributed to the increase. The increase in gas production occurred primarily in the Gulf Coast region (1,246 MMcf). During the quarter ended December 31, 2005, Seneca experienced significant production delays due largely to the impact of hurricane damage to pipeline infrastructure in the Gulf of Mexico. Seneca had substantially all of its pre-hurricane Gulf of Mexico production back on line at the beginning of fiscal 2007. Production also increased in this segment’s Appalachian region (447 MMcf), primarily due to increased drilling in this region during 2007, as highlighted in Item 2 under “Exploration and Production Activities.”
 
Refer to further discussion of derivative financial instruments in the “Market Risk Sensitive Instruments” section that follows. Refer to the tables above for production and price information.
 
2006 Compared with 2005
 
Operating revenues from continuing operations for the Exploration and Production segment increased $44.2 million in 2006 as compared with 2005. Oil production revenue after hedging increased $39.4 million due primarily to higher weighted average prices after hedging ($13.67 per barrel). This increase was offset slightly by a decrease in production (233,000 barrels). Gas production revenue after hedging decreased $5.6 million. A decrease in gas production (3,072 MMcf) more than offset an increase in the weighted average price of gas after hedging ($0.76 per Mcf). The decrease in gas production occurred primarily in the Gulf Coast (a 3,358 MMcf decline), which is partly attributable to the fall 2005 hurricane damage and partly attributable to the expected decline rates for the Company’s production in the region. Other revenues increased $6.5 million largely due to the non-recurrence of a $5.1 million mark-to-market adjustment, recorded in 2005, for losses on certain derivative financial instruments that no longer qualified as effective hedges due to the anticipated delays in oil and gas production volumes caused by Hurricane Rita.
 
Refer to further discussion of derivative financial instruments in the “Market Risk Sensitive Instruments” section that follows. Refer to the tables above for production and price information.
 
Earnings
 
2007 Compared with 2006
 
The Exploration and Production segment’s earnings from continuing operations for 2007 were $74.9 million, an increase of $7.4 million when compared with earnings from continuing operations of $67.5 million for 2006. Higher crude oil prices, higher natural gas production and higher natural gas prices increased earnings by $24.1 million, $7.9 million and $3.0 million, respectively. These increases were partly offset by the non-recurrence of $6.1 million of tax benefits recognized during 2006, discussed below, as well as by higher depletion expense and higher lease operating expense of $7.2 million and $4.6 million, respectively. Slightly lower crude oil production and higher general and administrative expenses also decreased earnings by $2.4 million and $0.6 million, respectively. Earnings were also negatively impacted by a higher effective tax rate ($6.3 million).
 
2006 Compared with 2005
 
The Exploration and Production segment’s earnings from continuing operations in 2006 were $67.5 million, an increase of $31.9 million when compared with earnings from continuing operations of $35.6 million in 2005. The increase is primarily the result of higher oil and gas prices, which increased earnings by $29.6 million and $8.9 million, respectively. Also, the non-recurrence of the 2005 mark-to-market adjustment discussed under Revenues above, contributed $3.3 million to earnings and strong cash flow provided higher interest


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income ($2.2 million). In the third quarter of 2006, a $6.1 million benefit to earnings related to income taxes was recognized. The Company reversed a valuation allowance ($2.9 million) associated with the capital loss carryforward that resulted from the 2003 sale of certain of Seneca’s oil properties, and also recognized a tax benefit of $3.2 million related to the favorable resolution of certain open tax issues. Partly offsetting these increases, lower gas and oil production decreased earnings by $12.5 million and $4.0 million, respectively. Further contributing to the decrease were higher general and administrative and other operating costs ($2.0 million) and higher lease operating expenses ($1.9 million). The increase in lease operating expenses was primarily in the West Coast region due to higher steaming costs associated with heavy crude oil production in the California Midway-Sunset and North Lost Hills fields. The higher steaming costs were due to an increase in the price for natural gas purchased in the field and used in the steaming operations, primarily in the second quarter of fiscal 2006, compared to the second quarter of fiscal 2005.
 
ENERGY MARKETING
 
Revenues
 
Energy Marketing Operating Revenues
 
                         
    Year Ended September 30  
    2007     2006     2005  
    (Thousands)  
 
Natural Gas (after Hedging)
  $ 413,405     $ 496,769     $ 329,560  
Other
    207       300       154  
                         
    $ 413,612     $ 497,069     $ 329,714  
                         
 
Energy Marketing Volumes
 
                         
    Year Ended September 30  
    2007     2006     2005  
 
Natural Gas — (MMcf)
    50,775       45,270       40,683  
                         
 
2007 Compared with 2006
 
Operating revenues for the Energy Marketing segment decreased $83.5 million in 2007 as compared with 2006. The decrease primarily reflects lower gas sales revenue due to a decrease in natural gas commodity prices for the period that were recovered through revenues, offset in part by an increase in throughput. The increase in throughput was due to the addition of certain large, low-margin commercial and industrial customers, an increase in sales to wholesale customers, and colder weather.
 
2006 Compared with 2005
 
Operating revenues for the Energy Marketing segment increased $167.4 million in 2006 as compared with 2005. The increase primarily reflects higher natural gas commodity prices that were recovered through revenues, and, to a lesser extent, an increase in throughput. The increase in throughput was due to the addition of certain large commercial and industrial customers, which more than offset any decrease in throughput due to warmer weather and greater conservation by customers due to higher natural gas prices.
 
Earnings
 
2007 Compared with 2006
 
The Energy Marketing segment’s earnings in 2007 were $7.7 million, an increase of $1.9 million when compared with earnings of $5.8 million in 2006. Higher margins of $2.3 million are responsible for the increase in earnings. The increase in margin is mainly the result of a $2.3 million reversal of an accrual for purchased gas expense related to the resolution of a contingency during 2007. While throughput increased, as noted above, much of this increase in volume is related to sales to low margin customers.


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2006 Compared with 2005
 
The Energy Marketing segment’s earnings in 2006 were $5.8 million, an increase of $0.7 million when compared with earnings of $5.1 million in 2005. Despite warmer weather and greater conservation by customers, gross margin increased due to a number of factors, including higher volumes and the marketing flexibility associated with stored gas. The Energy Marketing segment’s contracts for significant storage and transportation volumes provided operational flexibility resulting in increased sales throughput and earnings. The increase in gross margin more than offset an increase in operation expense.
 
TIMBER
 
Revenues
 
Timber Operating Revenues
 
                         
    Year Ended September 30  
    2007     2006     2005  
    (Thousands)  
 
Log Sales
  $ 21,927     $ 23,077     $ 22,478  
Green Lumber Sales
    5,097       7,123       7,296  
Kiln-dried Lumber Sales
    27,908       32,809       29,651  
Other
    3,965       2,020       1,861  
                         
    $ 58,897     $ 65,029     $ 61,286  
                         
 
Timber Board Feet
 
                         
    Year Ended September 30  
    2007     2006     2005  
    (Thousands)  
 
Log Sales
    8,660       9,527       7,601  
Green Lumber Sales
    9,358       10,454       10,489  
Kiln-dried Lumber Sales
    14,778       16,862       15,491  
                         
      32,796       36,843       33,581  
                         
 
2007 Compared with 2006
 
Operating revenues for the Timber segment decreased $6.1 million in 2007 as compared with 2006. This decrease is attributed to unfavorable weather conditions primarily during the fall of 2006 and the spring of 2007 that greatly limited the harvesting of logs. These conditions consisted of warm, wet weather that made it difficult to bring logging trucks into the forests. Weather conditions were significantly more favorable throughout fiscal 2006. These unfavorable conditions for harvesting resulted in a decline in log sales of $1.2 million or 867,000 board feet. There was also a decline in both green lumber and kiln-dried lumber sales of $2.0 million and $4.9 million, respectively, primarily because there were fewer logs available for processing. Declines in market prices for the cherry and maple species also contributed to the decrease in green lumber and kiln-dried lumber sales. Additionally, the processing of a greater amount of lumber species other than cherry (due to the mix of species on the areas being harvested) contributed to the decline in kiln-dried lumber sales since lumber species other than cherry are sold at a lower price than kiln-dried cherry lumber. With the addition of two new kilns placed into service in June 2007 that allow for greater processing capacity, the Company plans to continue to focus on increasing cherry kiln-dried lumber sales since cherry kiln-dried lumber commands a higher price in the overall mix of lumber. Offsetting the decreases discussed above, other revenues increased $1.9 million largely due to the sale of 3.1 million board feet of timber rights ($1.6 million).


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2006 Compared with 2005
 
Operating revenues for the Timber segment increased $3.7 million in 2006 as compared with 2005. This increase is attributed to an increase in kiln-dried lumber sales of $3.2 million primarily due to an increase in kiln-dried cherry lumber sales volumes of 2.0 million board feet. Other kiln-dried lumber sales volumes decreased by 0.6 million board feet, but there was little impact to revenues. The addition of two new kilns in February 2005 allowed for greater processing capacity in 2006 as compared to 2005 since the kilns were in operation for all of 2006. Higher log sales revenue of $0.6 million also contributed to the increase in revenues. An increase in cherry export log sales as a result of greater market demand and an increase in saw log sales were the primary factors contributing to the increase. Offsetting these increases was a decline in cherry veneer log sales due to lower volumes of cherry veneer logs harvested because of unfavorable weather conditions.
 
Earnings
 
2007 Compared with 2006
 
The Timber segment earnings in 2007 were $3.7 million, a decrease of $2.0 million when compared with earnings of $5.7 million in 2006. The decrease was primarily due to lower margins from lumber and log sales ($2.5 million) as a result of the decline in revenues noted above, as well as higher general and administrative expenses of $0.3 million. Partially offsetting this decrease was a decline in depletion expense of $1.2 million. The decrease in depletion expense reflects the cutting of more low cost or no cost basis timber from Company owned land as well as the overall decrease in logs harvested.
 
2006 Compared with 2005
 
The Timber segment earnings in 2006 were $5.7 million, an increase of $0.7 million when compared with earnings of $5.0 million in 2005. Higher margins from kiln-dried lumber sales and cherry export log sales accounted for the earnings increase.
 
ALL OTHER AND CORPORATE OPERATIONS
 
All Other and Corporate Operations primarily includes the operations of Horizon LFG, Horizon Power, former International segment activity other than the activity from the Czech Republic operations, and corporate operations. Horizon LFG owns and operates short-distance landfill gas pipeline companies. Horizon Power’s activity primarily consists of equity method investments in Seneca Energy, Model City and ESNE. Horizon Power has a 50% ownership interest in each of these entities. The income from these equity method investments is reported as Income from Unconsolidated Subsidiaries on the Consolidated Statements of Income. Seneca Energy and Model City generate and sell electricity using methane gas obtained from landfills owned by outside parties. ESNE generates electricity from an 80-megawatt, combined cycle, natural gas-fired power plant in North East, Pennsylvania. Horizon Power also owns a gas-powered turbine and other assets which it had planned to use in the development of a co-generation plant. The Company is in the process of selling these assets. The former International segment activity primarily consists of project development activities in Italy and Bulgaria.
 
Earnings
 
2007 Compared with 2006
 
All Other and Corporate operations had earnings of $8.1 million in 2007, an increase of $7.9 million compared with earnings of $0.2 million for 2006. This improvement was largely due to an increase in interest income of $4.1 million (primarily intercompany interest). In the All Other category, Horizon LFG’s earnings benefited from higher margins of $1.0 million in 2007 as compared to 2006, and Horizon Power’s income from unconsolidated subsidiaries increased $0.9 million, also contributing to the increase in earnings. The Corporate and All Other categories also had an earnings benefit associated with a lower effective tax rate ($2.0 million).


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2006 Compared with 2005
 
All Other and Corporate operations experienced income of $0.2 million in 2006, which was $7.1 million greater than a loss of $6.9 million in 2005. The increase is due primarily to the non-recurrence of $4.5 million of impairment charges recorded in 2005. During 2005, Horizon Power recorded a $2.7 million impairment in the value of its 50% investment in ESNE. Management determined that there was a decline in the fair market value of ESNE that was other than temporary in nature given continuing high commodity prices for natural gas and the negative impact these prices had on operations. The Company also recorded a $1.8 million impairment of the gas-powered turbine mentioned above. This impairment was based on a review of current market prices for similar turbines. Also contributing to the increase were higher interest income ($4.7 million) during 2006, resulting primarily from the investment of proceeds from the sale of U.E. in July 2005, combined with higher average interest rates in 2006 versus 2005. These increases were partially offset by higher operating expenses ($1.3 million) and lower margins on landfill gas sales ($0.5 million).
 
INTEREST INCOME
 
Interest income was $7.9 million lower in 2007 as compared to 2006. As discussed in the Utility earnings section above, the main reason for this decrease was lower interest income of $7.4 million on a pension-related regulatory asset in accordance with the 2005 New York rate agreement. The New York division’s 2005 rate agreement with the NYPSC allows the Company to accrue interest on a pension-related regulatory asset. The amount of the interest that can be accrued is reduced as the funded status of the pension plan improves. The fair market value of the pension plan assets exceeded the accumulated benefit obligation at September 30, 2007 resulting in a significant reduction in the interest accrual related to this regulatory asset in 2007.
 
Interest income was $3.2 million higher in 2006 as compared to 2005. As discussed in the earnings discussion by segment above, the main reasons for this increase were strong cash flow from operations, the investment of proceeds from the sale of U.E. in July 2005 and higher average annual interest rates. Additionally, interest income on a pension-related regulatory asset in accordance with the New York rate agreement increased by $0.5 million.
 
OTHER INCOME
 
Other income was $2.1 million higher in 2007 as compared to 2006. The increase is attributed to a death benefit gain on life insurance proceeds of $1.9 million recognized in the Corporate category.
 
Other income was $9.9 million lower in 2006 as compared to 2005. As discussed in the earnings discussion by segment above, the main reasons for this decrease included non-recurring gains recorded during 2005 in the Pipeline and Storage segment related to the sale of base gas ($2.6 million), and the disposition of insurance proceeds ($3.9 million) received in prior years for which a contingency was resolved.
 
INTEREST CHARGES
 
Although most of the variances in Interest Charges are discussed in the earnings discussion by segment above, the following is a summary on a consolidated basis:
 
Interest on long-term debt decreased $4.2 million in 2007 and $0.6 million in 2006. The decrease in 2007 was primarily the result of a lower average amount of long-term debt outstanding. In addition, the Company recognized a $1.9 million benefit to interest expense as a result of the discontinuance of hedge accounting for Empire’s interest rate collar, as discussed above under Pipeline and Storage. The underlying long-term debt associated with this interest rate collar was repaid in December 2006 and the unrealized gain recorded in accumulated other comprehensive income associated with the interest rate collar was reclassified to interest expense during the quarter ended December 31, 2006.
 
Other interest charges were $0.1 million higher in 2007 and $3.1 million lower in 2006. The decrease in 2006 resulted primarily from the non-recurrence of $2.1 million of interest expense recorded by the Utility segment in 2005 and a lower average amount of short-term debt outstanding during 2006. The $2.1 million of interest expense recorded in 2005 related to an adjustment to a regulatory liability for previous over-collections of New York State gross receipts tax.


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CAPITAL RESOURCES AND LIQUIDITY
 
The primary sources and uses of cash during the last three years are summarized in the following condensed statement of cash flows:
 
Sources (Uses) of Cash
 
                         
    Year Ended September 30  
    2007     2006     2005  
    (Millions)  
 
Provided by Operating Activities
  $ 394.2     $ 471.4     $ 317.3  
Capital Expenditures
    (276.7 )     (294.2 )     (219.5 )
Investment in Partnership
    (3.3 )            
Net Proceeds from Sale of Foreign Subsidiaries
    232.1             111.6  
Cash Held in Escrow
    (58.2 )            
Net Proceeds from Sale of Oil and Gas Producing Properties
    5.1             1.4  
Other Investing Activities
    (0.8 )     (3.2 )     3.2  
Change in Short-Term Debt
                (115.4 )
Reduction of Long-Term Debt
    (119.6 )     (9.8 )     (13.3 )
Issuance of Common Stock
    17.5       23.3       20.3  
Dividends Paid on Common Stock
    (100.6 )     (98.2 )     (94.1 )
Dividends Paid to Minority Interest
                (12.7 )
Excess Tax Benefits Associated with Stock- Based Compensation Awards
    13.7       6.5        
Shares Repurchased under Repurchase Plan
    (48.1 )     (85.2 )      
Effect of Exchange Rates on Cash
    (0.1 )     1.4       1.3  
                         
Net Increase in Cash and Temporary Cash Investments
  $ 55.2     $ 12.0     $ 0.1  
                         
 
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 partnership, deferred income taxes, income or loss from unconsolidated subsidiaries net of cash distributions, minority interest in foreign subsidiaries and gain on sale of discontinued operations.
 
Cash provided by operating activities in the Utility and Pipeline and Storage segments may vary substantially from year to year because of the impact of rate cases. In the Utility segment, supplier refunds, over- or under-recovered purchased gas costs and weather may also significantly impact cash flow. The impact of weather on cash flow is tempered in the Utility segment’s New York rate jurisdiction by its WNC and in the Pipeline and Storage segment by Supply Corporation’s straight fixed-variable rate design.
 
Cash provided by operating activities in the Exploration and Production segment may vary from period to period as a result of changes in the commodity prices of natural gas and crude oil. The Company uses various derivative financial instruments, including price swap agreements, no cost collars and futures contracts in an attempt to manage this energy commodity price risk.
 
Net cash provided by operating activities totaled $394.2 million in 2007, a decrease of $77.2 million compared with the $471.4 million provided by operating activities in 2006. Higher working capital requirements in the Exploration and Production, Utility, and Pipeline and Storage segments were partially offset by lower working capital requirements in the Energy Marketing segment.


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INVESTING CASH FLOW
 
Expenditures for Long-Lived Assets
 
The Company’s expenditures for long-lived assets associated with continuing operations totaled $250.9 million in 2007. The table below presents these expenditures:
 
                         
    Year Ended September 30, 2007  
                Total Expenditures
 
    Capital
    Investment
    For Long-Lived
 
    Expenditures     in Partnership     Assets  
    (Millions)  
 
Utility
  $ 54.2     $     $ 54.2  
Pipeline and Storage
    43.2             43.2  
Exploration and Production
    146.7             146.7  
Timber
    3.7             3.7  
All Other and Corporate
    (0.2 )     3.3       3.1  
                         
Total Expenditures from Continuing Operations(1)
  $ 247.6     $ 3.3     $ 250.9  
                         
 
 
(1) Excludes expenditures for long-lived assets associated with discontinued operations of $29.1 million.
 
Utility
 
The majority of the Utility capital expenditures were made for replacement of mains and main extensions, as well as for the replacement of service lines.
 
Pipeline and Storage
 
The majority of the Pipeline and Storage segment’s capital expenditures were made for additions, improvements and replacements to this segment’s transmission and gas storage systems. It also reflects $15.5 million of costs related to the Empire Connector project that were added to Construction Work in Progress during 2007. The Empire Connector project is discussed below under Estimated Capital Expenditures.
 
Exploration and Production
 
The Exploration and Production segment’s capital expenditures were primarily well drilling and completion expenditures and included approximately $66.2 million for the Gulf Coast region ($65.7 million for the off-shore program in the Gulf of Mexico), $41.4 million for the West Coast region and $39.1 million for the Appalachian region. The significant amount spent in the Gulf Coast region is related to high commodity prices, which has improved the economics of investment in the area, plus projected royalty relief. These amounts included approximately $30.3 million spent to develop proved undeveloped reserves.
 
Timber
 
The majority of the Timber segment capital expenditures were for the construction of two new kilns that were placed into service during the quarter ended June 30, 2007, as well as construction of a lumber sorter for Highland’s sawmill operations, which was placed into service in October 2007.
 
All Other and Corporate
 
The majority of the All Other and Corporate category expenditures for long-lived assets consisted of a $3.3 million capital contribution to Seneca Energy by Horizon Power, $1.65 million in each of the first and second quarters of fiscal 2007. Seneca Energy generates and sells electricity using methane gas obtained from landfills owned by outside parties. Seneca Energy is in the process of expanding its generating capacity from 11.2 megawatts to 17.6 megawatts. Horizon Power has funded its capital contributions with short-term borrowings.


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Estimated Capital Expenditures
 
The Company’s estimated capital expenditures for the next three years are:
 
                         
    Year Ended September 30  
    2008     2009     2010  
    (Millions)  
 
Utility
  $ 59.0     $ 57.0     $ 56.0  
Pipeline and Storage
    152.0       96.0       40.0  
Exploration and Production(1)
    154.0       146.0       143.0  
Timber
    1.0              
                         
    $ 366.0     $ 299.0     $ 239.0  
                         
 
 
(1) Includes estimated expenditures for the years ended September 30, 2008, 2009 and 2010 of approximately $33 million, $36 million and $27 million, respectively, to develop proved undeveloped reserves.
 
Estimated capital expenditures for the Utility segment in 2008 will be concentrated in the areas of main and service line improvements and replacements and, to a lesser extent, the purchase of new equipment.
 
Estimated capital expenditures for the Pipeline and Storage segment in 2008 includes $122.9 million for the Empire Connector project as discussed below. Other capital expenditures will be concentrated in the replacement of transmission and storage lines, reconditioning of storage wells and improvements of compressor stations.
 
The Company continues to explore various opportunities to expand its capabilities to transport gas to the East Coast, either through the Supply Corporation or Empire systems or in partnership with others. In October 2005, Empire filed an application with the FERC for the authority to build and operate the Empire Connector project to expand its natural gas pipeline operations to serve new markets in New York and elsewhere in the Northeast by extending the Empire Pipeline. The application also asked that Empire’s existing business and facilities be brought under FERC jurisdiction, and that the FERC approve rates for Empire’s existing and proposed services. The Empire Connector will provide an upstream supply link for the Millennium Pipeline, which began construction in June 2007, and will transport Canadian and other natural gas supplies to downstream customers. The Empire Connector is designed to move up to approximately 250 MDth of natural gas per day. 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, which has been accepted by Empire and the other applicants. In June 2007, Empire and KeySpan Gas East Corporation (KeySpan) executed a binding firm transportation service agreement for 150.75 MDth per day, obligating Empire to provide transportation service that will require construction of the Empire Connector project. Construction of the Empire Connector began in September 2007 and the planned in-service date is November 2008. Refer to the Rate and Regulatory Matters section that follows for further discussion of this matter. The forecasted expenditures for this project over the next two years are as follows: $122.9 million in 2008 and $34.4 million in 2009. These expenditures are included as Pipeline and Storage estimated capital expenditures in the table above. The total cost to the Company of the Empire Connector project is estimated at $177 million, after giving effect to sales tax exemptions worth approximately $3.7 million. The Company anticipates financing this project with cash on hand and/or through the use of the Company’s lines of credit. As of September 30, 2007, the Company had incurred approximately $19.7 million in costs related to this project. Of this amount, $13.7 million, $2.0 million and $3.4 million were incurred during the years ended September 30, 2007, 2006 and 2005, respectively. During the quarter ended June 30, 2007, the Company reversed the reserve established for these costs, as discussed above under Results of Operations, following the execution of the KeySpan service agreement. As of September 30, 2007, all of the costs incurred to date related to this project have been capitalized as either Construction Work in Progress ($15.5 million) or Materials and Supplies Inventory ($4.2 million), as per the accounting guidance in the FERC’s Uniform System of Accounts and SFAS 71.


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Supply Corporation continues to view its potential Tuscarora Extension project as an important link to Millennium and potential storage development in the Corning, New York area. This new pipeline, which would expand the Supply Corporation system from its Tuscarora storage field to the intersection of the proposed Millennium and Empire Connector pipelines, could be designed initially to transport up to approximately 130 MDth of natural gas per day. It may also provide Supply Corporation with the opportunity to increase the deliverability of the existing Tuscarora storage field. Supply Corporation is also developing a project to meet the results of an “Open Season” seeking customers for new capacity from the Rockies Express Project, Appalachian production, storage and other points to Leidy and to interconnections with Millennium and Empire at Corning. This new project (the “West to East Project”) could include the Tuscarora Extension, or could be a second phase following the development of that project. The timeline of both of these projects depends on market development, and should the market mature, the Company anticipates financing the Tuscarora Extension with cash on hand and/or through the use of the Company’s lines of credit. The capital cost of the West to East project could amount to $700 million, which would be financed by a combination of debt and equity. There have been no costs incurred by the Company related to either project as of September 30, 2007, and the forecasted expenditures for the Tuscarora Extension Project over the next three years are as follows: $0 in 2008, $34.0 million in 2009, and $15.0 million in 2010. These expenditures are included as Pipeline and Storage estimated capital expenditures in the table above. The Company has not yet forecast any expenditures for the West to East Project. The Company has not yet filed an application with the FERC for the authority to build either project.
 
Estimated capital expenditures in 2008 for the Exploration and Production segment include approximately $50.0 million for the Gulf Coast region ($48.0 million on the off-shore program in the Gulf of Mexico), $46.0 million for the West Coast region and $58.0 million for the Appalachian region.
 
Estimated capital expenditures in 2008 in the Timber segment will be concentrated on the purchase of new equipment, vehicles and improvements to facilities for this segment’s lumber yard, sawmill and kiln operations.
 
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 Company’s other business segments depends, to a large degree, upon market conditions.
 
FINANCING CASH FLOW
 
The Company did not have any outstanding short-term notes payable to banks or commercial paper at September 30, 2007. However, 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, repurchases of stock, and other working capital needs. Fluctuations in these items can have a significant impact on the amount and timing of short-term debt. 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 $455.0 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 Company’s commercial paper program is $300.0 million. The commercial paper program is backed by a syndicated committed credit facility totaling $300.0 million that extends through September 30, 2010.
 
Under the Company’s 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 from September 30, 2005 through September 30, 2010. At September 30, 2007, the Company’s debt to capitalization ratio (as calculated under the facility) was .38. The constraints specified in the committed credit facility would permit an additional $2.02 billion in short-term


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and/or long-term debt to be outstanding (further limited by the indenture covenants discussed below) before the Company’s debt to capitalization ratio would exceed .65. If a downgrade in any of the Company’s credit ratings were to occur, access to the commercial paper markets might not be possible. However, the Company expects that it could borrow under its uncommitted bank lines of credit or rely upon other liquidity sources, including cash provided by operations.
 
Under the Company’s existing indenture covenants, at September 30, 2007, the Company would have been permitted to issue up to a maximum of $1.4 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 Company’s present liquidity position is believed to be adequate to satisfy known demands.
 
The Company’s 1974 indenture, pursuant to which $399.0 million (or 40%) of the Company’s long-term debt (as of September 30, 2007) 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 Company’s $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 September 30, 2007, the Company had no debt outstanding under the committed credit facility.
 
The Company’s embedded cost of long-term debt was 6.4% at both September 30, 2007 and September 30, 2006. Refer to “Interest Rate Risk” in this Item for a more detailed breakdown of the Company’s embedded cost of long-term debt.
 
The Company has an effective registration statement on file with the SEC under which it has available capacity to issue an additional $550.0 million of debt and equity securities under the Securities Act of 1933. The Company may sell all or a portion of these securities if warranted by market conditions and the Company’s capital requirements. Any offer and sale of these securities will be made only by means of a prospectus meeting the requirements of the Securities Act of 1933 and the rules and regulations thereunder.
 
The amounts and timing of the issuance and sale of debt or equity securities will depend on market conditions, indenture requirements, regulatory authorizations and the capital requirements of the Company.
 
On April 30, 2007, the Company redeemed $96.3 million of 6.5% unsecured notes, plus accrued interest. These notes were redeemable by the Company at par at any time after September 15, 2006. On December 8, 2006, the Company repaid $22.8 million of Empire’s secured debt. Such amount was classified as Current Portion of Long-Term Debt on the Company’s Consolidated Balance Sheet at September 30, 2006.
 
On December 8, 2005, the Company’s Board of Directors authorized the Company to implement a share repurchase program, whereby the Company may repurchase outstanding shares of common stock, up to an aggregate amount of 8 million shares in the open market or through privately negotiated transactions. As of September 30, 2007, the Company has repurchased 3,834,878 shares for $133.2 million under this program, including 1,308,328 shares for $48.1 million during fiscal 2007. These share repurchases were funded with cash provided by operating activities and/or through the use of the Company’s lines of credit. In the future, it is expected that this share repurchase program will continue to be funded with cash provided by operating activities and/or through the use of the Company’s lines of credit. It is expected that open market repurchases will continue from time to time depending on market conditions.


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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 Company’s consolidated subsidiaries have operating leases, the majority of which are with the Utility and the Pipeline and Storage segments, having a remaining lease commitment of approximately $35.5 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 Company’s unconsolidated subsidiaries, which are accounted for under the equity method, have capital leases of electric generating equipment having a remaining lease commitment of approximately $4.8 million. The Company has guaranteed 50%, or $2.4 million, of these capital lease commitments.
 
CONTRACTUAL OBLIGATIONS
 
The following table summarizes the Company’s expected future contractual cash obligations as of September 30, 2007, and the twelve-month periods over which they occur:
 
                                                         
    Payments by Expected Maturity Dates  
    2008     2009     2010     2011     2012     Thereafter     Total  
    (Millions)  
 
Long-Term Debt, including interest expense(1)
  $ 259.8     $ 148.4     $ 45.5     $ 232.7     $ 171.8     $ 439.3     $ 1,297.5  
Operating Lease Obligations
  $ 6.7     $ 5.8     $ 4.4     $ 2.9     $ 2.6     $ 13.1     $ 35.5  
Capital Lease Obligations
  $ 0.9     $ 0.5     $ 0.4     $ 0.4     $ 0.2     $     $ 2.4  
Purchase Obligations:
                                                       
Gas Purchase Contracts(2)
  $ 718.1     $ 67.2     $ 7.1     $ 2.8     $ 2.8     $ 16.2     $ 814.2  
Transportation and Storage Contracts
  $ 48.4     $ 47.3     $ 43.7     $ 19.3     $ 6.0     $ 7.1     $ 171.8  
Empire Connector Project Obligations(3)
  $ 118.3     $ 0.6     $     $     $     $     $ 118.9  
Other
  $ 20.5     $ 9.6     $ 6.0     $ 4.2     $ 3.7     $ 14.2     $ 58.2  
 
 
(1) Refer to Note E — Capitalization and Short-Term Borrowings, as well as the table under Interest Rate Risk in the Market Risk Sensitive Instruments section below, for the amounts excluding interest expense.
 
(2) Gas prices are variable based on the NYMEX prices adjusted for basis.
 
(3) The Empire Connector is scheduled to be placed in service by November 2008, at an estimated cost of $177 million. The Company has only committed itself to $118.9 million for the project at September 30, 2007.
 
The Company has made certain other guarantees on behalf of its subsidiaries. The guarantees relate primarily to: (i) obligations under derivative financial instruments, which are included on the consolidated balance sheet in accordance with SFAS 133 (see Item 7, MD&A under the heading “Critical Accounting Estimates — Accounting for Derivative Financial Instruments”); (ii) NFR obligations to purchase gas or to purchase gas transportation/storage services where the amounts due on those obligations each month are included on the consolidated balance sheet as a current liability; and (iii) other obligations which are reflected on the consolidated balance sheet. The Company believes that the likelihood it would be required to make payments under the guarantees is remote, and therefore has not included them in the table above.
 
OTHER MATTERS
 
In addition to the legal proceedings disclosed in Item 3 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 period in which they are resolved, they are not


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expected to change materially the Company’s present liquidity position, nor to have a material adverse effect on the financial condition of the Company.
 
The Company has a tax-qualified, noncontributory defined-benefit retirement plan (Retirement Plan) that covers approximately 73% of the Company’s employees. The Company has been making contributions to the Retirement Plan over the last several years and anticipates that it will continue making contributions to the Retirement Plan. During 2007, the Company contributed $24.9 million to the Retirement Plan. The Company anticipates that the annual contribution to the Retirement Plan in 2008 will be in the range of $15.0 million to $20.0 million. The Company expects that all subsidiaries having domestic employees covered by the Retirement Plan will make contributions to the Retirement Plan. The funding of such contributions will come from amounts collected in rates in the Utility and Pipeline and Storage segments or through short-term borrowings or through cash from operations.
 
The Company provides health care and life insurance benefits for a majority of its retired employees under a post-retirement benefit plan (Post-Retirement Plan). The Company has been making contributions to the Post-Retirement Plan over the last several years and anticipates that it will continue making contributions to the Post-Retirement Plan. During 2007, the Company contributed $42.3 million to the Post-Retirement Plan. The Company anticipates that the annual contribution to the Post-Retirement Plan in 2008 will be in the range of $25.0 million to $35.0 million. The funding of such contributions will come from amounts collected in rates in the Utility and Pipeline and Storage segments.
 
A capital loss carryover which existed at September 30, 2006, was fully utilized in 2007 in connection with the gain recognized on the sale of SECI.
 
MARKET RISK SENSITIVE INSTRUMENTS
 
Energy Commodity Price Risk
 
The Company, in its Exploration and Production segment, Energy Marketing segment, Pipeline and Storage segment, and All Other category, uses various derivative financial instruments (derivatives), including price swap agreements, no cost collars and futures contracts, as part of the Company’s overall energy commodity price risk management strategy. Under this strategy, the Company manages a portion of the market risk associated with fluctuations in the price of natural gas and crude oil, thereby attempting to provide more stability to operating results. The Company has operating procedures in place that are administered by experienced management to monitor compliance with the Company’s risk management policies. The derivatives are not held for trading purposes. The fair value of these derivatives, as shown below, represents the amount that the Company would receive from or pay to the respective counterparties at September 30, 2007 to terminate the derivatives. However, the tables below and the fair value that is disclosed do not consider the physical side of the natural gas and crude oil transactions that are related to the financial instruments.
 
The following tables disclose natural gas and crude oil price swap information by expected maturity dates for agreements in which the Company receives a fixed price in exchange for paying a variable price as quoted in various national natural gas publications or on the NYMEX. Notional amounts (quantities) are used to calculate the contractual payments to be exchanged under the contract. The weighted average variable prices represent the weighted average settlement prices by expected maturity date as of September 30, 2007. At September 30, 2007, the Company had not entered into any natural gas or crude oil price swap agreements extending beyond 2009.
 
Natural Gas Price Swap Agreements
 
                         
    Expected Maturity Dates  
    2008     2009     Total  
 
Notional Quantities (Equivalent Bcf)
    12.2       1.0       13.2  
Weighted Average Fixed Rate (per Mcf)
  $ 8.15     $ 8.82     $ 8.20  
Weighted Average Variable Rate (per Mcf)
  $ 7.77     $ 9.08     $ 7.86  


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Crude Oil Price Swap Agreements
 
                         
    Expected Maturity Dates  
    2008     2009     Total  
 
Notional Quantities (Equivalent bbls)
    1,305,000       180,000       1,485,000  
Weighted Average Fixed Rate (per bbl)
  $ 57.72     $ 54.70     $ 57.35  
Weighted Average Variable Rate (per bbl)
  $ 78.69     $ 74.31     $ 78.16  
 
At September 30, 2007, the Company would have received from its respective counterparties an aggregate of approximately $2.8 million to terminate the natural gas price swap agreements outstanding at that date. The Company would have had to pay an aggregate of approximately $11.2 million to its counterparties to terminate the crude oil price swap agreements outstanding at September 30, 2007.
 
At September 30, 2006, the Company had natural gas price swap agreements covering 7.4 Bcf at a weighted average fixed rate of $7.24 per Mcf. The Company also had crude oil price swap agreements covering 900,000 bbls at a weighted average fixed rate of $37.13 per bbl. The increase in natural gas price swap agreements from September 2006 to September 2007 is largely attributable to management’s decision to utilize fewer collars and more swaps. This decision was as a result of market conditions being less conducive to using collars than they were in the prior year. The increase in crude oil price swap agreements is primarily due to an increased availability of counterparties willing to enter into new swap agreements with terms that match the delivery points of its West Coast crude oil production.
 
The following table discloses the notional quantities, the weighted average ceiling price and the weighted average floor price for the no cost collars used by the Company to manage natural gas price risk. The no cost collars provide for the Company to receive monthly payments from (or make payments to) other parties when a variable price falls below an established floor price (the Company receives payment from the counterparty) or exceeds an established ceiling price (the Company pays the counterparty). At September 30, 2007, the Company had not entered into any natural gas or crude oil no cost collars extending beyond 2008.
 
No Cost Collars
 
         
    Expected
 
    Maturity
 
    Date  
    2008  
 
Natural Gas
       
Notional Quantities (Equivalent Bcf)
    1.4  
Weighted Average Ceiling Price (per Mcf)
  $ 16.45  
Weighted Average Floor Price (per Mcf)
  $ 8.83  
 
At September 30, 2007, the Company would have received an aggregate of approximately $1.9 million to terminate the natural gas no cost collars outstanding at that date.
 
At September 30, 2006, the Company had natural gas no cost collars covering 7.1 Bcf at a weighted average floor price of $8.26 per Mcf and a weighted average ceiling price of $17.25 per Mcf. The Company also had crude oil no cost collars covering 180,000 bbls at a weighted average floor price of $70.00 per bbl and a weighted average ceiling price of $77.00 per bbl at September 30, 2006. The decrease in natural gas collars from September 2006 to September 2007 is due to management’s decision to utilize fewer collars and more swaps. This is due to the market conditions discussed in the Swap Agreements section.


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The following table discloses the net contract volumes purchased (sold), weighted average contract prices and weighted average settlement prices by expected maturity date for futures contracts used to manage natural gas price risk. At September 30, 2007, the Company held no futures contracts with maturity dates extending beyond 2012.
 
Futures Contracts
 
                                                 
    Expected Maturity Dates  
    2008     2009     2010     2011     2012     Total  
 
Net Contract Volumes Purchased (Sold)
                                               
(Equivalent Bcf)
    2.9       (0.1 )           (1)     (1)     2.8  
Weighted Average Contract Price (per Mcf)
  $ 9.08     $ 9.50       NA     $ 6.99     $ 8.68     $ 9.11  
Weighted Average Settlement Price (per Mcf)
  $ 8.94     $ 9.13       NA     $ 6.31     $ 9.00     $ 8.96  
 
 
(1) The Energy Marketing segment has purchased 4 and 6 futures contracts (1 contract = 2,500 Dth) for 2011 and 2012, respectively.
 
At September 30, 2007, the Company would have received $2.2 million to terminate these futures contracts.
 
At September 30, 2006, the Company had futures contracts covering 7.0 Bcf (net long position) at a weighted average contract price of $9.67 per Mcf.
 
The decrease in net long positions at September 30, 2007 as compared to September 30, 2006 is attributed to fewer customers entering into fixed price sales commitments at September 30, 2007 as compared to September 30, 2006. Management believes this is due to the lack of a significant decrease in natural gas prices at the end of 2007 as compared to 2006, sufficient natural gas in storage throughout the United States, and forecasts for a mild winter. As a result, the Energy Marketing segment had purchased fewer futures contracts as of September 30, 2007 as compared to September 30, 2006 to hedge against a lower number of fixed price sales commitments.
 
The Company may be exposed to credit risk on some of the derivatives disclosed above. Credit risk relates to the risk of loss that the Company would incur as a result of nonperformance by counterparties pursuant to the terms of their contractual obligations. To mitigate such credit risk, management performs a credit check and then, on an ongoing basis, monitors counterparty credit exposure. Management has obtained guarantees from many of the parent companies of the respective counterparties to its derivatives. At September 30, 2007, the Company used nine counterparties for its over-the-counter derivatives. At September 30, 2007, no individual counterparty represented greater than 32% of total credit risk (measured as volumes hedged by an individual counterparty as a percentage of the Company’s total volumes hedged). All of the counterparties (or the parent of the counterparty) were rated as investment grade entities at September 30, 2007.
 
Exchange Rate Risk
 
The Exploration and Production segment’s investment in Canada was valued in Canadian dollars, and, as such, this investment was subject to currency exchange risk when the Canadian dollars are translated into U.S. dollars. This exchange rate risk to the Company’s investment in Canada resulted in increases or decreases to the CTA, a component of Accumulated Other Comprehensive Income (Loss) on the Consolidated Balance Sheets. When the foreign currency increased in value in relation to the U.S. dollar, there was a positive adjustment to CTA. When the foreign currency decreased in value in relation to the U.S. dollar, there was a negative adjustment to CTA. In August 2007, the Exploration and Production segment’s investment in Canada was sold, eliminating the Company’s major foreign operations. Of the $232.1 million in net proceeds received, $58.0 million was placed in escrow (denominated in Canadian dollars) pending receipt of a tax clearance certificate from the Canadian government. To hedge against foreign currency exchange risk, the Company entered into a $58.0 million forward contract to sell Canadian dollars. At September 30, 2007, due to the increase in the strength of the Canadian dollar versus the U.S. dollar, the Company had a $2.7 million derivative


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liability related to the collar. The Company records gains or losses associated with this forward contract directly to the income statement.
 
Interest Rate Risk
 
On December 8, 2006, the Company repaid $22.8 million of Empire’s secured debt. The interest costs of this secured debt were hedged by an interest rate collar. Since the hedged transaction was settled and there will be no future cash flows associated with the secured debt, hedge accounting for the interest rate collar was discontinued and the unrealized gain in accumulated other comprehensive income associated with the interest rate collar was reclassified to the Consolidated Statement of Income.
 
The following table presents the principal cash repayments and related weighted average interest rates by expected maturity date for the Company’s long-term fixed rate debt as well as the other long-term debt of certain of the Company’s subsidiaries. The interest rates for the variable rate debt are based on those in effect at September 30, 2007:
 
                                                         
    Principal Amounts by Expected Maturity Dates  
    2008     2009     2010     2011     2012     Thereafter     Total  
    (Dollars in millions)  
 
Long-Term Fixed Rate Debt
  $ 200.0 (1)   $ 100.0     $     $ 200.0     $ 150.0     $ 349.0     $ 999.0  
Weighted Average Interest Rate Paid
    6.3 %     6.0 %           7.5 %     6.7 %     5.9 %     6.4 %
Fair Value = $1,024.4
                                                       
 
 
(1) These notes have been classified as Current Portion of Long-Term Debt on the Company’s Consolidated Balance Sheet.
 
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 August 27, 2004, Distribution Corporation commenced a rate case by filing proposed tariff amendments and supporting testimony requesting approval to increase its annual revenues beginning October 1, 2004. Various parties opposed the filing. On April 15, 2005, Distribution Corporation, the parties and others executed an agreement settling all outstanding issues. In an order issued July 22, 2005, the NYPSC approved the April 15, 2005 rate agreement, substantially as filed, for an effective date of August 1, 2005. The rate agreement provided for a rate increase of $21 million by means of the elimination of bill credits ($5.8 million) and an increase in base rates ($15.2 million). For the two-year term of the agreement and until new rates should go into effect, the return on equity level above which earnings must be shared with rate payers is 11.5%.
 
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 is necessitated by decreased revenues resulting from customer conservation efforts and increased customer uncollectibles, among other things. The rate filing also includes a proposal for an aggressive 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, the Company’s conservation program for implementation on an accelerated basis. Associated ratemaking issues, however, were reserved for consideration in the rate case. On September 28, 2007, an administrative law judge assigned to the proceeding issued a


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recommended decision (RD) based on a review and analysis of the evidence presented in the case. The RD recommends a rate increase designed to provide additional annual revenues of $2.5 million, together with a bill surcharge that would collect up to $10.8 million to recover expenses arising from the conservation program. The recommended cost of equity, subject to updates, is 9.4%. The RD also recommends approval of the unopposed revenue decoupling mechanism. The NYPSC is not bound to accept the RD, and may accept, reject or modify the Company’s filing. Assuming standard procedure, rates would become effective in late December 2007. The outcome of the proceeding cannot be ascertained at this time.
 
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 Corporation’s 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 includes 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.
 
On June 8, 2006, the NTSB issued safety recommendations to Distribution Corporation, the PaPUC and certain other parties as a result of an investigation of a natural gas explosion that occurred on Distribution Corporation’s system in Dubois, Pennsylvania in August 2004. The explosion destroyed a residence, resulting in the death of two people who lived there, and damaged a number of other houses in the immediate vicinity. Without admitting liability, Distribution Corporation settled all significant third-party claims against it related to the explosion.
 
The NTSB’s safety recommendations to Distribution Corporation involved revisions to its butt-fusion procedures for joining plastic pipe, and revisions to its procedures for qualifying personnel who perform plastic fusions. Although not required by law to do so, Distribution Corporation implemented those recommendations. In December 2006, the NTSB classified its recommendations as “closed” after determining that Distribution Corporation took acceptable action with respect to the recommendations.
 
The NTSB’s recommendation to the PaPUC was to require an analysis of the integrity of butt-fusion joints in Distribution Corporation’s system and replacement of those joints that are determined to have unacceptable characteristics. Distribution Corporation has worked cooperatively with the Staff of the PaPUC to permit the PaPUC to undertake the analysis recommended by the NTSB.
 
In late November 2007, Distribution Corporation reached a Settlement Agreement with the Law Bureau Prosecutory Staff of the PaPUC (the “Law Bureau”) regarding the explosion and the PaPUC’s subsequent investigation. The Law Bureau and Distribution Corporation will jointly submit this Settlement Agreement to the PaPUC for approval. In the Settlement Agreement, Distribution Corporation agrees, without admitting liability, to pay a $50,000 fine and to fund an additional $30,000 of safety-related activities. Distribution Corporation also agrees to make various improvements to its butt-fusion procedures and to implement a program to review existing butt-fusions.
 
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.


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Empire currently does not have a rate case on file with the NYPSC. Among the issues resolved in connection with Empire’s FERC application to build the Empire Connector are the rates and terms of service that will become applicable to all of Empire’s business, effective upon Empire constructing and placing its new facilities into service (currently expected for November 2008). At that time, Empire will become an interstate pipeline subject to FERC regulation. The order described in the following paragraph requires Empire to make a filing at FERC within three years after the in-service date justifying Empire’s existing recourse rates or proposing alternative rates.
 
The FERC issued on December 21, 2006 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 has accepted that Certificate. Additional environmental permits from the U.S. Army Corps of Engineers and state environmental agencies have been received. Empire has also received, from all six upstate New York counties in which it would build the Empire Connector project, final approval of sales tax exemptions and temporary partial property tax abatements necessary to enable the Empire Connector to generate a fair return. 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 will require construction of this project. Construction began in September 2007 and is planned to be complete by November 1, 2008.
 
ENVIRONMENTAL MATTERS
 
The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. The Company has established procedures for the ongoing evaluation of its operations to identify potential environmental exposures and comply with regulatory policies and procedures. It is the Company’s policy to accrue estimated environmental clean-up costs (investigation and remediation) when such amounts can reasonably be estimated and it is probable that the Company will be required to incur such costs. At September 30, 2007, the Company has estimated its remaining clean-up costs related to former manufactured gas plant sites and third party waste disposal sites will be in the range of $12.1 million to $15.8 million. The minimum estimated liability of $12.1 million has been recorded on the Consolidated Balance Sheet at September 30, 2007. The Company expects to recover its environmental clean-up costs from a combination of rate recovery and insurance proceeds. Other than discussed in Note H (referred to below), the Company is currently not aware of any material additional exposure to environmental liabilities. However, adverse changes in environmental regulations or other factors could impact the Company.
 
For further discussion refer to Item 8 at Note H — Commitments and Contingencies under the heading “Environmental Matters.”
 
NEW ACCOUNTING PRONOUNCEMENTS
 
In June 2006, the FASB issued FIN 48. FIN 48 clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined in FIN 48 as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. If a tax benefit meets this threshold, it is measured and recognized based on an analysis of the cumulative probability of the tax benefit being ultimately sustained. The cumulative effect of applying FIN 48 at adoption, if any, is reported as an adjustment to opening retained earnings for the year of adoption. FIN 48 is effective for the first quarter of the Company’s 2008 fiscal year and it is expected that this pronouncement will not have a material effect on the Company’s consolidated financial statements.
 
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. The Company is currently evaluating the impact that the adoption of SFAS 157 will have on its consolidated financial statements. SFAS 157 is to be applied whenever another standard requires or allows assets


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or liabilities to be measured at fair value. The pronouncement will be effective as of the Company’s first quarter of fiscal 2009. The Company is currently evaluating the impact that the adoption of SFAS 157 will have on its consolidated financial statements.
 
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 plan’s assets and obligations that determine its funded status be measured as of the end of Company’s fiscal year, with limited exceptions. Under SFAS 158, certain previously unrecognized actuarial gains and losses and previously unrecognized prior service costs for both the pension and other post-retirement benefit plans as well as a previously unrecognized transition obligation for the other post-retirement benefit plan are required to be recognized. These amounts were not required to be recorded on the Company’s Consolidated Balance Sheet before the adoption of SFAS 158, but were instead amortized over a period of time. 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 Company’s fiscal year-end date will be adopted by the Company by the end of fiscal 2009. Currently, the Company measures its plan assets and benefit obligations using a June 30th measurement date. At September 30, 2007, in order to recognize the funded status of its pension and post-retirement benefit plans in accordance with SFAS 158, the Company recorded additional liabilities or reduced assets by a cumulative amount of $78.7 million ($71.1 million net of deferred tax benefits recognized for the portion recorded as an increase to Accumulated Other Comprehensive Loss). Of the $71.1 million recognized, $61.9 million was recorded as an increase to Other Regulatory Assets in the Company’s Utility and Pipeline and Storage segments, $12.5 million (net of deferred tax benefits of $7.6 million) was recorded as an increase to Accumulated Other Comprehensive Loss, and $3.3 million was recorded as an increase to Other Regulatory Liabilities in the Company’s Utility segment. The Company has recorded amounts to Other Regulatory Assets or Other Regulatory Liabilities in the Utility and Pipeline and Storage segments in accordance with the provisions of SFAS 71. The Company, in those segments, has certain regulatory commission authorizations, which allow the Company to defer as a regulatory asset or liability the difference between pension and post-retirement benefit costs as calculated in accordance with SFAS 87 and SFAS 106 and what is collected in rates. Refer to Item 8 at Note G — Retirement Plan and Other Post-Retirement Benefits for further disclosures regarding the impact of SFAS 158 on the Company’s consolidated financial statements.
 
In February 2007, the FASB issued SFAS 159. 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 item’s fair value in reporting periods subsequent to the date of adoption. SFAS 159 will be effective as of the Company’s first quarter of fiscal 2009. The Company is currently evaluating the impact, if any, that the adoption of SFAS 159 will have on its consolidated financial statements.
 
EFFECTS OF INFLATION
 
Although the rate of inflation has been relatively low over the past few years, the Company’s operations remain sensitive to increases in the rate of inflation because of its capital spending and the regulated nature of a significant portion of its business.
 
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
 
The Company is including the following cautionary statement in this Form 10-K 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


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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, performance and 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” and “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 Company’s expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including, without limitation, management’s examination of historical operating trends, data contained in the Company’s records and other data available from third parties, but there can be no assurance that management’s expectations, beliefs or projections will result or be achieved or accomplished. In addition to other factors and matters discussed elsewhere herein, the following are important factors that, in the view of the Company, could cause actual results to differ materially from those discussed in the forward-looking statements:
 
 1.  Changes in economic conditions, including economic disruptions caused by terrorist activities, acts of war or major accidents;
 
 2.  Changes in demographic patterns and weather conditions, including the occurrence of severe weather such as hurricanes;
 
 3.  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 Company’s natural gas and oil reserves;
 
 4.  Uncertainty of oil and gas reserve estimates;
 
 5.  Ability to successfully identify, drill for and produce economically viable natural gas and oil reserves;
 
 6.  Significant changes from expectations in the Company’s actual production levels for natural gas or oil;
 
 7.  Changes in the availability and/or price of derivative financial instruments;
 
 8.  Changes in the price differentials between various types of oil;
 
 9.  Inability to obtain new customers or retain existing ones;
 
10.  Significant changes in competitive factors affecting the Company;
 
11.  Changes in laws and regulations to which the Company is subject, including changes in tax, environmental, safety and employment laws and regulations;
 
12.  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 gas), affiliate relationships, industry structure, franchise renewal, and environmental/safety requirements;
 
13.  Unanticipated impacts of restructuring initiatives in the natural gas and electric industries;
 
14.  Significant changes from expectations in actual capital expenditures and operating expenses and unanticipated project delays or changes in project costs or plans;
 
15.  The nature and projected profitability of pending and potential projects and other investments, and the ability to obtain necessary governmental approvals and permits;
 
16.  Occurrences affecting the Company’s ability to obtain funds from operations, from borrowings under our credit lines or other credit facilities or from issuances of other short-term notes or debt or equity securities to finance needed capital expenditures and other investments, including any downgrades in the Company’s credit ratings;
 
17.  Ability to successfully identify and finance acquisitions or other investments and ability to operate and integrate existing and any subsequently acquired business or properties;


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18.  Impairments under the SEC’s full cost ceiling test for natural gas and oil reserves;
 
19.  Significant changes in tax rates or policies or in rates of inflation or interest;
 
20.  Significant changes in the Company’s relationship with its employees or contractors and the potential adverse effects if labor disputes, grievances or shortages were to occur;
 
21.  Changes in accounting principles or the application of such principles to the Company;
 
22.  The cost and effects of legal and administrative claims against the Company;
 
23.  Changes in actuarial assumptions and the return on assets with respect to the Company’s retirement plan and post-retirement benefit plans;
 
24.  Increasing health care costs and the resulting effect on health insurance premiums and on the obligation to provide post-retirement benefits; or
 
25.  Increasing costs of insurance, changes in coverage and the ability to obtain insurance.
 
The Company disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof.
 
Item 7A    Quantitative and Qualitative Disclosures About Market Risk
 
Refer to the “Market Risk Sensitive Instruments” section in Item 7, MD&A.


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Item 8    Financial Statements and Supplementary Data
 
Index to Financial Statements
 
         
    Page
 
Financial Statements:
       
    61  
    62  
    63  
    64  
    65  
    66  
Financial Statement Schedules:
       
For the three years ended September 30, 2007
       
    117  
 
All other schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto.
 
Supplementary Data
 
Supplementary data that is included in Note M — Quarterly Financial Data (unaudited) and Note O — Supplementary Information for Oil and Gas Producing Activities (unaudited), appears under this Item, and reference is made thereto.


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Shareholders of National Fuel Gas Company:
 
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of National Fuel Gas Company and its subsidiaries at September 30, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in “Management’s Report on Internal Control Over Financial Reporting” appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
PricewaterhouseCoopers LLP
 
Buffalo, New York
November 29, 2007


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NATIONAL FUEL GAS COMPANY
 
CONSOLIDATED STATEMENTS OF INCOME AND EARNINGS
REINVESTED IN THE BUSINESS
 
                         
    Year Ended September 30  
    2007     2006     2005  
    (Thousands of dollars, except per common
 
    share amounts)  
 
INCOME
                       
Operating Revenues
  $ 2,039,566     $ 2,239,675     $ 1,860,774  
                         
Operating Expenses
                       
Purchased Gas
    1,018,081       1,267,562       959,827  
Operation and Maintenance
    396,408       395,289       388,094  
Property, Franchise and Other Taxes
    70,660       69,202       68,164  
Depreciation, Depletion and Amortization
    157,919       151,999       156,502  
                         
      1,643,068       1,884,052       1,572,587  
                         
Operating Income
    396,498       355,623       288,187  
Other Income (Expense):
                       
Income from Unconsolidated Subsidiaries
    4,979       3,583       3,362  
Impairment of Investment in Partnership
                (4,158 )
Other Income
    4,936       2,825       12,744  
Interest Income
    1,550       9,409       6,236  
Interest Expense on Long-Term Debt
    (68,446 )     (72,629 )     (73,244 )
Other Interest Expense
    (6,029 )     (5,952 )     (9,069 )
                         
Income from Continuing Operations Before Income Taxes
    333,488       292,859       224,058  
Income Tax Expense
    131,813       108,245       85,621  
                         
Income from Continuing Operations
    201,675       184,614       138,437  
Discontinued Operations:
                       
Income (Loss) from Operations, Net of Tax
    15,479       (46,523 )     25,277  
Gain on Disposal, Net of Tax
    120,301             25,774  
                         
Income (Loss) from Discontinued Operations, Net of Tax
    135,780       (46,523 )     51,051  
                         
Net Income Available for Common Stock
    337,455       138,091       189,488  
                         
EARNINGS REINVESTED IN THE BUSINESS
                       
Balance at Beginning of Year
    786,013       813,020       718,926  
                         
      1,123,468       951,111       908,414  
Share Repurchases
    38,196       66,269        
Dividends on Common Stock
    101,496       98,829       95,394  
                         
Balance at End of Year
  $ 983,776     $ 786,013     $ 813,020  
                         
Earnings Per Common Share:
                       
Basic:
                       
Income from Continuing Operations
  $ 2.43     $ 2.20     $ 1.66  
Income (Loss) from Discontinued Operations
    1.63       (0.56 )     0.61  
                         
Net Income Available for Common Stock
  $ 4.06     $ 1.64     $ 2.27  
                         
Diluted:
                       
Income from Continuing Operations
  $ 2.37     $ 2.15     $ 1.63  
Income (Loss) from Discontinued Operations
    1.59       (0.54 )     0.60  
                         
Net Income Available for Common Stock
  $ 3.96     $ 1.61     $ 2.23  
                         
Weighted Average Common Shares Outstanding:
                       
Used in Basic Calculation
    83,141,640       84,030,118       83,541,627  
                         
Used in Diluted Calculation
    85,301,361       86,028,466       85,029,131  
                         
 
See Notes to Consolidated Financial Statements


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NATIONAL FUEL GAS COMPANY
 
CONSOLIDATED BALANCE SHEETS
 
                 
    At September 30  
    2007     2006  
    (Thousands of dollars)  
 
ASSETS
Property, Plant and Equipment
  $ 4,461,586     $ 4,703,040  
Less — Accumulated Depreciation, Depletion and Amortization
    1,583,181       1,825,314  
                 
      2,878,405       2,877,726  
                 
Current Assets
               
Cash and Temporary Cash Investments
    124,806       69,611  
Cash Held in Escrow
    61,964        
Hedging Collateral Deposits
    4,066       19,676  
Receivables — Net of Allowance for Uncollectible Accounts of $28,654 and $31,427, Respectively
    172,380       173,671  
Unbilled Utility Revenue
    20,682       25,538  
Gas Stored Underground
    66,195       59,461  
Materials and Supplies — at average cost
    35,669       36,693  
Unrecovered Purchased Gas Costs
    14,769       12,970  
Other Current Assets
    45,057       63,723  
Deferred Income Taxes
    8,550       23,402  
                 
      554,138       484,745  
                 
Other Assets
               
Recoverable Future Taxes
    83,954       79,511  
Unamortized Debt Expense
    12,070       15,492  
Other Regulatory Assets
    137,577       76,917  
Deferred Charges
    5,545       3,558  
Other Investments
    85,902       88,414  
Investments in Unconsolidated Subsidiaries
    18,256       11,590  
Goodwill
    5,476       5,476  
Intangible Assets
    28,836       31,498  
Prepaid Pension and Post-Retirement Benefit Costs
    61,006       64,125  
Fair Value of Derivative Financial Instruments
    9,188       11,305  
Deferred Income Taxes
          9,003  
Other
    8,059       4,388  
                 
      455,869       401,277  
                 
Total Assets
  $ 3,888,412     $ 3,763,748  
                 
 
CAPITALIZATION AND LIABILITIES
Capitalization:
               
Comprehensive Shareholders’ Equity
               
Common Stock, $1 Par Value
               
Authorized — 200,000,000 Shares; Issued and Outstanding — 83,461,308 Shares and 83,402,670 Shares, Respectively
  $ 83,461     $ 83,403  
Paid In Capital
    569,085       543,730  
Earnings Reinvested in the Business
    983,776       786,013  
                 
Total Common Shareholders’ Equity Before Items Of Other Comprehensive Income (Loss)
    1,636,322       1,413,146  
Accumulated Other Comprehensive Income (Loss)
    (6,203 )     30,416  
                 
Total Comprehensive Shareholders’ Equity
    1,630,119       1,443,562  
Long-Term Debt, Net of Current Portion
    799,000       1,095,675  
                 
Total Capitalization
    2,429,119       2,539,237  
                 
Current and Accrued Liabilities
               
Notes Payable to Banks and Commercial Paper
           
Current Portion of Long-Term Debt
    200,024       22,925  
Accounts Payable
    109,757       133,034  
Amounts Payable to Customers
    10,409       23,935  
Dividends Payable
    25,873       25,008  
Interest Payable on Long-Term Debt
    18,158       18,420  
Customer Advances
    22,863       29,417  
Other Accruals and Current Liabilities
    36,062       27,040  
Fair Value of Derivative Financial Instruments
    16,200       39,983  
                 
      439,346       319,762  
                 
Deferred Credits
               
Deferred Income Taxes
    575,356       544,502  
Taxes Refundable to Customers
    14,026       10,426  
Unamortized Investment Tax Credit
    5,392       6,094  
Cost of Removal Regulatory Liability
    91,226       85,076  
Other Regulatory Liabilities
    76,659       75,456  
Post-Retirement Liabilities
    70,555       32,918  
Asset Retirement Obligations
    75,939       77,392  
Other Deferred Credits
    110,794       72,885  
                 
      1,019,947       904,749  
                 
Commitments and Contingencies
           
                 
Total Capitalization and Liabilities
  $ 3,888,412     $ 3,763,748  
                 
 
See Notes to Consolidated Financial Statements


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NATIONAL FUEL GAS COMPANY
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                         
    Year Ended September 30  
    2007     2006     2005  
    (Thousands of dollars)  
 
Operating Activities
                       
Net Income Available for Common Stock
  $ 337,455     $ 138,091     $ 189,488  
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
                       
Gain on Sale of Discontinued Operations
    (159,873 )           (27,386 )
Impairment of Oil and Gas Producing Properties
          104,739        
Depreciation, Depletion and Amortization
    170,803       179,615       193,144  
Deferred Income Taxes
    52,847       (5,230 )     40,388  
Income from Unconsolidated Subsidiaries, Net of Cash Distributions
    (3,366 )     1,067       (1,372 )
Impairment of Investment in Partnership
                4,158  
Minority Interest in Foreign Subsidiaries
                2,645  
Excess Tax Benefits Associated with Stock-Based Compensation Awards
    (13,689 )     (6,515 )      
Other
    16,399       4,829       7,390  
Change in:
                       
Hedging Collateral Deposits
    15,610       58,108       (69,172 )
Receivables and Unbilled Utility Revenue
    5,669       (12,343 )     (25,828 )
Gas Stored Underground and Materials and Supplies
    (5,714 )     1,679       1,934  
Unrecovered Purchased Gas Costs
    (1,799 )     1,847       (7,285 )
Prepayments and Other Current Assets
    18,800       (39,572 )     (42,409 )
Accounts Payable
    (26,002 )     (23,144 )     48,089  
Amounts Payable to Customers
    (13,526 )     22,777       (1,996 )
Customer Advances
    (6,554 )     4,946       3,971  
Other Accruals and Current Liabilities
    8,950       (17,754 )     18,715  
Other Assets
    4,109       (22,700 )     (13,461 )
Other Liabilities
    (5,922 )     80,960       (3,667 )
                         
Net Cash Provided by Operating Activities
    394,197       471,400       317,346  
                         
Investing Activities
                       
Capital Expenditures
    (276,728 )     (294,159 )     (219,530 )
Investment in Partnership
    (3,300 )            
Net Proceeds from Sale of Foreign Subsidiaries
    232,092             111,619  
Cash Held in Escrow
    (58,248 )            
Net Proceeds from Sale of Oil and Gas Producing Properties
    5,137       13       1,349  
Other
    (725 )     (3,230 )     3,238  
                         
Net Cash Used in Investing Activities
    (101,772 )     (297,376 )     (103,324 )
                         
Financing Activities
                       
Change in Notes Payable to Banks and Commercial Paper
                (115,359 )
Excess Tax Benefits Associated with Stock-Based Compensation Awards
    13,689       6,515        
Shares Repurchased under Repurchase Plan
    (48,070 )     (85,168 )      
Reduction of Long-Term Debt
    (119,576 )     (9,805 )     (13,317 )
Net Proceeds from Issuance of Common Stock
    17,498       23,339       20,279  
Dividends Paid on Common Stock
    (100,632 )     (98,266 )     (94,159 )
Dividends Paid to Minority Interest
                (12,676 )
                         
Net Cash Used in Financing Activities
    (237,091 )     (163,385 )     (215,232 )
                         
Effect of Exchange Rates on Cash
    (139 )     1,365       1,276  
                         
Net Increase in Cash and Temporary Cash Investments
    55,195       12,004       66  
Cash and Temporary Cash Investments At Beginning of Year
    69,611       57,607       57,541  
                         
Cash and Temporary Cash Investments At End of Year
  $ 124,806     $ 69,611     $ 57,607  
                         
Supplemental Disclosure of Cash Flow Information
                       
Cash Paid For:
                       
Interest
  $ 75,987     $ 78,003     $ 84,455  
                         
Income Taxes
  $ 97,961     $ 54,359     $ 83,542  
                         
 
See Notes to Consolidated Financial Statements


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NATIONAL FUEL GAS COMPANY
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
                         
    Year Ended September 30  
    2007     2006     2005  
    (Thousands of dollars)  
 
Net Income Available for Common Stock
  $ 337,455     $ 138,091     $ 189,488  
                         
Other Comprehensive Income (Loss), Before Tax:
                       
Minimum Pension Liability Adjustment
          165,914       (83,379 )
Foreign Currency Translation Adjustment
    7,874       7,408       14,286  
Reclassification Adjustment for Realized Foreign Currency Translation Gain in Net Income
    (42,658 )     (716 )     (37,793 )
Unrealized Gain on Securities Available for Sale Arising During the Period
    4,747       2,573       2,891  
Reclassification Adjustment for Realized Gains On Securities Available for Sale in Net Income
                (651 )
Unrealized Gain (Loss) on Derivative Financial Instruments Arising During the Period
    8,495       90,196       (206,847 )
Reclassification Adjustment for Realized Loss on Derivative Financial Instruments in Net Income
    5,106       91,743       97,689  
                         
Other Comprehensive Income (Loss), Before Tax
    (16,436 )     357,118       (213,804 )
                         
Income Tax Expense (Benefit) Related to Minimum Pension Liability Adjustment
          58,070       (29,183 )
Income Tax Expense Related to Foreign Currency Translation Adjustment
                112  
Reclassification Adjustment for Income Tax Expense on Foreign Currency Translation Adjustment in Net Income
                (112 )
Income Tax Expense Related to Unrealized Gain on Securities Available for Sale Arising During the Period
    1,724       894       1,012  
Reclassification Adjustment for Income Tax Expense on Realized Gains from Securities Available for Sale in Net Income
                (228 )
Income Tax Expense (Benefit) Related to Unrealized Gain (Loss) on Derivative Financial Instruments Arising During the Period
    3,153       34,772       (79,059 )
Reclassification Adjustment for Income Tax Benefit on Realized Loss on Derivative Financial Instruments In Net Income
    2,824       35,338       36,507  
                         
Income Taxes — Net
    7,701       129,074       (70,951 )
                         
Other Comprehensive Income (Loss)
    (24,137 )     228,044       (142,853 )
                         
Comprehensive Income
  $ 313,318     $ 366,135     $ 46,635  
                         
 
See Notes to Consolidated Financial Statements


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note A — 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 Company uses proportionate consolidation when accounting for drilling arrangements related to oil and gas producing properties accounted for under the full cost method of accounting.
 
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.
 
Reclassification
 
Certain prior year amounts have been reclassified to conform with current year presentation.
 
Regulation
 
The Company is subject to regulation by certain state and federal authorities. The Company has accounting policies which conform to GAAP, as applied to regulated enterprises, and are in accordance with the accounting requirements and ratemaking practices of the regulatory authorities. Reference is made to Note C — Regulatory Matters for further discussion.
 
Revenues
 
The Company’s Utility segment records revenue as bills are rendered, except that service supplied but not billed is reported as unbilled utility revenue and is included in operating revenues for the year in which service is furnished.
 
The Company’s Energy Marketing segment records revenue as bills are rendered for service supplied on a calendar month basis.
 
The Company’s Pipeline and Storage segment records revenue for natural gas transportation and storage services. Revenue from reservation charges on firm contracted capacity is recognized through equal monthly charges over the contract period regardless of the amount of gas that is transported or stored. Commodity charges on firm contracted capacity and interruptible contracts are recognized as revenue when physical deliveries of natural gas are made at the agreed upon delivery point or when gas is injected or withdrawn from the storage field. The point of delivery into the pipeline or injection or withdrawal from storage is the point at which ownership and risk of loss transfers to the buyer of such transportation and storage services.
 
The Company’s Timber segment records revenue on lumber and log sales as products are shipped, which is the point at which ownership and risk of loss transfers to the buyer of lumber products or logs.
 
The Company’s Exploration and Production segment records revenue based on entitlement, which means that revenue is recorded based on the actual amount of gas or oil that is delivered to a pipeline and the Company’s ownership interest in the producing well. If a production imbalance occurs between what was supposed to be delivered to a pipeline and what was actually produced and delivered, the Company accrues the difference as an imbalance.
 
Allowance for Uncollectible Accounts
 
The allowance for uncollectible accounts is the Company’s best estimate of the amount of probable credit losses in the existing accounts receivable. The allowance is determined based on historical experience, the age


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
and other specific information about customer accounts. Account balances are charged off against the allowance twelve months after the account is final billed or when it is anticipated that the receivable will not be recovered.
 
Regulatory Mechanisms
 
The Company’s rate schedules in the Utility segment contain clauses that permit adjustment of revenues to reflect price changes from the cost of purchased gas included in base rates. Differences between amounts currently recoverable and actual adjustment clause revenues, as well as other price changes and pipeline and storage company refunds not yet includable in adjustment clause rates, are deferred and accounted for as either unrecovered purchased gas costs or amounts payable to customers. Such amounts are generally recovered from (or passed back to) customers during the following fiscal year.
 
Estimated refund liabilities to ratepayers represent management’s current estimate of such refunds. Reference is made to Note C — Regulatory Matters for further discussion.
 
The impact of weather on revenues in the Utility segment’s New York rate jurisdiction is tempered by a WNC, which covers the eight-month period from October through May. The WNC is designed to adjust the rates of retail customers to reflect the impact of deviations from normal weather. Weather that is more than 2.2% warmer than normal results in a surcharge being added to customers’ current bills, while weather that is more than 2.2% colder than normal results in a refund being credited to customers’ current bills. Since the Utility segment’s Pennsylvania rate jurisdiction does not have a WNC, weather variations have a direct impact on the Pennsylvania rate jurisdiction’s revenues.
 
In the Pipeline and Storage segment, the allowed rates that Supply Corporation bills its customers are based on a straight fixed-variable rate design, which allows recovery of all fixed costs in fixed monthly reservation charges. The allowed rates that Empire bills its customers are based on a modified-fixed variable rate design, which allows recovery of most fixed costs in fixed monthly reservation charges. To distinguish between the two rate designs, the modified fixed-variable rate design recovers return on equity and income taxes through variable charges whereas straight fixed-variable recovers all fixed costs, including return on equity and income taxes, through its monthly reservation charge. Because of the difference in rate design, changes in throughput due to weather variations do not have a significant impact on Supply Corporation’s revenues but may have a significant impact on Empire’s revenues.
 
Property, Plant and Equipment
 
The principal assets of the Utility and Pipeline and Storage segments, consisting primarily of gas plant in service, are recorded at the historical cost when originally devoted to service in the regulated businesses, as required by regulatory authorities.
 
In the Company’s 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.


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
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 a country-by-country basis 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. In adjusting estimated future net cash flows for hedging under the ceiling test at September 30, 2007, 2006, and 2005, estimated future net cash flows were increased by $2.2 million, increased by $4.7 million, and decreased by $175.3 million, respectively. The Company’s capitalized costs exceeded the full cost ceiling for the Company’s Canadian properties at June 30, 2006 and September 30, 2006. As such, the Company recognized pre-tax impairments of $62.4 million at June 30, 2006 and $42.3 million at September 30, 2006. These impairment charges are included in loss from discontinued operations for 2006 due to the sale of SECI during 2007.
 
Maintenance and repairs of property and replacements of minor items of property are charged directly to maintenance expense. The original cost of the regulated subsidiaries’ property, plant and equipment retired, and the cost of removal less salvage, are charged to accumulated depreciation.
 
Depreciation, Depletion and Amortization
 
For oil and gas properties, depreciation, depletion and amortization is computed based on quantities produced in relation to proved reserves using the units of production method. The cost of unproved oil and gas properties is excluded from this computation. For timber properties, depletion, determined on a property by property basis, is charged to operations based on the actual amount of timber cut in relation to the total amount of recoverable timber. For all other property, plant and equipment, depreciation, depletion and amortization is computed using the straight-line method in amounts sufficient to recover costs over the estimated service lives of property in service. The following is a summary of depreciable plant by segment:
 
                 
    As of September 30  
    2007     2006  
    (Thousands)  
 
Utility
  $ 1,539,808     $ 1,493,991  
Pipeline and Storage
    976,316       962,831  
Exploration and Production(1)
    1,577,745       1,899,777  
Energy Marketing
    1,199       1,123  
Timber
    119,237       116,281  
All Other and Corporate
    32,806       33,338  
                 
    $ 4,247,111     $ 4,507,341  
                 
 
 
(1) Fiscal 2006 includes the depreciable plant of SECI discontinued operations of $469,810.


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
Average depreciation, depletion and amortization rates are as follows:
 
                         
    Year Ended September 30  
    2007     2006     2005  
 
Utility
    2.8 %     2.8 %     2.8 %
Pipeline and Storage
    3.5 %     4.0 %     4.1 %
Exploration and Production, per Mcfe(1)
  $ 1.94     $ 2.00     $ 1.74  
Energy Marketing
    2.8 %     4.8 %     7.6 %
Timber
    4.0 %     5.6 %     6.2 %
All Other and Corporate
    4.6 %     4.1 %     4.3 %
 
 
(1) Amounts include depletion of oil and gas producing properties as well as depreciation of fixed assets. As disclosed in Note O — Supplementary Information for Oil and Gas Producing Properties, depletion of oil and gas producing properties amounted to $1.92, $1.98 and $1.72 per Mcfe of production in 2007, 2006 and 2005, respectively. Depletion of oil and gas producing properties in the United States amounted to $1.97, $1.74 and $1.58 per Mcfe of production in 2007, 2006 and 2005, respectively. Depletion of oil and gas producing properties in Canada amounted to $1.67, $2.95 and $2.36 per Mcfe of production in 2007, 2006 and 2005, respectively.
 
Goodwill
 
The Company has recognized goodwill of $5.5 million as of September 30, 2007 and 2006 on its consolidated balance sheet related to the Company’s acquisition of Empire in 2003. The Company accounts for goodwill in accordance with SFAS 142, which requires the Company to test goodwill for impairment annually. At September 30, 2007 and 2006, the fair value of Empire was greater than its book value. As such, the goodwill was considered not impaired.
 
Financial Instruments
 
Unrealized gains or losses from the Company’s investments in an equity mutual fund and the stock of an insurance company (securities available for sale) are recorded as a component of accumulated other comprehensive income (loss). Reference is made to Note F — Financial Instruments for further discussion.
 
The Company 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 include price swap agreements, no cost collars and futures contracts. The Company accounts for these instruments as either cash flow hedges or fair value hedges. In both cases, the fair value of the instrument is recognized on the Consolidated Balance Sheets as either an asset or a liability labeled fair value of derivative financial instruments. Fair value represents the amount the Company would receive or pay to terminate these instruments.
 
For effective cash flow hedges, the offset to the asset or liability that is recorded is a gain or loss recorded in accumulated other comprehensive income (loss) on the Consolidated Balance Sheets. The gain or loss recorded in accumulated other comprehensive income (loss) remains there until the hedged transaction occurs, at which point the gains or losses are reclassified to operating revenues, purchased gas expense or interest expense on the Consolidated Statements of Income. Any ineffectiveness associated with the cash flow hedges is recorded in the Consolidated Statements of Income. In December 2006, the Company repaid $22.8 million of Empire’s secured debt. The interest costs of this secured debt were hedged by an interest rate collar. Since the hedged transaction was settled and there will be no future cash flows associated with the secured debt, hedge accounting for the interest rate collar was discontinued and the unrealized gain of $1.9 million in accumulated other comprehensive income associated with the interest rate collar was reclassified to the Consolidated Statement of Income. The Company did not experience any material ineffectiveness with regard to its cash flow hedges during 2006.


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
At September 30, 2005, it was determined that certain derivative financial instruments no longer qualified as effective cash flow hedges due to anticipated delays in oil and gas production volumes caused by Hurricane Rita. These volumes were originally forecast to be produced in the first quarter of 2006. As such, at September 30, 2005, the Company reclassified $5.1 million in accumulated losses on such derivative financial instruments from accumulated other comprehensive income (loss) on the Consolidated Balance Sheet to other revenues on the Consolidated Statement of Income. For fair value hedges, the offset to the asset or liability that is recorded is a gain or loss recorded to operating revenues or purchased gas expense on the Consolidated Statements of Income. However, in the case of fair value hedges, the Company also records an asset or liability on the Consolidated Balance Sheets representing the change in fair value of the asset or firm commitment that is being hedged (see Other Current Assets section in this footnote). The offset to this asset or liability is a gain or loss recorded to operating revenues or purchased gas expense on the Consolidated Statements of Income as well. If the fair value hedge is effective, the gain or loss from the derivative financial instrument is offset by the gain or loss that arises from the change in fair value of the asset or firm commitment that is being hedged. The Company did not experience any material ineffectiveness with regard to its fair value hedges during 2007, 2006 or 2005.
 
Accumulated Other Comprehensive Income (Loss)
 
The components of Accumulated Other Comprehensive Income (Loss) are as follows:
 
                 
    Year Ended September 30  
    2007     2006  
    (Thousands)  
 
Funded Position of the Pension and Other Post-Retirement Benefit Plans Adjustment
  $ (12,482 )(1)   $  
Cumulative Foreign Currency Translation Adjustment
    (83 )     34,701  
Net Unrealized Loss on Derivative Financial Instruments
    (3,886 )     (11,510 )
Net Unrealized Gain on Securities Available for Sale
    10,248       7,225  
                 
Accumulated Other Comprehensive Income (Loss)
  $ (6,203 )   $ 30,416  
                 
 
 
(1) In accordance with the transition recognition provisions of SFAS 158, the adjustment to recognize the funded positions of the Pension and Other Post-retirement Benefit Plans are shown as an adjustment to the ending balance of accumulated other comprehensive income (loss). The adjustment is not shown as other comprehensive income (loss) in the Consolidated Statements of Comprehensive Income.
 
At September 30, 2007, it is estimated that of the $3.9 million net unrealized loss on derivative financial instruments shown in the table above, $2.4 million will be reclassified into the Consolidated Statement of Income during 2008. The remaining unrealized loss on derivative financial instruments of $1.5 million will be reclassified into the Consolidated Statement of Income in subsequent years. As disclosed in Note F — Financial Instruments, the Company’s derivative financial instruments extend out to 2012.
 
Gas Stored Underground — Current
 
In the Utility segment, gas stored underground — current in the amount of $33.0 million is carried at lower of cost or market, on a LIFO method. Based upon the average price of spot market gas purchased in September 2007, including transportation costs, the current cost of replacing this inventory of gas stored underground — current exceeded the amount stated on a LIFO basis by approximately $129.3 million at September 30, 2007. All other gas stored underground — current, which is in the Energy Marketing segment, is carried at lower of cost or market on an average cost method.


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Purchased Timber Rights
 
In the Timber segment, the Company purchases the right to harvest timber from land owned by other parties. These rights, which extend from several months to several years, are purchased to ensure a consistent supply of timber for the Company’s sawmill and kiln operations. The historical value of timber rights expected to be harvested during the following year are included in Materials and Supplies on the Consolidated Balance Sheets while the historical value of timber rights expected to be harvested beyond one year are included in Other Assets on the Consolidated Balance Sheets. The components of the Company’s purchased timber rights are as follows:
 
                 
    Year Ended September 30  
    2007     2006  
    (Thousands)  
 
Materials and Supplies
  $ 8,925     $ 13,174  
Other Assets
    5,641       3,218  
                 
    $ 14,566     $ 16,392  
                 
 
Unamortized Debt Expense
 
Costs associated with the issuance of debt by the Company are deferred and amortized over the lives of the related debt. Costs associated with the reacquisition of debt related to rate-regulated subsidiaries are deferred and amortized over the remaining life of the issue or the life of the replacement debt in order to match regulatory treatment.
 
Foreign Currency Translation
 
The functional currency for the Company’s foreign operations is the local currency of the country where the operations are located. Asset and liability accounts are translated at the rate of exchange on the balance sheet date. Revenues and expenses are translated at the average exchange rate during the period. Foreign currency translation adjustments are recorded as a component of accumulated other comprehensive income (loss). With the sale of SECI on August 31, 2007, the Company has eliminated its major foreign operation. While the Company is in the process of winding up or selling certain power development projects in Europe, the investment in such projects is not significant and the Company does not expect to have any significant foreign currency translation adjustments in the future.
 
Income Taxes
 
The Company and its domestic subsidiaries file a consolidated federal income tax return. Investment tax credit, prior to its repeal in 1986, was deferred and is being amortized over the estimated useful lives of the related property, as required by regulatory authorities having jurisdiction.
 
Consolidated Statements of Cash Flows
 
For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
 
Hedging Collateral Account
 
Cash held in margin accounts serves as collateral for open positions on exchange-traded futures contracts, exchange-traded options and over-the-counter swaps and collars.


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
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 is a Canadian dollar denominated account. On a U.S. dollar basis, the value of this account was $62.0 million at September 30, 2007.
 
Other Current Assets
 
Other Current Assets consist of prepayments in the amounts of $14.1 million and $12.0 million at September 30, 2007 and 2006, respectively, prepaid property and other taxes of $14.1 million and $13.7 million at September 30, 2007 and 2006, respectively, federal income taxes receivable in the amounts of $8.7 million and $7.5 million at September 30, 2007 and 2006, respectively, state income taxes receivable in the amounts of zero and $7.4 million at September 30, 2007 and 2006, respectively, and fair values of firm commitments in the amounts of $8.2 million and $23.1 million at September 30, 2007 and 2006, respectively.
 
Earnings Per Common Share
 
Basic earnings per common share is computed by dividing income available for common stock by the weighted average number of common shares outstanding for the period. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The only potentially dilutive securities the Company has outstanding are stock options and stock-settled SARs. The diluted weighted average shares outstanding shown on the Consolidated Statements 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 2007, no stock options or stock-settled SARs were excluded as being antidilutive. For 2006, 119,241 stock options were excluded as being antidilutive. There were no stock-settled SARs excluded as being antidilutive for 2006. There were no stock options or stock-settled SARs excluded as being antidilutive for 2005.
 
Share Repurchases
 
The Company considers all shares repurchased as cancelled shares restored to the status of authorized but unissued shares, in accordance with New Jersey law. The repurchases are accounted for on the date the share repurchase is settled as an adjustment to common stock (at par value) with the excess repurchase price allocated between paid in capital and retained earnings. Refer to Note E — Capitalization and Short-Term Borrowings for further discussion of the share repurchase program.
 
Stock-Based Compensation
 
The Company has various stock option and stock award plans which provide or provided for the issuance of one or more of the following to key employees: incentive stock options, nonqualified stock options, stock-settled SARs, restricted stock, performance units or performance shares. Stock options and stock-settled SARs under all plans have exercise prices equal to the average market price of Company common stock on the date of grant, and generally no stock option or stock-settled SAR is exercisable less than one year or more than ten years after the date of each grant. Restricted stock is subject to restrictions on vesting and transferability. Restricted stock awards entitle the participants to full dividend and voting rights. Certificates for shares of restricted stock awarded under the Company’s stock option and stock award plans are held by the Company during the periods in which the restrictions on vesting are effective. Restrictions on restricted stock awards generally lapse ratably over a period of not more than ten years after the date of each grant.


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Prior to October 1, 2005, the Company accounted for its stock-based compensation under the recognition and measurement principles of APB 25 and related interpretations. Under that method, no compensation expense was recognized for options granted under the Company’s stock option and stock award plans. The Company did record, in accordance with APB 25, compensation expense for the market value of restricted stock on the date of the award over the periods during which the vesting restrictions existed.
 
Effective October 1, 2005, the Company adopted SFAS 123R, which requires the measurement and recognition of compensation cost at fair value for all share-based payments, including stock options and stock-settled SARs. The Company has chosen to use the modified version of prospective application, as allowed by SFAS 123R. Using the modified prospective application, the Company recorded compensation cost for the portion of awards granted prior to October 1, 2005 for which the requisite service had not been rendered and recognized such compensation cost as the requisite service was rendered on or after October 1, 2005. Such compensation expense is based on the grant-date fair value of the awards as calculated for the Company’s disclosure using a Binomial option-pricing model under SFAS 123. Any new awards, modifications to awards, repurchases of awards, or cancellations of awards subsequent to September 30, 2005 will follow the provisions of SFAS 123R, with compensation expense being calculated using the Black-Scholes-Merton closed form model. The Company has chosen the Black-Scholes-Merton closed form model since it is easier to administer than the Binomial option-pricing model. Furthermore, since the Company does not have complex stock-based compensation awards, it does not believe that compensation expense would be materially different under either model. There were 448,000, 317,000 and 700,000 stock options granted during the years ended September 30, 2007, 2006 and 2005, respectively. The Company granted 50,000 stock-settled SARs during the year ended September 30, 2007. There were no stock-settled SARs granted during the years ended September 30, 2006 and 2005. The accounting treatment for such stock-settled SARs is the same under SFAS 123R as the accounting for stock options under SFAS 123R. The Company also granted 25,000 and 16,000 restricted share awards (non-vested stock as defined by SFAS 123R) during the years ended September 30, 2007 and 2006, respectively. There were no restricted share awards granted during the year ended September 30, 2005. Stock-based compensation expense for the years ended September 30, 2007, 2006 and 2005 was approximately $3,727,000, $1,705,000, and $517,000, respectively. Stock-based compensation expense is included in operation and maintenance expense on the Consolidated Statement of Income. The total income tax benefit related to stock-based compensation expense during the years ended September 30, 2007, 2006 and 2005 was approximately $1,488,000, $653,000 and $206,000, respectively. There were no capitalized stock-based compensation costs during the years ended September 30, 2007 and 2006.
 
Prior to the adoption of SFAS 123R, the Company followed the nominal vesting period approach under the disclosure requirements of SFAS 123 for determining the vesting period for awards with retirement-eligible provisions, which recognized stock-based compensation expense over the nominal vesting period. As a result of the adoption of SFAS 123R, the Company currently applies the non-substantive vesting period approach for determining the vesting period of such awards. Under this approach, the retention of the award is not contingent on providing subsequent service and the vesting period would begin at the grant date and end at the retirement-eligible date. For the year ended September 30, 2007, the amount of compensation expense recognized by the Company using the non-substantive vesting approach was $280,000 ($182,000 net of tax) less than if the nominal vesting period approach had been used. For the year ended September 30, 2006, the Company recognized an additional $442,000 ($288,000 net of tax) of stock-based compensation expense by applying the non-substantive vesting approach as opposed to the nominal vesting period approach. For the year ended September 30, 2005, stock-based compensation expense would have been $4,282,000 ($2,752,000 net of tax) for pro forma recognition purposes had the non-substantive vesting period approach been used. Pro forma stock-based compensation expense following the nominal vesting period approach is shown in the table below.


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table illustrates the effect on net income and earnings per share of the Company had the Company applied the fair value recognition provisions of SFAS 123 relating to stock-based employee compensation for the year ended September 30, 2005:
 
         
    Year Ended
 
    September 30,
 
    2005  
    (Thousands, except
 
    per share amounts)  
 
Net Income, Available for Common Stock, As Reported
  $ 189,488  
Add: Stock-Based Employee Compensation Expense Included in Reported Net Income, Net of Tax(1)
    336  
Deduct: Total Stock-Based Employee Compensation Expense Determined Under Fair Value Based Methods for all Awards, Net of Related Tax Effects
    (2,782 )
         
Pro Forma Net Income Available for Common Stock
  $ 187,042  
         
Earnings Per Common Share:
       
Basic — As Reported
  $ 2.27  
Basic — Pro Forma
  $ 2.24  
Diluted — As Reported
  $ 2.23  
Diluted — Pro Forma
  $ 2.20  
 
 
(1) Stock-based compensation expense in 2005 represented compensation expense related to restricted stock awards. The pre-tax expense was $517,000 for the year ended September 30, 2005.
 
Stock Options
 
The total intrinsic value of stock options exercised during the years ended September 30, 2007, 2006 and 2005 totaled approximately $38.7 million, $30.9 million, and $19.8 million, respectively. For 2007, 2006 and 2005, the amount of cash received by the Company from the exercise of such stock options was approximately $26.0 million, $30.1 million, and $24.8 million, respectively.
 
The Company realizes tax benefits related to the exercise of stock options on a calendar year basis as opposed to a fiscal year basis. As such, for stock options exercised during the quarters ended December 31, 2006, 2005, and 2004, the Company realized a tax benefit of $3.2 million, $0.9 million, and $1.1 million, respectively. For stock options exercised during the period of January 1, 2007 through September 30, 2007, the Company will realize a tax benefit of approximately $12.0 million in the quarter ended December 31, 2007. For stock options exercised during the period of January 1, 2006 through September 30, 2006, the Company realized a tax benefit of approximately $11.4 million in the quarter ended December 31, 2006. For stock options exercised during the period of January 1, 2005 through September 30, 2005, the Company realized a tax benefit of approximately $6.3 million in the quarter ended December 31, 2005. The weighted average grant date fair value of options granted in 2007, 2006 and 2005 is $7.27 per share, $6.68 per share, and $4.59 per share, respectively. For the years ended September 30, 2007, 2006 and 2005, 327,501, 89,665 and 1,375,105 stock options became fully vested, respectively. The total fair value of these stock options was approximately $2.1 million, $0.4 million and $6.2 million, respectively, for the years ended September 30, 2007, 2006 and 2005. As of September 30, 2007, unrecognized compensation expense related to stock options totaled approximately $0.9 million, which will be recognized over a weighted average period of 10.6 months. For a summary of transactions during 2007 involving option shares for all plans, refer to Note E — Capitalization and Short-Term Borrowings.
 
The fair value of options at the date of grant was estimated using a Binomial option-pricing model for options granted prior to October 1, 2005 and the Black-Scholes-Merton closed form model for options granted


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
after September 30, 2005. The following weighted average assumptions were used in estimating the fair value of options at the date of grant:
 
                         
    Year Ended September 30  
    2007     2006     2005  
 
Risk Free Interest Rate
    4.46 %     5.08 %     4.46 %
Expected Life (Years)
    7.0       7.0       7.0  
Expected Volatility
    17.73 %     17.71 %     17.76 %
Expected Dividend Yield (Quarterly)
    0.76 %     0.83 %     1.00 %
 
The risk-free interest rate is based on the yield of a Treasury Note with a remaining term commensurate with the expected term of the option. The expected life and expected volatility are based on historical experience.
 
For grants prior to October 1, 2005, the Company used a forfeiture rate of 13.6% for calculating stock-based compensation expense related to stock options and this rate is based on the Company’s historical experience of forfeitures on unvested stock option grants. For grants during the years ended September 30, 2007 and 2006, it was assumed that there would be no forfeitures, based on the vesting term and the number of grantees.
 
Stock-settled SARs
 
There were no stock-settled SARs exercised during the years ended September 30, 2007, 2006 and 2005 as none of the stock-settled SARs granted have vested. The weighted average grant date fair value of stock-settled SARs granted in 2007 is $7.81 per share. There were no stock-settled SARs granted during 2006 or 2005. For the years ended September 30, 2007, 2006 and 2005, there were no stock-settled SARs that became fully vested. As of September 30, 2007, unrecognized compensation expense related to stock-settled SARs totaled approximately $0.3 million, which will be recognized over a weighted average period of 1.4 years. For a summary of transactions during 2007 involving stock-settled SARs for all plans, refer to Note E — Capitalization and Short-Term Borrowings.
 
The fair value of stock-settled SARs at the date of grant was estimated using the Black-Scholes-Merton closed form model. The following weighted average assumptions were used in estimating the fair value of options at the date of grant:
 
         
    Year Ended
 
    September 30,
 
    2007  
 
Risk Free Interest Rate
    4.53 %
Expected Life (Years)
    7.0  
Expected Volatility
    17.55 %
Expected Dividend Yield (Quarterly)
    0.73 %
 
The risk-free interest rate is based on the yield of a Treasury Note with a remaining term commensurate with the expected term of the option. The expected life and expected volatility are based on historical experience.
 
For grants during the year ended September 30, 2007, it was assumed that there would be no forfeitures, based on the vesting term and the number of grantees.


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Restricted Share Awards
 
The weighted average fair value of restricted share awards granted in 2007 and 2006 is $40.18 per share and $34.94 per share, respectively. There were no restricted share awards granted during 2005. As of September 30, 2007, unrecognized compensation expense related to restricted share awards totaled approximately $1.0 million, which will be recognized over a weighted average period of 1.7 years. For a summary of transactions during 2007 involving restricted share awards, refer to Note E — Capitalization and Short-Term Borrowings.
 
During 2006, a modification was made to a restricted share award involving one employee. The modification accelerated the vesting date of 4,000 shares from December 7, 2006 to July 1, 2006. The incremental compensation expense, totaling approximately $32,000, was included with the total stock-based compensation expense for the year ended September 30, 2006.
 
New Accounting Pronouncements
 
In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined in FIN 48 as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. If a tax benefit meets this threshold, it is measured and recognized based on an analysis of the cumulative probability of the tax benefit being ultimately sustained. The cumulative effect of applying FIN 48 at adoption, if any, is reported as an adjustment to opening retained earnings for the year of adoption. FIN 48 is effective for the first quarter of the Company’s 2008 fiscal year and it is expected that this pronouncement will not have a material effect on the Company’s consolidated financial statements.
 
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. The pronouncement is effective as of the Company’s first quarter of fiscal 2009. The Company is currently evaluating the impact that the adoption of SFAS 157 will have on its consolidated financial statements.
 
In September 2006, the FASB also issued SFAS 158, “Employer’s 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 plan’s assets and obligations that determine its funded status be measured as of the end of the Company’s 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 Company’s fiscal year-end date will be adopted by the Company by the end of fiscal 2009. Currently, the Company measures its plan assets and benefit obligations using a June 30th measurement date. At September 30, 2007, in order to recognize the funded status of its pension and post-retirement benefit plans in accordance with SFAS 158, the Company recorded additional liabilities or reduced assets by a cumulative amount of $78.7 million ($71.1 million net of deferred tax benefits recognized for the portion recorded as an increase to Accumulated Other Comprehensive Loss). Of the $71.1 million recognized, $61.9 million was recorded as an increase to Other Regulatory Assets in the Company’s Utility and Pipeline and Storage segments, $12.5 million (net of deferred tax benefits of $7.6 million) was recorded as an increase to Accumulated Other Comprehensive Loss, and $3.3 million was recorded as an increase to Other Regulatory


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Liabilities in the Company’s Utility segment. The Company has recorded amounts to Other Regulatory Assets or Other Regulatory Liabilities in the Utility and Pipeline and Storage segments in accordance with the provisions of SFAS 71. The Company, in those segments, has certain regulatory commission authorizations, which allow the Company to defer as a regulatory asset or liability the difference between pension and post-retirement benefit costs as calculated in accordance with SFAS 87 and SFAS 106 and what is collected in rates. Refer to Note G — Retirement Plan and Other Post-Retirement Benefits for further disclosures regarding the impact of SFAS 158 on the Company’s consolidated financial statements.
 
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 item’s fair value in reporting periods subsequent to the date of adoption. SFAS 159 is effective as of the Company’s first quarter of fiscal 2009. The Company is currently evaluating the impact, if any, that the adoption of SFAS 159 will have on its consolidated financial statements.
 
Note B — Asset Retirement Obligations
 
The Company accounts for asset retirement obligations in accordance with the provisions of SFAS 143. SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes the estimated cost of retiring the asset as part of the carrying amount of the related long-lived asset. Over time, the liability is adjusted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset.
 
As previously disclosed, the Company follows the full cost method of accounting for its exploration and production costs. Upon the adoption of SFAS 143 on October 1, 2002, the Company recorded an asset retirement obligation representing plugging and abandonment costs associated with the Exploration and Production segment’s crude oil and natural gas wells and capitalized such costs in property, plant and equipment (i.e. the full cost pool). Prior to the adoption of SFAS 143, plugging and abandonment costs were accounted for solely through the Company’s units-of-production depletion calculation. An estimate of such costs was added to the depletion base, which also included capitalized costs in the full cost pool and estimated future expenditures to be incurred in developing proved reserves. With the adoption of SFAS 143, plugging and abandonment costs are already included in capitalized costs and the units-of-production depletion calculation has been modified to exclude from the depletion base any estimate of future plugging and abandonment costs that are already recorded in the full cost pool.
 
The full cost method of accounting provides a limit to the amount of costs that can be capitalized in the full cost pool. This limit is referred to as the full cost ceiling. Prior to the adoption of SFAS 143, in calculating the full cost ceiling, the Company reduced the future net cash flows from proved oil and gas reserves by the estimated plugging and abandonment costs. Such future net cash flows would then be compared to capitalized costs in the full cost pool, with any excess capitalized costs being expensed. With the adoption of SFAS 143, since the full cost pool now includes an amount associated with plugging and abandoning the wells, the calculation of the full cost ceiling has been changed so that future net cash flows from proved oil and gas reserves are no longer reduced by the estimated plugging and abandonment costs.
 
On September 30, 2006, the Company adopted FIN 47, an interpretation of SFAS 143. FIN 47 provides clarification of the term “conditional asset retirement obligation” as used in SFAS 143, defined as a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the Company. Under this standard, if the fair value of a conditional asset retirement obligation can be reasonably estimated, a company must record a liability and a corresponding asset for the conditional asset retirement obligation representing the present value of that obligation at the date the obligation was incurred. FIN 47 also serves to clarify when a company


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
would have sufficient information to reasonably estimate the fair value of a conditional asset retirement obligation.
 
Upon the adoption of FIN 47, the Company recorded future asset retirement obligations associated with the plugging and abandonment of natural gas storage wells in the Pipeline and Storage segment and the removal of asbestos and asbestos-containing material in various facilities in the Utility and Pipeline and Storage segments. The Company also identified asset retirement obligations for certain costs connected with the retirement of distribution mains and services pipeline systems in the Utility segment and with the transmission mains and other components in the pipeline systems in the Pipeline and Storage segment. These retirement costs within the distribution and transmission systems are primarily for the capping and purging of pipe, which are generally abandoned in place when retired, as well as for the clean-up of PCB contamination associated with the removal of certain pipe.
 
As a result of the implementation of FIN 47 as of September 30, 2006, the Company recorded additional asset retirement obligations of $23.2 million and corresponding long-lived plant assets, net of accumulated depreciation, of $3.5 million. These assets will be depreciated over their respective remaining depreciable life. The remaining $19.7 million represents the cumulative accretion and depreciation of the asset retirement obligations that would have been recognized if this interpretation had been in effect at the inception of the obligations. Of this amount, the Company recorded an increase to regulatory assets of $9.0 million and a reduction to cost of removal regulatory liability of $10.7 million. The cost of removal regulatory liability represents amounts collected from customers through depreciation expense in the Company’s Utility and Pipeline and Storage segments. These removal costs are not a legal retirement obligation in accordance with SFAS 143. Rather, they represent a regulatory liability. However, SFAS 143 requires that such costs of removal be reclassified from accumulated depreciation to other regulatory liabilities. At September 30, 2007 and 2006, the costs of removal reclassified to other regulatory liabilities amounted to $91.2 million and $85.1 million, respectively.
 
A reconciliation of the Company’s asset retirement obligation calculated in accordance with SFAS 143 is shown below ($000s):
 
                         
    Year Ended September 30  
    2007     2006     2005  
    (Thousands)  
 
Balance at Beginning of Year
  $ 77,392     $ 41,411     $ 32,292  
Additions — Adoption of FIN 47
          23,234        
Liabilities Incurred and Revisions of Estimates
    (932 )     11,244       8,343  
Liabilities Settled
    (6,108 )     (1,303 )     (1,938 )
Accretion Expense
    5,394       2,671       2,448  
Exchange Rate Impact
    193       135       266  
                         
Balance at End of Year
  $ 75,939     $ 77,392     $ 41,411  
                         
 
Pursuant to FIN 47, the financial statements for periods prior to September 30, 2006 have not been restated. If FIN 47 had been in effect, the Company would have recorded additional asset retirement obligations of $21.9 million at October 1, 2005.


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note C — Regulatory Matters
 
Regulatory Assets and Liabilities
 
The Company has recorded the following regulatory assets and liabilities:
 
                 
    At September 30  
    2007     2006  
    (Thousands)  
 
Regulatory Assets(1):
               
Pension and Post-Retirement Benefit Costs(2) (Note G)
  $ 98,787     $ 47,368  
Recoverable Future Taxes (Note D)
    83,954       79,511  
Environmental Site Remediation Costs(2) (Note H)
    20,738       12,937  
Unrecovered Purchased Gas Costs (See Regulatory Mechanisms in Note A)
    14,769       12,970  
Unamortized Debt Expense (Note A)
    8,470       8,399  
Asset Retirement Obligations(2) (Note B)
    8,315       9,018  
Recoverable Worker Compensation Expense(2)
    4,445       3,691  
Other(2)
    5,292       3,903  
                 
Total Regulatory Assets
    244,770       177,797  
                 
Regulatory Liabilities :
               
Cost of Removal Regulatory Liability (Note B)
    91,226       85,076  
New York Rate Settlements(3)
    27,964       40,881  
Pension and Post-Retirement Benefit Costs(3) (Note G)
    21,676       13,063  
Tax Benefit on Medicare Part D Subsidy(3)
    19,147       13,791  
Taxes Refundable to Customers (Note D)
    14,026       10,426  
Amounts Payable to Customers (See Regulatory Mechanisms in Note A)
    10,409       23,935  
Deferred Insurance Proceeds(3)
    7,422       7,516  
Other(3)
    450       205  
                 
Total Regulatory Liabilities
    192,320       194,893  
                 
Net Regulatory Position
  $ 52,450     $ (17,096 )
                 
 
 
(1) The Company recovers the cost of its regulatory assets but, with the exception of Unrecovered Purchased Gas Costs, does not earn a return on them.
 
(2) Included in Other Regulatory Assets on the Consolidated Balance Sheets.
 
(3) Included in Other Regulatory Liabilities on the Consolidated Balance Sheets.
 
If for any reason the Company ceases to meet the criteria for application of regulatory accounting treatment for all or part of its operations, the regulatory assets and liabilities related to those portions ceasing to meet such criteria would be eliminated from the balance sheet and included in income of the period in which the discontinuance of regulatory accounting treatment occurs. Such amounts would be classified as an extraordinary item.


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
New York Rate Settlements
 
With respect to utility services provided in New York, the Company has entered into rate settlements approved by the NYPSC. The rate settlements have given rise to several significant liabilities, which are described as follows:
 
Gross Receipts Tax Over-Collections — In accordance with NYPSC policies, Distribution Corporation deferred the difference between the revenues it collects under a New York State gross receipts tax surcharge and its actual New York State income tax expense. Distribution Corporation’s cumulative gross receipts tax revenues exceeded its New York State income tax expense, resulting in a regulatory liability at September 30, 2007 and 2006 of $6.7 million and $19.8 million, respectively. Under the terms of its 2005 rate agreement, Distribution Corporation has been passing back that regulatory liability to rate payers since August 1, 2005. Further, the gross receipts tax surcharge that gave rise to the regulatory liability was eliminated from Distribution Corporation’s tariff (New York State income taxes are now recovered as a component of base rates).
 
Cost Mitigation Reserve (“CMR”) — The CMR is a regulatory liability that can be used to offset certain expense items specified in Distribution Corporation’s rate settlements. The source of the CMR is principally the accumulation of certain refunds from upstream pipeline companies. During 2005, under the terms of the 2005 rate agreement, Distribution Corporation transferred the remaining balance in a generic restructuring reserve (which had been established in a prior rate settlement) and the balances it had accumulated under various earnings sharing mechanisms to the CMR. The balance in the CMR at September 30, 2007 and 2006 amounted to $7.4 million and $7.6 million, respectively.
 
Other — The 2005 agreement also established a reserve to fund area development projects. The balance in the area development projects reserve at September 30, 2007 and 2006 amounted to $3.6 million and $3.9 million, respectively (Distribution Corporation established the reserve at September 30, 2005 by transferring $3.8 million from the CMR discussed above). Various other regulatory liabilities have also been created through the New York rate settlements and amounted to $10.3 million and $9.6 million at September 30, 2007 and 2006, respectively.
 
Tax Benefit on Medicare Part D Subsidy
 
The Company has established a regulatory liability for the tax benefit it will receive under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Act). The Act provides a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In the Company’s Utility and Pipeline and Storage segments, the ratepayer funds the Company’s post-retirement benefit plans. As such, any tax benefit received under the Act must be flowed-through to the ratepayer. Refer to Note G — Retirement Plan and Other Post-Retirement Benefits for further discussion of the Act and its impact on the Company.
 
Deferred Insurance Proceeds
 
In 2006, the Company, in its Utility and Pipeline and Storage segments, received $7.5 million in environmental insurance settlement proceeds. Such proceeds have been deferred as a regulatory liability to be applied against any future environmental claims that may be incurred. The proceeds have been classified as a regulatory liability in recognition of the fact that ratepayers funded the premiums on the former insurance policies. Deferred insurance proceeds amounted to $7.4 million at September 30, 2007.
 
Recoverable Worker Compensation Expense
 
The Company has established a liability in its Utility segment in accordance with the provisions of SFAS 112 for future worker compensation liabilities. Such amounts have been deferred as a regulatory asset because the Company is allowed to recover worker compensation expense in rates.


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note D — Income Taxes
 
The components of federal, state and foreign income taxes included in the Consolidated Statements of Income are as follows:
 
                         
    Year Ended September 30  
    2007     2006     2005  
    (Thousands)  
 
Current Income Taxes —
                       
Federal
  $ 99,608     $ 65,593     $ 45,571  
State
    21,700       13,511       14,413  
Foreign
    22       2,212       4,104  
Deferred Income Taxes —
                       
Federal
    39,340       19,111       27,412  
State
    10,751       9,024       2,280  
Foreign
    2,756       (33,365 )     10,120  
                         
      174,177       76,086       103,900  
Deferred Investment Tax Credit
    (697 )     (697 )     (697 )
                         
Total Income Taxes
  $ 173,480     $ 75,389     $ 103,203  
                         
Presented as Follows:
                       
Other Income
  $ (697 )   $ (697 )   $ (697 )
Income Tax Expense — Continuing Operations
    131,813       108,245       85,621  
Discontinued Operations —
                       
Income From Operations
    2,792       (32,159 )     16,667  
Gain on Disposal
    39,572             1,612  
                         
Total Income Taxes
  $ 173,480     $ 75,389     $ 103,203  
                         
 
The U.S. and foreign components of income (loss) before income taxes are as follows:
 
                         
    Year Ended September 30  
    2007     2006     2005  
    (Thousands)  
 
U.S. 
  $ 496,074     $ 293,887     $ 223,113  
Foreign
    14,861       (80,407 )     69,578  
                         
    $ 510,935     $ 213,480     $ 292,691  
                         


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Total income taxes as reported differ from the amounts that were computed by applying the federal income tax rate to income before income taxes. The following is a reconciliation of this difference:
 
                         
    Year Ended September 30  
    2007     2006     2005  
    (Thousands)  
 
Income Tax Expense, Computed at U.S. Federal Statutory Rate of 35%
  $ 178,827     $ 74,718     $ 102,442  
Increase in Taxes Resulting from:
                       
State Income Taxes
    21,093       14,648       10,850  
Foreign Tax Differential
    (20,980 )     (3,718 )     (4,845 )
Reversal of Capital Loss Valuation Allowance
          (2,877 )      
Miscellaneous
    (5,460 )     (7,382 )     (5,244 )
                         
Total Income Taxes
  $ 173,480     $ 75,389     $ 103,203  
                         
 
The foreign tax differential amount shown above for 2007 includes tax effects relating to the gain on disposition of a foreign subsidiary. Also, the foreign tax differential amount shown above for 2006 includes a $5.1 million deferred tax benefit relating to additional future tax deductions forecasted in Canada and the amount for 2005 includes tax effects relating to the disposition of a foreign subsidiary. The miscellaneous amount shown above for 2006 includes a net reversal of $3.2 million relating to a tax contingency reserve.
 
Significant components of the Company’s deferred tax liabilities and assets are as follows:
 
                 
    At September 30  
    2007     2006  
    (Thousands)  
 
Deferred Tax Liabilities:
               
Property, Plant and Equipment
  $ 612,648     $ 569,677  
Other
    61,616       37,865  
                 
Total Deferred Tax Liabilities
    674,264       607,542  
                 
Deferred Tax Assets:
               
Other
    (107,458 )     (95,445 )
                 
Total Deferred Tax Assets
    (107,458 )     (95,445 )
                 
Total Net Deferred Income Taxes
  $ 566,806     $ 512,097  
                 
Presented as Follows:
               
Net Deferred Tax Asset — Current
  $ (8,550 )   $ (23,402 )
Net Deferred Tax Asset — Non-Current
          (9,003 )
Net Deferred Tax Liability — Non-Current
    575,356       544,502  
                 
Total Net Deferred Income Taxes
  $ 566,806     $ 512,097  
                 
 
Regulatory liabilities representing the reduction of previously recorded deferred income taxes associated with rate-regulated activities that are expected to be refundable to customers amounted to $14.0 million and $10.4 million at September 30, 2007 and 2006, 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 $84.0 million and $79.5 million at September 30, 2007 and 2006, respectively.


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note E — Capitalization and Short-Term Borrowings
 
Summary of Changes in Common Stock Equity
 
                                         
                      Earnings
    Accumulated
 
                      Reinvested
    Other
 
                Paid
    in
    Comprehensive
 
    Common Stock     In
    the
    Income
 
    Shares     Amount     Capital     Business     (Loss)  
    (Thousands, except per share amounts)  
 
Balance at September 30, 2004
    82,990     $ 82,990     $ 506,560     $ 718,926     $ (54,775 )
Net Income Available for Common Stock
                            189,488          
Dividends Declared on Common Stock ($1.14 Per Share)
                            (95,394 )        
Other Comprehensive Loss, Net of Tax
                                    (142,853 )
Cancellation of Shares
    (2 )     (2 )     (52 )                
Common Stock Issued Under Stock and Benefit Plans(1)
    1,369       1,369       23,326                  
                                         
Balance at September 30, 2005
    84,357       84,357       529,834       813,020       (197,628 )
                                         
Net Income Available for Common Stock
                            138,091          
Dividends Declared on Common Stock ($1.18 Per Share)
                            (98,829 )        
Other Comprehensive Income, Net of Tax
                                    228,044  
Share-Based Payment Expense(2)
                    1,705                  
Common Stock Issued Under Stock and Benefit Plans(1)
    1,572       1,572       28,564                  
Share Repurchases
    (2,526 )     (2,526 )     (16,373 )     (66,269 )        
                                         
Balance at September 30, 2006
    83,403       83,403       543,730       786,013       30,416  
                                         
Net Income Available for Common Stock
                            337,455          
Dividends Declared on Common Stock ($1.22 Per Share)
                            (101,496 )        
Other Comprehensive Loss, Net of Tax
                                    (24,137 )
Adjustment to Recognize the Funded Position of the Pension and Other Post-Retirement Benefit Plans
                                    (12,482 )
Share-Based Payment Expense(2)
                    3,727                  
Common Stock Issued Under Stock and Benefit Plans(1)
    1,367       1,367       30,193                  
Share Repurchases
    (1,309 )     (1,309 )     (8,565 )     (38,196 )        
                                         
Balance at September 30, 2007
    83,461     $ 83,461     $ 569,085     $ 983,776 (3)   $ (6,203 )
                                         
 
 
(1) Paid in Capital includes tax benefits of $13.7 million, $6.5 million and $3.7 million for September 30, 2007, 2006 and 2005, respectively, associated with the exercise of stock options.
 
(2) As of October 1, 2005, Paid in Capital includes compensation costs associated with stock option, stock-settled SARs and/or restricted stock awards, in accordance with SFAS 123R. The expense is included within Net Income Available For Common Stock, net of tax benefits.
 
(3) The availability of consolidated earnings reinvested in the business for dividends payable in cash is limited under terms of the indentures covering long-term debt. At September 30, 2007, $880.6 million of accumulated earnings was free of such limitations.


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
Common Stock
 
The Company has various plans which allow shareholders, employees and others to purchase shares of the Company common stock. The National Fuel Gas Company Direct Stock Purchase and Dividend Reinvestment Plan allows shareholders to reinvest cash dividends and make cash investments in the Company’s common stock and provides investors the opportunity to acquire shares of the Company common stock without the payment of any brokerage commissions in connection with such acquisitions. The 401(k) Plans allow employees the opportunity to invest in the Company common stock, in addition to a variety of other investment alternatives. Generally, at the discretion of the Company, shares purchased under these plans are either original issue shares purchased directly from the Company or shares purchased on the open market by an independent agent.
 
During 2007, the Company issued 2,070,613 original issue shares of common stock as a result of stock option exercises and 25,000 original issue shares for restricted stock awards (non-vested stock as defined in SFAS 123R). 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 2007, 731,793 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. There were also 6,000 restricted stock award shares forfeited during 2007.
 
The Company also has a Director Stock Program under which it issues shares of the Company common stock to its non-employee directors as partial consideration for their services as directors. Under this program, the Company issued 9,146 original issue shares of common stock to the non-employee directors of the Company during 2007.
 
On December 8, 2005, the Company’s Board of Directors authorized the Company to implement a share repurchase program, whereby the Company may repurchase outstanding shares of common stock, up to an aggregate amount of 8 million shares in the open market or through privately negotiated transactions. During 2007, the Company repurchased 1,308,328 shares for $48.1 million under this program, funded with cash provided by operating activities and/or through the use of the Company’s lines of credit. Since the repurchase program was implemented, the Company has repurchased 3,834,878 shares for $133.2 million.
 
Shareholder Rights Plan
 
In 1996, the Company’s Board of Directors adopted a shareholder rights plan (Plan). The Plan has been amended three times since it was adopted and is now embodied in an Amended and Restated Rights Agreement effective September 1, 2007, which is an Exhibit to this Annual Report and Form 10-K.
 
The holders of the Company’s common stock have one right (Right) for each of their shares. Each Right, which will initially be evidenced by the Company’s common stock certificates representing the outstanding shares of common stock, entitles the holder to purchase one-half of one share of common stock at a purchase price of $65.00 per share, being $32.50 per half share, subject to adjustment (Purchase Price).
 
The Rights become exercisable upon the occurrence of a distribution date. At any time following a distribution date, each holder of a Right may exercise its right to receive common stock (or, under certain circumstances, other property of the Company) having a value equal to two times the Purchase Price of the Right then in effect. 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 Company’s common stock or other voting stock having 10% or more of the total voting power of the Company’s common stock and other voting stock and (ii) ten days after the commencement or announcement by a person or group of an intention to


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
make a tender or exchange offer that would result in that person acquiring, or obtaining the right to acquire, beneficial ownership of the Company’s common stock or other voting stock having 10% or more of the total voting power of the Company’s 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 Company’s stock as described above, each holder of a Right will have the right to exercise its Rights to receive common stock of the acquiring company having a value equal to two times the Purchase Price of the Right then in effect. These situations would arise if the Company is acquired in a merger or other business combination or if 50% or more of the Company’s assets or earning power are sold or transferred.
 
At any time prior to the end of the business day on the tenth day following the announcement that a person or group has acquired, or obtained the right to acquire, beneficial ownership of 10% or more of the total voting power of the Company, 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 Company’s full Board of Directors. Also, at any time following the announcement that a person or group has acquired, or obtained the right to acquire, beneficial ownership of 10% or more of the total voting power of the Company, 75% of the Company’s 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.
 
After a distribution date, Rights that are owned by an acquiring person will be null and void. 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, 2008, unless earlier than that date, they are exchanged or redeemed or the Plan is amended to extend the expiration date.
 
The Rights have anti-takeover effects because they will cause substantial dilution of the common stock if a person attempts to acquire the Company on terms not approved by the Board of Directors.
 
Stock Option and Stock Award Plans
 
The Company has various stock option and stock award plans which provide or provided for the issuance of one or more of the following to key employees: incentive stock options, nonqualified stock options, stock-settled SARs, restricted stock, performance units or performance shares. Stock options and stock-settled SARs under all plans have exercise prices equal to the average market price of Company common stock on the date of grant, and generally no option or stock-settled SAR is exercisable less than one year or more than ten years after the date of each grant.


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Transactions involving option shares for all plans are summarized as follows:
 
                                 
                Weighted
       
                Average
       
    Number of
          Remaining
    Aggregate
 
    Shares Subject
    Weighted Average
    Contractual
    Intrinsic
 
    to Option     Exercise Price     Life (Years)     Value  
                      (In thousands)  
 
Outstanding at September 30, 2006
    9,016,254     $ 24.69                  
Granted in 2007
    448,000     $ 39.48                  
Exercised in 2007
    (2,070,613 )   $ 23.65                  
Forfeited in 2007
    (33,600 )   $ 25.39                  
                                 
Outstanding at September 30, 2007
    7,360,041     $ 25.89       3.96     $ 154,007  
                                 
Option shares exercisable at September 30, 2007
    6,875,041     $ 24.99       3.62     $ 150,038  
                                 
Option shares available for future grant at September 30, 2007(1)
    1,075,397                          
                                 
 
 
(1) Including shares available for stock-settled SARs and restricted stock grants.
 
The following table summarizes information about options outstanding at September 30, 2007:
 
                                         
    Options Outstanding              
          Weighted
          Options Exercisable  
    Number
    Average
    Weighted
    Number
    Weighted
 
    Outstanding
    Remaining
    Average
    Exercisable
    Average
 
    at
    Contractual
    Exercise
    at
    Exercise
 
Range of Exercise Price
  9/30/07     Life     Price     9/30/07     Price  
 
$20.60-$24.72
    4,233,174       2.8     $ 22.72       4,213,174     $ 22.73  
$24.73-$28.84
    2,361,867       4.4     $ 27.72       2,361,867     $ 27.72  
$28.85-$32.96
                             
$32.97-$37.08
    300,000       8.6     $ 35.11       300,000     $ 35.11  
$37.09-$41.20
    465,000       9.2     $ 39.39              


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Transactions involving stock-settled SARs for all plans are summarized as follows:
 
                                 
                Weighted
       
                Average
       
    Number of
          Remaining
    Aggregate
 
    Shares Subject
    Weighted Average
    Contractual
    Intrinsic
 
    to Option     Exercise Price     Life (Years)     Value  
                      (In thousands)  
 
Outstanding at September 30, 2006
        $                  
Granted in 2007
    50,000     $ 41.20                  
Exercised in 2007
        $                  
Forfeited in 2007
        $                  
                                 
Outstanding at September 30, 2007
    50,000     $ 41.20       9.45     $ 281  
                                 
Stock-settled SARs exercisable at September 30, 2007
                    $  
                                 
 
The following table summarizes information about stock-settled SARs outstanding at September 30, 2007:
 
                                         
    Stock-Settled SARs Outstanding     Stock-Settled SARs
 
          Weighted
          Exercisable  
    Number
    Average
    Weighted
    Number
    Weighted
 
    Outstanding
    Remaining
    Average
    Exercisable
    Average
 
    at
    Contractual
    Exercise
    at
    Exercise
 
Range of Exercise Price
  9/30/07     Life     Price     9/30/07     Price  
 
$37.09-$41.20
    50,000       9.5     $ 41.20              
 
Restricted Share Awards
 
Restricted stock is subject to restrictions on vesting and transferability. Restricted stock awards entitle the participants to full dividend and voting rights. The market value of restricted stock on the date of the award is recorded as compensation expense over the vesting period. Certificates for shares of restricted stock awarded under the Company’s stock option and stock award plans are held by the Company during the periods in which the restrictions on vesting are effective.
 
Transactions involving restricted shares for all plans are summarized as follows:
 
                 
    Number of
    Weighted Average
 
    Restricted
    Fair Value per
 
    Share Awards     Award  
 
Restricted Share Awards Outstanding at September 30, 2006
    42,328     $ 28.44  
Granted in 2007
    25,000     $ 40.18  
Vested in 2007
    (25,000 )   $ 24.50  
Forfeited in 2007
    (6,000 )   $ 34.94  
                 
Restricted Share Awards Outstanding at September 30, 2007
    36,328     $ 38.16  
                 
 
Vesting restrictions for the outstanding shares of non-vested restricted stock at September 30, 2007 will lapse as follows: 2008 — 2,500 shares; 2009 — 2,500 shares; 2010 — 28,828 shares; and 2011 — 2,500 shares.
 
Redeemable Preferred Stock
 
As of September 30, 2007, there were 10,000,000 shares of $1 par value Preferred Stock authorized but unissued.


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Long-Term Debt
 
The outstanding long-term debt is as follows:
 
                 
    At September 30  
    2007     2006  
    (Thousands)  
 
Medium-Term Notes(1):
               
6.0% to 7.50% due May 2008 to June 2025
  $ 749,000     $ 749,000  
Notes(1):
               
5.25% to 6.5% due March 2013 to September 2022(2)
    250,000       346,665  
                 
      999,000       1,095,665  
                 
Other Notes:
               
Secured(3)
          22,766  
Unsecured
    24       169  
                 
Total Long-Term Debt
    999,024       1,118,600  
Less Current Portion
    200,024       22,925  
                 
    $ 799,000     $ 1,095,675  
                 
 
 
(1) These medium-term notes and notes are unsecured.
 
(2) At September 30, 2006, $96,665,000 of the 6.5% unsecured notes were redeemable at par at any time after September 15, 2006. On April 30, 2007, the Company redeemed these notes for $96.3 million, plus accrued interest.
 
(3) On December 8, 2006, the Company repaid these notes for $22.8 million. As such, the notes were classified as Current Portion of Long-Term Debt on the Company’s Consolidated Balance Sheet at September 30, 2006. These notes constituted “project financing” that was secured by the various project documentation and natural gas transportation contracts related to the Empire State Pipeline. The interest rate on these notes was a variable rate based on LIBOR.
 
As of September 30, 2007, the aggregate principal amounts of long-term debt maturing during the next five years and thereafter are as follows: $200.0 million in 2008, $100.0 million in 2009, zero in 2010, $200.0 million in 2011, $150.0 million in 2012, and $349.0 million thereafter.
 
Short-Term Borrowings
 
The Company historically has obtained short-term funds either through bank loans or the issuance of commercial paper. As for the former, 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 $455.0 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 Company’s commercial paper program is $300.0 million. The commercial paper program is backed by a syndicated committed credit facility totaling $300.0 million that extends through September 30, 2010.
 
At September 30, 2007 and 2006, the Company had no outstanding short-term notes payable to banks or commercial paper.


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Debt Restrictions
 
Under the Company’s 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 from September 30, 2005 through September 30, 2010. At September 30, 2007, the Company’s debt to capitalization ratio (as calculated under the facility) was .38. The constraints specified in the committed credit facility would permit an additional $2.02 billion in short-term and/or long-term debt to be outstanding (further limited by the indenture covenants discussed below) before the Company’s debt to capitalization ratio would exceed .65. If a downgrade in any of the Company’s credit ratings were to occur, access to the commercial paper markets might not be possible. However, the Company expects that it could borrow under its uncommitted bank lines of credit or rely upon other liquidity sources, including cash provided by operations.
 
Under the Company’s existing indenture covenants, at September 30, 2007, the Company would have been permitted to issue up to a maximum of $1.4 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 Company’s 1974 indenture pursuant to which $399.0 million (or 40%) of the Company’s long-term debt (as of September 30, 2007) 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 or 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 Company’s $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 September 30, 2007, the Company had no debt outstanding under the committed credit facility.
 
Note F — Financial Instruments
 
Fair Values
 
The fair market value of the Company’s long-term debt is estimated based on quoted market prices of similar issues having the same remaining maturities, redemption terms and credit ratings. Based on these criteria, the fair market value of long-term debt, including current portion, was as follows:
 
                                 
    At September 30  
    2007 Carrying
    2007 Fair
    2006 Carrying
    2006 Fair
 
    Amount     Value     Amount     Value  
    (Thousands)  
 
Long-Term Debt
  $ 999,024     $ 1,024,417     $ 1,118,600     $ 1,148,089  
                                 
 
The fair value amounts are not intended to reflect principal amounts that the Company will ultimately be required to pay.
 
Temporary cash investments, notes payable to banks and commercial paper are stated at cost, which approximates their fair value due to the short-term maturities of those financial instruments. Investments in life


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
insurance are stated at their cash surrender values as discussed below. Investments in an equity mutual fund and the stock of an insurance company (marketable equity securities), as discussed below, are stated at fair value based on quoted market prices.
 
Other Investments
 
Other investments includes cash surrender values of insurance contracts and marketable equity securities. The cash surrender values of the insurance contracts amounted to $54.7 million and $62.5 million at September 30, 2007 and 2006, respectively. The fair value of the equity mutual fund was $14.7 million and $12.9 million at September 30, 2007 and 2006, respectively. The gross unrealized gain on this equity mutual fund was $2.2 million and $1.0 million at September 30, 2007 and 2006, respectively. During 2005, the Company sold all of its interest in one equity mutual fund for $8.5 million and reinvested the proceeds in another equity mutual fund. The Company recognized a gain of $0.7 million on the sale of the equity mutual fund. The fair value of the stock of an insurance company was $16.3 million and $12.7 million at September 30, 2007 and 2006, respectively. The gross unrealized gain on this stock was $13.8 million and $10.3 million at September 30, 2007 and 2006, respectively. The insurance contracts and marketable equity securities are primarily informal funding mechanisms for various benefit obligations the Company has to certain employees.
 
Derivative Financial Instruments
 
The Company uses a variety of derivative financial instruments to manage a portion of the market risk associated with the fluctuations in the price of natural gas and crude oil. These instruments include price swap agreements, no cost collars and futures contracts.
 
Under the price swap agreements, the Company receives monthly payments from (or makes payments to) other parties based upon the difference between a fixed price and a variable price as specified by the agreement. The variable price is either a crude oil or natural gas price quoted on the NYMEX or a quoted natural gas price in various national natural gas publications. The majority of these derivative financial instruments are accounted for as cash flow hedges and are used to lock in a price for the anticipated sale of natural gas and crude oil production in the Exploration and Production segment and the All Other category. The Energy Marketing segment accounts for these derivative financial instruments as fair value hedges and uses them to hedge against falling prices, a risk to which they are exposed on their fixed price gas purchase commitments. The Energy Marketing segment also uses these derivative financial instruments to hedge against rising prices, a risk to which they are exposed on their fixed price sales commitments. At September 30, 2007, the Company had natural gas price swap agreements covering a notional amount of 13.2 Bcf extending through 2009 at a weighted average fixed rate of $8.20 per Mcf. Of this amount, 0.5 Bcf is accounted for as fair value hedges at a weighted average fixed rate of $6.94 per Mcf. The remaining 12.7 Bcf are accounted for as cash flow hedges at a weighted average fixed rate of $8.24 per Mcf. At September 30, 2007, the Company would have received a net $2.8 million to terminate the price swap agreements. The Company also had crude oil price swap agreements covering a notional amount of 1,485,000 bbls extending through 2009 at a weighted average fixed rate of $57.35 per bbl. At September 30, 2007, the Company would have had to pay a net $11.2 million to terminate the price swap agreements.
 
Under the no cost collars, the Company receives monthly payments from (or makes payments to) other parties when a variable price falls below an established floor price (the Company receives payment from the counterparty) or exceeds an established ceiling price (the Company pays the counterparty). The variable price is either a crude oil price quoted on the NYMEX or a quoted natural gas price in various national natural gas publications. These derivative financial instruments are accounted for as cash flow hedges and are used to lock in a price range for the anticipated sale of natural gas and crude oil production in the Exploration and Production segment. At September 30, 2007, the Company had no cost collars on natural gas covering a notional amount of 1.4 Bcf extending through 2008 with a weighted average floor price of $8.83 per Mcf and a


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
weighted average ceiling price of $16.45 per Mcf. At September 30, 2007, the Company would have received $1.9 million to terminate the no cost collars.
 
At September 30, 2007, the Company had long (purchased) futures contracts covering 8.7 Bcf of gas extending through 2012 at a weighted average contract price of $8.72 per Mcf. They are accounted for as fair value hedges and are used by the Company’s Energy Marketing segment to hedge against rising prices, a risk to which this segment is exposed due to the fixed price gas sales commitments that it enters into with residential, commercial and industrial customers. The Company would have had to pay $6.0 million to terminate these futures contracts at September 30, 2007.
 
At September 30, 2007, the Company had short (sold) futures contracts covering 5.9 Bcf of gas extending through 2009 at a weighted average contract price of $9.67 per Mcf. Of this amount, 3.9 Bcf is accounted for as cash flow hedges as these contracts relate to the anticipated sale of natural gas by the Energy Marketing segment. The remaining 2.0 Bcf is accounted for as fair value hedges used to hedge against falling prices on their fixed price gas purchasing commitments and hedge against decreases in natural gas prices associated with the eventual sale of gas in storage. The Company would have received $8.2 million to terminate these futures contracts at September 30, 2007.
 
The Company may be exposed to credit risk on some of the derivative financial instruments discussed above. Credit risk relates to the risk of loss that the Company would incur as a result of nonperformance by counterparties pursuant to the terms of their contractual obligations. To mitigate such credit risk, management performs a credit check, and then on an ongoing basis monitors counterparty credit exposure. Management has obtained guarantees from many of the parent companies of the respective counterparties to its derivative financial instruments. At September 30, 2007, the Company used nine counterparties for its over the counter derivative financial instruments. At September 30, 2007, no individual counterparty represented greater than 32% of total credit risk (measured as volumes hedged by an individual counterparty as a percentage of the Company’s total volumes hedged). All of the counterparties (or the parent of the counterparty) were rated as investment grade entities at September 30, 2007.
 
In August 2007, the Exploration and Production segment’s investment in Canada was sold. Of the $232.1 million in net proceeds received, $58.0 million was placed in escrow (denominated in Canadian dollars) pending receipt of a tax clearance certificate from the Canadian government. To hedge against foreign currency exchange risk, the Company entered into a $58.0 million forward contract to sell Canadian dollars. At September 30, 2007, due to the increase in the strength of the Canadian dollar versus the U.S. dollar, the Company had a $2.7 million derivative liability related to the collar. The Company records gains or losses associated with this forward contract directly to the income statement.
 
Note G — Retirement Plan and Other Post-Retirement Benefits
 
The Company has a tax-qualified, noncontributory, defined-benefit retirement plan (Retirement Plan) that covers approximately 73% of the employees of the Company. The Company provides health care and life insurance benefits for a majority of its retired employees under a post-retirement benefit plan (Post-Retirement Plan).
 
The Company’s policy is to fund the Retirement Plan with at least an amount necessary to satisfy the minimum funding requirements of applicable laws and regulations and not more than the maximum amount deductible for federal income tax purposes. The Company has established VEBA trusts for its Post-Retirement Plan. Contributions to the VEBA trusts are tax deductible, subject to limitations contained in the Internal Revenue Code and regulations and are made to fund employees’ post-retirement health care and life insurance benefits, as well as benefits as they are paid to current retirees. In addition, the Company has established 401(h) accounts for its Post-Retirement Plan. They are separate accounts within the Retirement Plan used to pay retiree medical benefits for the associated participants in the Retirement Plan. Contributions are tax-deductible when


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
made, subject to limitations contained in the Internal Revenue Code and regulations. Retirement Plan and Post-Retirement Plan assets primarily consist of equity and fixed income investments or units in commingled funds or money market funds.
 
The expected returns on plan assets of the Retirement Plan and Post-Retirement Plan are applied to the market-related value of plan assets of the respective plans. The market-related values of the Retirement Plan and Post-Retirement Plan assets are equal to market value as of the measurement date.
 
Reconciliations of the Benefit Obligations, Plan Assets and Funded Status, as well as the components of Net Periodic Benefit Cost and the Weighted Average Assumptions of the Retirement Plan and Post-Retirement Plan are shown in the tables below. The date used to measure the Benefit Obligations, Plan Assets and Funded Status is June 30, 2007, 2006 and 2005, respectively.
 
                                                 
    Retirement Plan     Other Post-Retirement Benefits  
    Year Ended September 30     Year Ended September 30  
    2007     2006     2005     2007     2006     2005  
    (Thousands)  
 
Change in Benefit Obligation
                                               
Benefit Obligation at Beginning of Period
  $ 732,207     $ 825,204     $ 693,532     $ 445,931     $ 546,273     $ 422,003  
Service Cost
    12,898       16,416       13,714       5,614       8,029       6,153  
Interest Cost
    44,350       40,196       42,079       27,198       26,804       25,783  
Plan Participants’ Contributions
                      1,566       1,559       1,017  
Retiree Drug Subsidy Receipts
                      1,325              
Actuarial (Gain) Loss
    (2,986 )     (108,112 )     115,128       (14,450 )     (115,052 )     110,663  
Benefits Paid
    (43,950 )     (41,497 )     (39,249 )     (22,639 )     (21,682 )     (19,346 )
                                                 
Benefit Obligation at End of Period
  $ 742,519     $ 732,207     $ 825,204     $ 444,545     $ 445,931     $ 546,273  
                                                 
Change in Plan Assets
                                               
Fair Value of Assets at Beginning of Period
  $ 664,521     $ 616,462     $ 573,366     $ 325,624     $ 271,636     $ 229,485  
Actual Return on Plan Assets
    119,662       68,649       56,201       65,552       34,785       20,577  
Employer Contributions
    16,488       20,907       26,144       42,268       39,326       39,903  
Employer Contributions During Period from Measurement Date to Fiscal Year End
    8,423                                
Plan Participants’ Contributions
                      1,566       1,559       1,017  
Benefits Paid
    (43,950 )     (41,497 )     (39,249 )     (22,639 )     (21,682 )     (19,346 )
                                                 
Fair Value of Assets at End of Period
  $ 765,144     $ 664,521     $ 616,462     $ 412,371     $ 325,624     $ 271,636  
                                                 
Reconciliation of Funded Status
                                               
Funded Status
  $ 22,625     $ (67,686 )   $ (208,742 )   $ (32,174 )   $ (120,307 )   $ (274,637 )
Unrecognized Net Actuarial Loss
          107,626       257,553             54,487       205,423  
Unrecognized Transition Obligation
                            49,890       57,017  
Unrecognized Prior Service Cost
          7,185       8,142             12       17  
                                                 
Net Amount Recognized at End of Period
  $ 22,625     $ 47,125     $ 56,953     $ (32,174 )   $ (15,918 )   $ (12,180 )
                                                 


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    Retirement Plan     Other Post-Retirement Benefits  
    Year Ended September 30     Year Ended September 30  
    2007     2006     2005     2007     2006     2005  
    (Thousands)  
 
Amounts Recognized in the Balance Sheets Consist of:
                                               
Accrued Benefit Liability
  $     $     $ (117,103 )   $ (70,555 )   $ (32,918 )   $ (26,584 )
Prepaid Benefit Cost
    22,625       47,125             38,381       17,000       14,404  
Intangible Assets
                8,142                    
Accumulated Other Comprehensive Loss from Additional Minimum Pension Liability Adjustment (Pre-Tax)
                165,914                    
                                                 
Net Amount Recognized at End of Period
  $ 22,625     $ 47,125     $ 56,953     $ (32,174 )   $ (15,918 )   $ (12,180 )
                                                 
Weighted Average Assumptions Used to Determine Benefit Obligation at September 30
                                               
Discount Rate
    6.25 %     6.25 %     5.00 %     6.25 %     6.25 %     5.00 %
Expected Return on Plan Assets
    8.25 %     8.25 %     8.25 %     8.25 %     8.25 %     8.25 %
Rate of Compensation Increase
    5.00 %     5.00 %     5.00 %     5.00 %     5.00 %     5.00 %
Components of Net Periodic Benefit Cost
                                               
Service Cost
  $ 12,898     $ 16,416     $ 13,714     $ 5,614     $ 8,029     $ 6,153  
Interest Cost
    44,350       40,196       42,079       27,198       26,804       25,783  
Expected Return on Plan Assets
    (51,235 )     (49,943 )     (49,545 )     (26,960 )     (22,302 )     (18,862 )
Amortization of Prior Service Cost
    882       957       1,029       4       4       4  
Amortization of Transition Amount
                      7,127       7,127       7,127  
Recognition of Actuarial Loss(1)
    13,528       23,108       10,473       8,214       23,402       12,467  
Net Amortization and Deferral for Regulatory Purposes
    1,211       (6,409 )     1,988       16,220       (11,084 )     (410 )
                                                 
Net Periodic Benefit Cost
  $ 21,634     $ 24,325     $ 19,738     $ 37,417     $ 31,980     $ 32,262  
                                                 
Other Comprehensive (Income) Loss (Pre-Tax) Attributable to Change In Additional Minimum Liability Recognition
  $     $ (165,914 )   $ 83,379     $     $     $  
                                                 
Accumulated Other Comprehensive Loss (Pre-Tax) Attributable to Adoption of SFAS 158
  $ 11,256       NA       NA     $ 778       NA       NA  
                                                 
Weighted Average Assumptions Used to Determine Net Periodic Benefit Cost at September 30
                                               
Discount Rate
    6.25 %     5.00 %     6.25 %     6.25 %     5.00 %     6.25 %
Expected Return on Plan Assets
    8.25 %     8.25 %     8.25 %     8.25 %     8.25 %     8.25 %
Rate of Compensation Increase
    5.00 %     5.00 %     5.00 %     5.00 %     5.00 %     5.00 %
 
 
(1) Distribution Corporation’s New York jurisdiction calculates the amortization of the actuarial loss on a vintage year basis over 10 years, as mandated by the NYPSC. All the other subsidiaries of the Company utilize the corridor approach.

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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
The Net Periodic Benefit Cost in the table above includes the effects of regulation. The Company recovers pension and post-retirement benefit costs in its Utility and Pipeline and Storage segments in accordance with the applicable regulatory commission authorizations. Certain of those commission authorizations established tracking mechanisms which allow the Company to record the difference between the amount of pension and post-retirement benefit costs recoverable in rates and the amounts of such costs as determined under SFAS 87 and SFAS 106 as either a regulatory asset or liability, as appropriate. Any activity under the tracking mechanisms (including the amortization of pension and post-retirement regulatory assets) is reflected in the Net Amortization and Deferral for Regulatory Purposes line item above.
 
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 plan’s assets and obligations that determine its funded status be measured as of the end of Company’s fiscal year, with limited exceptions. Under SFAS 158, certain previously unrecognized actuarial gains and losses and previously unrecognized prior service costs for both the pension and other post-retirement benefit plans as well as a previously unrecognized transition obligation for the other post-retirement benefit plan are required to be recognized. These amounts were not required to be recorded on the Company’s Consolidated Balance Sheet before the adoption of SFAS 158, but were instead amortized over a period of time. 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 Company’s fiscal year-end date will be adopted by the Company by the end of fiscal 2009. Currently, the Company measures its plan assets and benefit obligations using a June 30th measurement date. The incremental effects of adopting the provisions of SFAS 158 on the Company’s Consolidated Balance Sheet at September 30, 2007 are presented in the table below:
 
                         
    Before
    Consolidated
    After
 
    Application of
    SFAS 158
    Application of
 
    SFAS 158(1)     Impact     SFAS 158  
    (Thousands)  
 
Qualified Retirement Plan
                       
Reduction in Prepaid Pension and Post-Retirement Benefit Costs
  $ 51,612     $ (28,987 )   $ 22,625  
Increase in Other Regulatory Assets Related to SFAS 158
  $     $ 17,731     $ 17,731  
Reduction in Accumulated Other Comprehensive Income
  $     $ 7,008     $ 7,008  
Reduction in Deferred Income Taxes (under Deferred Credits)
  $     $ 4,248     $ 4,248  


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                         
    Before
    Consolidated
    After
 
    Application of
    SFAS 158
    Application of
 
    SFAS 158(1)     Impact     SFAS 158  
    (Thousands)  
 
Other Post-Retirement Benefits
                       
Increase in Prepaid Pension and Post-Retirement Benefit Costs
  $ 26,067     $ 12,314     $ 38,381  
Increase in Other Regulatory Assets Related to SFAS 158
  $     $ 38,472     $ 38,472  
Increase in Other Regulatory Liabilities Related to SFAS 158
  $     $ (3,247 )   $ (3,247 )
Reduction in Accumulated Other Comprehensive Income
  $     $ 484     $ 484  
Reduction in Deferred Income Taxes (under Deferred Credits)
  $     $ 294     $ 294  
Increase in Post-Retirement Liabilities
  $ (22,238 )   $ (48,317 )   $ (70,555 )
Non-Qualified Benefit Plan
                       
Increase in Other Regulatory Assets Related to SFAS 158
  $     $ 5,704     $ 5,704  
Reduction in Accumulated Other Comprehensive Income
  $     $ 4,990     $ 4,990  
Reduction in Deferred Income Taxes (under Deferred Credits)
  $     $ 3,027     $ 3,027  
Increase in Other Deferred Credits
  $ (30,115 )   $ (13,721 )   $ (43,836 )
Total Consolidated
                       
Reduction in Prepaid Pension and Post-Retirement Benefit Costs
  $ 77,679     $ (16,673 )   $ 61,006  
Increase in Other Regulatory Assets Related to SFAS 158
  $     $ 61,907     $ 61,907  
Increase in Other Regulatory Liabilities Related to SFAS 158
  $     $ (3,247 )   $ (3,247 )
Reduction in Accumulated Other Comprehensive Income
  $     $ 12,482     $ 12,482  
Reduction in Deferred Income Taxes (under Deferred Credits)
  $     $ 7,569     $ 7,569  
Increase in Post-Retirement Liabilities
  $ (22,238 )   $ (48,317 )   $ (70,555 )
Increase in Other Deferred Credits
  $ (30,115 )   $ (13,721 )   $ (43,836 )
 
 
(1) Amounts represent balances before applying the effects of the adoption of SFAS 158, but after giving effect to any necessary adjustments as a result of recognizing an additional minimum pension liability. At September 30, 2007, there was no additional minimum pension liability adjustment since the fair value of the plan assets exceeded the accumulated benefit obligation.

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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
The amounts recognized in accumulated other comprehensive loss, regulatory assets, and regulatory liabilities in fiscal 2007, as well as the amounts expected to be recognized in net periodic benefit cost in fiscal 2008 are presented in the table below:
 
                         
          Other
       
    Retirement
    Post-Retirement
    Non-Qualified
 
    Plan     Benefits     Benefit Plan  
    (Thousands)  
 
Amounts Recognized In Accumulated Other Comprehensive Loss, Regulatory Assets and Regulatory Liabilities(1)
                       
Net Actuarial Gain/(Loss)
  $ (22,684 )   $ 6,768     $ (13,605 )
Transition Obligation
          (42,763 )      
Prior Service Cost
    (6,303 )     (8 )     (116 )
                         
Net Amount Recognized
  $ (28,987 )   $ (36,003 )   $ (13,721 )
                         
Amounts Expected to be Recognized in Net Periodic Benefit Cost in the Next Fiscal Year(1)
                       
Net Actuarial Gain/(Loss)
  $ (11,064 )   $ (2,927 )   $ (1,218 )
Transition Obligation
          (7,127 )      
Prior Service Cost
    (808 )     (4 )     (106 )
                         
Net Amount Expected to be Recognized
  $ (11,872 )   $ (10,058 )   $ (1,324 )
                         
 
 
(1) Amounts presented are shown before recognizing deferred taxes.
 
In accordance with the provisions of SFAS 87, the Company recorded an additional minimum pension liability at September 30, 2005 representing the excess of the accumulated benefit obligation over the fair value of plan assets plus accrued amounts previously recorded. An intangible asset, as shown in the table above, offset the additional liability to the extent of previously Unrecognized Prior Service Cost. The amount in excess of Unrecognized Prior Service Cost was recorded net of the related tax benefit as accumulated other comprehensive loss. At September 30, 2006, the Company reversed the additional minimum pension liability, intangible asset and accumulated other comprehensive loss recorded in prior years since the fair value of the plan assets exceeded the accumulated benefit obligation at September 30, 2006. The pre-tax amounts of the change in accumulated other comprehensive (income) loss related to the additional minimum pension liability adjustment at September 30, 2006 and 2005 are shown in the table above. At September 30, 2007, prior to recognizing the impact of adopting SFAS 158, there was no additional minimum pension liability adjustment recorded since the fair value of the plan assets exceeded the accumulated benefit obligation. The projected benefit obligation, accumulated benefit obligation and fair value of assets for the Retirement Plan were as follows:
 
                         
    2007     2006     2005  
 
Projected Benefit Obligation
  $ 742,519     $ 732,207     $ 825,204  
Accumulated Benefit Obligation
  $ 672,340     $ 660,026     $ 733,565  
Fair Value of Plan Assets
  $ 765,144     $ 664,520     $ 616,462  
 
In 2007, other actuarial experience decreased the projected benefit obligation for the Retirement Plan by $3.0 million. There was no change to the discount rate used to estimate the projected benefit obligation for the Retirement Plan during 2007. The effect of the discount rate change for the Retirement Plan in 2006 was to decrease the projected benefit obligation of the Retirement Plan by $113.1 million. The discount rate change for the Retirement Plan in 2005 caused the projected benefit obligation to increase by $113.0 million.


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Company made cash contributions totaling $24.9 million to the Retirement Plan during the year ended September 30, 2007. The Company expects that the annual contribution to the Retirement Plan in 2008 will be in the range of $15.0 million to $20.0 million. The following benefit payments, which reflect expected future service, are expected to be paid during the next five years and the five years thereafter: $46.7 million in 2008; $47.8 million in 2009; $49.0 million in 2010; $50.1 million in 2011; $51.3 million in 2012; and $283.3 million in the five years thereafter.
 
The Retirement Plan covers certain domestic employees hired before July 1, 2003. Employees hired after June 30, 2003 are eligible for a Retirement Savings Account benefit provided under the Company’s defined contribution Tax-Deferred Savings Plans. Costs associated with the Retirement Savings Account benefit have been $0.4 million through September 30, 2007 (with $0.2 million and $0.1 million of costs occurring in 2007 and 2006, respectively). Costs associated with the Company’s contributions to the Tax-Deferred Savings Plans were $4.1 million, $4.1 million, and $4.2 million for the years ended September 30, 2007, 2006 and 2005, respectively.
 
In addition to the Retirement Plan discussed above, the Company also has a Non Qualified benefit plan that covers a group of management employees designated by the Chief Executive Officer of the Company. This plan provides for defined benefit payments upon retirement of the management employee, or to the spouse upon death of the management employee. The net periodic benefit cost associated with this plan was $5.5 million, $5.4 million and $4.3 million in 2007, 2006 and 2005, respectively. For 2007, accumulated other comprehensive loss (pre-tax) of $8.0 million was recognized attributable to the adoption of SFAS 158. There were no amounts recognized in other comprehensive income (loss) attributable to the recognition of an additional minimum liability for 2006 and 2005. The accumulated benefit obligation for this plan was $28.8 million and $26.5 million at September 30, 2007 and 2006, respectively. The projected benefit obligation for the plan was $43.8 million and $44.5 million at September 30, 2007 and 2006, respectively. The actuarial valuations for this plan were determined based on a discount rate of 6.25%, 6.25% and 5.0% as of September 30, 2007, 2006 and 2005, respectively; a rate of compensation increase of 10.0% as of September 30, 2007, 2006 and 2005; and an expected long-term rate of return on plan assets of 8.25% at September 30, 2007, 2006 and 2005.
 
There was no change to the discount rate used to estimate the other post-retirement benefit obligation during 2007. Effective July 1, 2007, the Medicare Part B reimbursement trend, prescription drug trend and medical trend assumptions were changed. The effect of these assumption changes was to increase the other post-retirement benefit obligation by $8.6 million. Other actuarial experience decreased the other post-retirement benefit obligation in 2007 by $23.0 million.
 
The effect of the discount rate change in 2006 was to decrease the other post-retirement benefit obligation by $77.5 million. Effective July 1, 2006, the Medicare Part B reimbursement trend, prescription drug trend and medical trend assumptions were changed. The effect of these assumption changes was to decrease the other post-retirement benefit obligation by $1.7 million. A change in the disability assumption decreased the other post-retirement benefit obligation by $1.4 million. Other actuarial experience decreased the other post-retirement benefit obligation in 2006 by $34.4 million.
 
The effect of the discount rate change in 2005 was to increase the other post-retirement benefit obligation by $78.2 million. Effective July 1, 2005, the Medicare Part B reimbursement trend, prescription drug trend and medical trend assumptions were changed. The effect of these assumption changes was to increase the other post-retirement benefit obligation by $21.7 million. Also effective July 1, 2005, the percent of active female participants who are assumed to be married at retirement was changed. The effect of this assumption change was to decrease the other post-retirement benefit obligation by $6.9 million. Other actuarial experience increased the other post-retirement benefit obligation in 2005 by $17.9 million.
 
On December 8, 2003, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Act) was signed into law. This Act introduced a prescription drug benefit under Medicare (Medicare Part D), as


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In accordance with FASB Staff Position FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003”, since the Company is assumed to continue to provide a prescription drug benefit to retirees in the point of service and indemnity plans that is at least actuarially equivalent to Medicare Part D, the impact of the Act was reflected as of December 8, 2003.
 
The estimated gross benefit payments and gross amount of subsidy receipts are as follows:
 
                 
    Benefit Payments     Subsidy Receipts  
 
First Year
  $ 23,990,000     $ (1,522,000 )
Second Year
  $ 25,973,000     $ (1,745,000 )
Third Year
  $ 28,007,000     $ (1,954,000 )
Fourth Year
  $ 29,917,000     $ (2,154,000 )
Fifth Year
  $ 31,406,000     $ (2,401,000 )
Next Five Years
  $ 176,333,000     $ (15,391,000 )
 
In 2005, the Company began making separate estimates of the annual rate of increase in the per capita cost of covered medical care benefits for Pre and Post age 65 participants. The rate of increase for Pre age 65 participants was assumed to be 10.0% while the rate of increase for Post age 65 participants was assumed to be 7.5%. In 2006, the rate of increase for Pre age 65 participants was 9.0% and was assumed to gradually decline to 5.0% by the year 2014. The rate of increase for the Post age 65 participants was 7.0% in 2006 and was assumed to gradually decline to 5.0% by the year 2014. In 2007, the rate of increase for Pre age 65 participants was 8.0% and was assumed to gradually decline to 5.0% by the year 2014. The rate of increase for the Post age 65 participants was 6.67% in 2007 and was assumed to gradually decline to 5.0% by the year 2014. The annual rate of increase in the per capita cost of covered prescription drug benefits was assumed to be 12.5% for 2005, 11.0% for 2006, 10.0% for 2007, and gradually decline to 5.0% by the year 2014 and remain level thereafter. The annual rate of increase in the per capita Medicare Part B Reimbursement was assumed to be 6.0% for 2005, 5.25% for 2006, and 7.0% for 2007. The annual rate of increase for the Medicare Part B Reimbursement is expected to gradually decline to 5.0% by the year 2016.
 
The health care cost trend rate assumptions used to calculate the per capita cost of covered medical care benefits have a significant effect on the amounts reported. If the health care cost trend rates were increased by 1% in each year, the Other Post-Retirement Benefit Obligation as of October 1, 2007 would increase by $55.6 million. This 1% change would also have increased the aggregate of the service and interest cost components of net periodic post-retirement benefit cost for 2007 by $4.9 million. If the health care cost trend rates were decreased by 1% in each year, the Other Post-Retirement Benefit Obligation as of October 1, 2007 would decrease by $46.6 million. This 1% change would also have decreased the aggregate of the service and interest cost components of net periodic post-retirement benefit cost for 2007 by $4.0 million.
 
The Company made cash contributions including payments made directly to participants totaling $42.3 million to the Post-Retirement Plan during the year ended September 30, 2007. The Company expects that the annual contribution to the Post-Retirement Plan in 2008 will be in the range of $25.0 million to $35.0 million.


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Company’s Retirement Plan weighted average asset allocations at September 30, 2007, 2006 and 2005 by asset category are as follows:
 
                                 
          Percentage of Plan
 
    Target Allocation
    Assets at September 30  
Asset Category
  2008     2007     2006     2005  
 
Equity Securities
    60-75 %     70 %     67 %     63 %
Fixed Income Securities
    20-35 %     24 %     26 %     28 %
Other
    0-15 %     6 %     7 %     9 %
                                 
Total
            100 %     100 %     100 %
                                 
 
The Company’s Post-Retirement Plan weighted average asset allocations at September 30, 2007, 2006 and 2005 by asset category are as follows:
 
                                 
          Percentage of Plan
 
    Target Allocation
    Assets at September 30  
Asset Category
  2008     2007     2006     2005  
 
Equity Securities
    85-100 %     95 %     95 %     92 %
Fixed Income Securities
    0-15 %     1 %     1 %     2 %
Other
    0-15 %     4 %     4 %     6 %
                                 
Total
            100 %     100 %     100 %
                                 
 
The Company’s assumption regarding the expected long-term rate of return on plan assets is 8.25%. The return assumption reflects the anticipated long-term rate of return on the plan’s current and future assets. The Company utilizes historical investment data, projected capital market conditions, and the plan’s target asset class and investment manager allocations to set the assumption regarding the expected return on plan assets.
 
The long-term investment objective of the Retirement Plan trust and the Post-Retirement Plan VEBA trusts is to achieve the target total return in accordance with the Company’s risk tolerance. Assets are diversified utilizing a mix of equities, fixed income and other securities (including real estate). Risk tolerance is established through consideration of plan liabilities, plan funded status and corporate financial condition.
 
Investment managers are retained to manage separate pools of assets. Comparative market and peer group performance of individual managers and the total fund are monitored on a regular basis, and reviewed by the Company’s Retirement Committee on at least a quarterly basis.
 
The discount rate which is used to present value the future benefit payment obligations of the Retirement Plan, the Non-Qualified benefit plan, and the Post-Retirement Plan is 6.25% as of September 30, 2007. This rate is equal to the Moody’s Aa Long-Term Corporate Bond index, rounded to the nearest 25 basis points. The duration of the securities underlying that index (approximately 13 years) reasonably matches the expected timing of anticipated future benefit payments (approximately 12 years). The Company also utilizes a yield curve model to determine the discount rate. The yield curve is a spot rate yield curve that provides a zero-coupon interest rate for each year into the future. Each year’s anticipated benefit payments are discounted at the associated spot interest rate back to the measurement date. The discount rate is then determined based on the spot interest rate that results in the same present value when applied to the same anticipated benefit payments.


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note H — 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 Company’s policy to accrue estimated environmental clean-up costs (investigation and remediation) when such amounts can reasonably be estimated and it is probable that the Company will be required to incur such costs. At September 30, 2007, the Company has estimated its remaining clean-up costs related to former manufactured gas plant sites and third party waste disposal sites will be in the range of $12.1 million to $15.8 million. The minimum estimated liability of $12.1 million has been recorded on the Consolidated Balance Sheet at September 30, 2007. The Company expects to recover its environmental clean-up costs from a combination of rate recovery and insurance proceeds (refer to Note C — Regulatory Matters for further discussion of the insurance proceeds). Other than as discussed below, the Company is currently not aware of any material exposure to environmental liabilities. However, adverse changes in environmental regulations, new information or other factors could impact the Company.
 
(i)  Former Manufactured Gas Plant Sites
 
The Company has incurred or is incurring clean-up costs at four former manufactured gas plant sites in New York and Pennsylvania. The Company continues to be responsible for future ongoing maintenance at one site. At a second site, remediation is complete and long-term maintenance and monitoring activities are ongoing. A third site, which allegedly contains, among other things, manufactured gas plant waste, is in the investigation stage.
 
At a fourth former manufactured gas plant site, the Company received, in 1998 and again in October 1999, notice that the NYDEC believes the Company is responsible for contamination discovered at the site located in New York for which the Company had not been named as a PRP. In February 2007, the NYDEC identified the Company as a PRP for the site and issued a proposed remedial action plan. The NYDEC estimated clean-up costs under its proposed remedy to be $8.9 million if implemented. Although the Company commented to the NYDEC that the proposed remedial action plan contained a number of material errors, omissions and procedural defects, the NYDEC, in a March 2007 Record of Decision, selected the remedy it had previously proposed. In July 2007, the Company appealed the NYDEC’s Record of Decision to the New York State Supreme Court, Albany County. The Company believes that a negotiated resolution with the NYDEC regarding the site remains possible.
 
(ii)  Third Party Waste Disposal Sites
 
The Company was identified by the NYDEC or the EPA as one of a number of companies considered to be PRPs with respect to two waste disposal sites in New York which were operated by unrelated third parties. The PRPs were alleged to have contributed to the materials that may have been collected at such waste disposal sites by the site operators. The remediation was completed at one site, with costs subject to an ongoing final reallocation process among five PRPs. At a second waste disposal site, settlement was reached in the amount of $9.3 million to be allocated among five PRPs. In September 2007, the reallocation process was concluded with respect to both of these sites whereby the Company was released from any future liability related to these sites, and was allocated a refund of approximately $0.5 million as a result of the conclusion of the cost reallocation process.


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
(iii)  Other
 
In June 2007, the NYDEC notified the Company, as well as a number of other companies, of their liability with respect to a remedial account at a waste disposal site in New York. The notification identified the Company as one of approximately 400 other companies considered to be PRPs related to this site and requested that the remedy the NYDEC proposed in a Record of Decision issued in March 2006 be performed. The estimated clean-up costs under the remedy selected by the NYDEC are estimated to be approximately $13.0 million if implemented. The Company is in the process of organizing a group with the other PRPs and negotiating an Order on Consent with the NYDEC to perform the remedy. The Company has not been able to reasonably estimate the probability or extent of its share of potential liability at this site.
 
Other
 
The Company, in its Utility segment, Energy Marketing segment, and All Other category, has entered into contractual commitments in the ordinary course of business, including commitments to purchase gas, transportation, and storage service to meet customer gas supply needs. Substantially all of these contracts expire within the next five years. The future gas purchase, transportation and storage contract commitments during the next five years and thereafter are as follows: $766.5 million in 2008, $114.5 million in 2009, $50.8 million in 2010, $22.1 million in 2011, $8.8 million in 2012, and $23.3 million thereafter. In the Utility segment, these costs are subject to state commission review, and are being recovered in customer rates. Management believes that, to the extent any stranded pipeline costs are generated by the unbundling of services in the Utility segment’s service territory, such costs will be recoverable from customers.
 
The Company has entered into leases for the use of buildings, vehicles, construction tools, meters, computer equipment and other items. These leases are accounted for as operating leases. The future lease commitments during the next five years and thereafter are as follows: $6.7 million in 2008, $5.8 million in 2009, $4.4 million in 2010, $2.9 million in 2011, $2.6 million in 2012, and $13.1 million thereafter.
 
The Company has entered into several contractual commitments associated with the construction of the Empire Connector project, including the pipeline construction itself and construction of a compressor station, as well as other contractual commitments for engineering and consulting services. The Empire Connector is scheduled to go in service by November 2008. As of September 30, 2007, the future contractual commitments related to the construction of the Empire Connector during the next two years are as follows: $118.3 million in 2008 and $0.6 million in 2009.
 
The Company is involved in other litigation arising in the normal course of business. In addition to the regulatory matters discussed in Note C — Regulatory Matters, the Company is involved in other regulatory matters arising in the normal course of business. These other litigation and regulatory 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 period in which they are resolved, they are not expected to change materially the Company’s present liquidity position, nor to have a material adverse effect on the financial condition of the Company.
 
Note I — Discontinued Operations
 
On August 31, 2007, the Company completed the sale of SECI, Seneca’s wholly owned subsidiary that operated in Canada, to NAL Oil & Gas Trust. The Company received approximately $232.1 million of proceeds from the sale, of which $58.0 million was placed in escrow pending receipt of a tax clearance certificate from the Canadian government. The sale resulted in the recognition of a gain of approximately $120.3 million, net of tax, during the fourth quarter of 2007. SECI is engaged in the exploration for, and the development and purchase of,


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
natural gas and oil reserves in the provinces of Alberta, Saskatchewan and British Columbia in Canada. The decision to sell was based on lower than expected returns from the Canadian oil and gas properties combined with difficulty in finding significant new reserves. Seneca will continue its exploration and development activities in the Gulf of Mexico, in California and in Appalachia. As a result of the decision to sell SECI, the Company began presenting all SECI operations as discontinued operations during the fourth quarter of 2007.
 
The following is selected financial information of the discontinued operations for SECI:
 
                         
    Year Ended September 30  
    2007     2006     2005  
    (Thousands)  
 
Operating Revenues
  $ 50,495     $ 71,984     $ 62,775  
Operating Expenses
    33,306       151,532       40,600  
                         
Operating Income (Loss)
    17,189       (79,548 )     22,175  
Interest Income
    1,082       866       260  
                         
Income (Loss) before Income Taxes
    18,271       (78,682 )     22,435  
Income Tax Expense (Benefit)
    2,792       (32,159 )     7,357  
                         
Income (Loss) from Discontinued Operations
    15,479       (46,523 )     15,078  
Gain on Disposal, Net of Taxes of $39,572
    120,301              
                         
Income (Loss) from Discontinued Operations
  $ 135,780     $ (46,523 )   $ 15,078  
                         
 
On July 18, 2005, the Company completed the sale of its entire 85.16% interest in U.E., a district heating and electric generation business in the Bohemia region of the Czech Republic, to Czech Energy Holdings, a.s. for sales proceeds of approximately $116.3 million. The sale resulted in the recognition of a gain of approximately $25.8 million, net of tax, at September 30, 2005. Market conditions during 2005, including the increasing value of the Czech currency as compared to the U.S. dollar, caused the value of the assets of U.E. to increase, providing an opportunity to sell the U.E. operations at a profit for the Company. As a result of the decision to sell its majority interest in U.E., the Company began presenting the Czech Republic operations, which are primarily comprised of U.E., as discontinued operations in June 2005. U.E. was the major component of the Company’s International segment. With this change in presentation, the Company discontinued all reporting for an International segment.


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following is selected financial information of the discontinued operations for U.E.:
 
         
    Year Ended
 
    September 30  
    2005  
    (Thousands)  
 
Operating Revenues
  $ 124,840  
Operating Expenses
    103,155  
         
Operating Income
    21,685  
Other Income
    2,048  
Interest Expense
    (558 )
         
Income before Income Taxes and Minority Interest
    23,175  
Income Tax Expense
    10,331  
Minority Interest, Net of Taxes
    2,645  
         
Income from Discontinued Operations
    10,199  
Gain on Disposal, Net of Taxes of $1,612
    25,774  
         
Income from Discontinued Operations
  $ 35,973  
         
 
Note J — Business Segment Information
 
The Company has five reportable segments: Utility, Pipeline and Storage, Exploration and Production, Energy Marketing, and Timber. The breakdown of the Company’s operations into reportable segments is based upon a combination of factors including differences in products and services, regulatory environment and geographic factors.
 
The Utility segment operations are regulated by the NYPSC and the PaPUC and are carried out by Distribution Corporation. Distribution Corporation sells natural gas to retail customers and provides natural gas transportation services in western New York and northwestern Pennsylvania.
 
The Pipeline and Storage segment operations are regulated. The FERC regulates the operations of Supply Corporation and the NYPSC regulates the operations of Empire. Supply Corporation transports and stores natural gas for utilities (including Distribution Corporation), natural gas marketers (including NFR) and pipeline companies in the northeastern United States markets. Empire transports natural gas from the United States/Canadian border near Buffalo, New York into Central New York just north of Syracuse, New York. Empire transports gas to major industrial companies, utilities (including Distribution Corporation) and power producers.
 
The Exploration and Production segment, through Seneca, is engaged in exploration for, and development and purchase of, natural gas and oil reserves in California, in the Appalachian region of the United States, and in the Gulf Coast region of Texas, Louisiana and Alabama. Seneca’s production is, for the most part, sold to purchasers located in the vicinity of its wells. As disclosed in Note I — Discontinued Operations, on August 31, 2007, Seneca completed the sale of SECI, its wholly owned subsidiary operating in Canada, for a gain of approximately $120.3 million, net of tax, during the fourth quarter of 2007. As a result of the sale, SECI’s operations have been reported as discontinued operations and previous period segment information has been restated to reflect this change.
 
The Energy Marketing segment is comprised of NFR’s operations. NFR markets natural gas to industrial, commercial, public authority and residential end-users in western and central New York and northwestern Pennsylvania, offering competitively priced energy and energy management services for its customers.


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Timber segment’s operations are carried out by the Northeast division of Seneca and by Highland. This segment has timber holdings (primarily high quality hardwoods) in the northeastern United States and sawmills and kilns in Pennsylvania.
 
The data presented in the tables below reflect the reportable segments and reconciliations to consolidated amounts. The accounting policies of the segments are the same as those described in Note A — Summary of Significant Accounting Policies. Sales of products or services between segments are billed at regulated rates or at market rates, as applicable. 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.
 
As disclosed in Note I — Discontinued Operations, the Company completed the sale of its majority interest in U.E., a district heating and electric generation business in the Czech Republic, on July 18, 2005. As a result of the sale of its majority interest in U.E., the Company discontinued all reporting for an International segment. All Czech Republic operations have been reported as discontinued operations. Any remaining international activity has been included in corporate operations.
 
                                                                         
    Year Ended September 30, 2007
                                Corporate
   
        Pipeline
  Exploration
          Total
      and
   
        and
  and
  Energy
      Reportable
  All
  Intersegment
  Total
    Utility   Storage   Production   Marketing   Timber   Segments   Other   Eliminations   Consolidated
    (Thousands)
 
Revenue from External Customers
  $ 1,106,453     $ 130,410     $ 324,037     $ 413,612     $ 58,897     $ 2,033,409     $ 5,385     $ 772     $ 2,039,566  
Intersegment Revenues
  $ 14,271     $ 81,556     $     $     $     $ 95,827     $ 8,726     $ (104,553 )   $  
Interest Income
  $ (2,345 )   $ 357     $ 9,905     $ 682     $ 1,249     $ 9,848     $ 16     $ (8,314 )   $ 1,550  
Interest Expense
  $ 28,190     $ 9,623     $ 51,743     $ 263     $ 3,265     $ 93,084     $ 2,687     $ (21,296 )   $ 74,475  
Depreciation, Depletion and Amortization
  $ 40,541     $ 32,985     $ 78,174     $ 33     $ 4,709     $ 156,442     $ 785     $ 692     $ 157,919  
Income Tax Expense
  $ 31,642     $ 35,740     $ 52,421     $ 5,654     $ 2,818     $ 128,275     $ 1,647     $ 1,891     $ 131,813  
Income from Unconsolidated Subsidiaries
  $     $     $     $     $     $     $ 4,979     $     $ 4,979  
Segment Profit: Income from Continuing Operations
  $ 50,886     $ 56,386     $ 74,889     $ 7,663     $ 3,728     $ 193,552     $ 2,564     $ 5,559     $ 201,675  
Expenditures for Additions to Long-Lived Assets from Continuing Operations
  $ 54,185     $ 43,226     $ 146,687     $ 76     $ 3,657     $ 247,831     $ 87     $ (319 )   $ 247,599  
     
    At September 30, 2007
     
    (Thousands)
Segment Assets
  $ 1,565,593     $ 810,957     $ 1,326,073     $ 59,802     $ 165,224     $ 3,927,649     $ 66,531     $ (105,768 )   $ 3,888,412  
 


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                                         
    Year Ended September 30, 2006
                                Corporate
   
        Pipeline
  Exploration
          Total
      and
   
        and
  and
  Energy
      Reportable
  All
  Intersegment
  Total
    Utility   Storage   Production   Marketing   Timber   Segments   Other   Eliminations   Consolidated
    (Thousands)
 
Revenue from External Customers
  $ 1,265,695     $ 132,921     $ 274,896     $ 497,069     $ 65,024     $ 2,235,605     $ 3,304     $ 766     $ 2,239,675  
Intersegment Revenues
  $ 15,068     $ 81,431     $     $     $ 5     $ 96,504     $ 9,444     $ (105,948 )   $  
Interest Income
  $ 4,889     $ 454     $ 7,816     $ 445     $ 747     $ 14,351     $ 22     $ (4,964 )   $ 9,409  
Interest Expense
  $ 26,174     $ 6,620     $ 50,457     $ 227     $ 3,095     $ 86,573     $ 2,555     $ (10,547 )   $ 78,581  
Depreciation, Depletion and Amortization
  $ 40,172     $ 36,876     $ 67,122     $ 53     $ 6,495     $ 150,718     $ 789     $ 492     $ 151,999  
Income Tax Expense
  $ 35,699     $ 33,896     $ 29,351     $ 3,748     $ 3,277     $ 105,971     $ 969     $ 1,305     $ 108,245  
Income from Unconsolidated Subsidiaries
  $     $     $     $     $     $     $ 3,583     $     $ 3,583  
Segment Profit (Loss): Income (Loss) from Continuing Operations
  $ 49,815     $ 55,633     $ 67,494     $ 5,798     $ 5,704     $ 184,444     $ 359     $ (189 )   $ 184,614  
Expenditures for Additions to Long-Lived Assets from Continuing Operations
  $ 54,414     $ 26,023     $ 166,535     $ 16     $ 2,323     $ 249,311     $ 85     $ 2,995     $ 252,391  
     
    At September 30, 2006
     
    (Thousands)
Segment Assets
  $ 1,498,442     $ 767,889     $ 1,209,969 (1)   $ 81,374     $ 159,421     $ 3,717,095     $ 64,287     $ (17,634 )   $ 3,763,748  
 
 
(1) Amount includes $134,930 of assets of SECI, which has been classified as discontinued operations as of September 30, 2007. (See Note I — Discontinued Operations).
 
                                                                         
    Year Ended September 30, 2005  
                                              Corporate
       
          Pipeline
    Exploration
                Total
          and
       
          and
    and
    Energy
          Reportable
    All
    Intersegment
    Total
 
    Utility     Storage     Production     Marketing     Timber     Segments     Other     Eliminations     Consolidated  
    (Thousands)  
 
Revenue from External Customers
  $ 1,101,572     $ 132,805     $ 230,650     $ 329,714     $ 61,285     $ 1,856,026     $ 4,748     $     $ 1,860,774  
Intersegment Revenues
  $ 15,495     $ 83,054     $     $     $ 1     $ 98,550     $ 8,606     $ (107,156 )   $  
Interest Income
  $ 4,111     $ 76     $ 4,401     $ 783     $ 438     $ 9,809     $ 19     $ (3,592 )   $ 6,236  
Interest Expense
  $ 22,900     $ 7,128     $ 48,856     $ 11     $ 2,764     $ 81,659     $ 1,726     $ (1,072 )   $ 82,313  
Depreciation, Depletion and Amortization
  $ 40,159     $ 38,050     $ 67,647     $ 41     $ 6,601     $ 152,498     $ 3,537     $ 467     $ 156,502  
Income Tax Expense (Benefit)
  $ 23,102     $ 39,068     $ 20,996     $ 3,210     $ 2,271     $ 88,647     $ (1,425 )   $ (1,601 )   $ 85,621  
Income from Unconsolidated Subsidiaries
  $     $     $     $     $     $     $ 3,362     $     $ 3,362  
Significant Non-Cash Item:
                                                                       
Impairment of Investment in Partnership
  $     $     $     $     $     $     $ (4,158 )(1)   $     $ (4,158 )
Segment Profit (Loss): Income (Loss) from Continuing Operations
  $ 39,197     $ 60,454     $ 35,581     $ 5,077     $ 5,032     $ 145,341     $ (2,616 )   $ (4,288 )   $ 138,437  
Expenditures for Additions to Long-Lived Assets from Continuing Operations
  $ 50,071     $ 21,099     $ 83,972     $ 58     $ 18,894     $ 174,094     $ 463     $ 618     $ 175,175  
     
    At September 30, 2005
     
    (Thousands)
Segment Assets
  $ 1,423,597     $ 782,546     $ 1,213,525 (2)   $ 92,470     $ 162,052     $ 3,674,190     $ 73,354     $ 2,209     $ 3,749,753  
 
 
(1) Amount represents the impairment in the value of the Company’s 50% investment in ESNE, a partnership that owns an 80-megawatt, combined cycle, natural gas-fired power plant in the town of North East, Pennsylvania.

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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
(2) Amount includes $204,892 of assets of SECI, which has been classified as discontinued operations as of September 30, 2007. (See Note I — Discontinued Operations).
 
                         
    For The Year Ended September 30  
Geographic Information
  2007     2006     2005  
    (Thousands)  
 
Revenues from External Customers(1):
                       
United States
  $ 2,039,566     $ 2,239,675     $ 1,860,774  
                         
 
                         
    At September 30  
    2007     2006     2005  
    (Thousands)  
 
Long-Lived Assets:
                       
United States
  $ 3,334,274     $ 3,181,769     $ 2,978,680  
Assets of Discontinued Operations
          97,234       171,196  
                         
    $ 3,334,274     $ 3,279,003     $ 3,149,876  
                         
 
 
(1) Revenue is based upon the country in which the sale originates. This table excludes revenues from Canadian discontinued operations of $50,495, $71,984 and $62,775 for September 30, 2007, 2006 and 2005, respectively.
 
Note K — Investments in Unconsolidated Subsidiaries
 
The Company’s unconsolidated subsidiaries consist of equity method investments in Seneca Energy, Model City and ESNE. The Company has 50% interests in each of these entities. Seneca Energy and Model City generate and sell electricity using methane gas obtained from landfills owned by outside parties. ESNE generates electricity from an 80-megawatt, combined cycle, natural gas-fired power plant in North East, Pennsylvania. ESNE sells its electricity into the New York power grid.
 
During 2007, Horizon Power made capital contributions of $3.3 million to Seneca Energy. Seneca Energy is in the process of expanding its generating capacity from 11.2 megawatts to 17.6 megawatts.
 
In September 2005, the Company recorded an impairment of $4.2 million of its equity investment in ESNE due to a decline in the fair market value of ESNE. This impairment was recorded in accordance with APB 18.
 
A summary of the Company’s investments in unconsolidated subsidiaries at September 30, 2007 and 2006 is as follows:
 
                 
    At September 30  
    2007     2006  
    (Thousands)  
 
ESNE
  $ 4,652     $ 4,486  
Seneca Energy
    12,033       5,366  
Model City
    1,571       1,738  
                 
    $ 18,256     $ 11,590  
                 
 
Note L — Intangible Assets
 
As a result of the Empire and Toro acquisitions, the Company acquired certain intangible assets during 2003. In the case of the Empire acquisition, the intangible assets represent the fair value of various long-term transportation contracts with Empire’s customers. In the case of the Toro acquisition, the intangible assets


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
represent the fair value of various long-term gas purchase contracts with the various landfills. These intangible assets are being amortized over the lives of the transportation and gas purchase contracts with no residual value at the end of the amortization period. The weighted-average amortization period for the gross carrying amount of the transportation contracts is 8 years. The weighted-average amortization period for the gross carrying amount of the gas purchase contracts is 20 years. Details of these intangible assets are as follows (in thousands):
 
                                 
                      At September 30,
 
    At September 30, 2007     2006  
    Gross Carrying
    Accumulated
    Net Carrying
    Net Carrying
 
    Amount     Amortization     Amount     Amount  
 
Intangible Assets Subject to Amortization:
                               
Long-Term Transportation Contracts
  $ 8,580     $ (4,989 )   $ 3,591     $ 4,660  
Long-Term Gas Purchase Contracts
    31,864       (6,619 )     25,245       26,838  
                                 
    $ 40,444     $ (11,608 )   $ 28,836     $ 31,498  
                                 
Aggregate Amortization Expense:
                               
For the Year Ended September 30, 2007
  $ 2,662                          
For the Year Ended September 30, 2006
  $ 2,662                          
For the Year Ended September 30, 2005
  $ 2,662                          
 
The gross carrying amount of intangible assets subject to amortization at September 30, 2007 remained unchanged from September 30, 2006. The only activity with regard to intangible assets subject to amortization was amortization expense as shown on the table above. Amortization expense for the long-term transportation contracts is estimated to be $1.1 million in 2008, $0.5 million in 2009, and $0.4 million in 2010, 2011 and 2012. Amortization expense for the long-term gas purchase contracts is estimated to be $1.6 million annually for 2008, 2009, 2010, 2011 and 2012.
 
Note M — Quarterly Financial Data (unaudited)
 
In the opinion of management, the following quarterly information includes all adjustments necessary for a fair statement of the results of operations for such periods. Per common share amounts are calculated using the weighted average number of shares outstanding during each quarter. The total of all quarters may differ from the per common share amounts shown on the Consolidated Statements of Income. Those per common share amounts are based on the weighted average number of shares outstanding for the entire fiscal year. Because of the seasonal nature of the Company’s heating business, there are substantial variations in operations reported on a quarterly basis.
 


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                                         
                            Net
                         
                      Income
    Income
                         
                Income
    (Loss)
    Available
                         
                from
    from
    for
    Earnings from
             
Quarter
  Operating
    Operating
    Continuing
    Discontinued
    Common
    Continuing Operations per Common Share     Earnings per Common Share  
Ended
  Revenues     Income     Operations     Operations     Stock     Basic     Diluted     Basic     Diluted  
    (Thousands, except per common share amounts)  
 
2007
                                                                       
9/30/2007
  $ 302,030     $ 73,504     $ 34,295     $ 123,395 (1)   $ 157,690 (1)   $ 0.41     $ 0.40     $ 1.89     $ 1.84  
6/30/2007
  $ 448,779     $ 83,933     $ 41,212 (2)   $ 5,586     $ 46,798 (2)   $ 0.49     $ 0.48     $ 0.56     $ 0.55  
3/31/2007
  $ 798,100     $ 142,404     $ 75,480 (3)   $ 2,967     $ 78,447 (3)   $ 0.91     $ 0.89     $ 0.95     $ 0.92  
12/31/2006
  $ 490,657     $ 96,657     $ 50,688 (4)   $ 3,832     $ 54,520 (4)   $ 0.61     $ 0.60     $ 0.66     $ 0.64  
2006
                                                                       
9/30/2006
  $ 280,506     $ 56,865     $ 28,585     $ (26,617 )(5)   $ 1,968 (5)   $ 0.34     $ 0.33     $ 0.02     $ 0.02  
6/30/2006
  $ 397,206     $ 67,122     $ 37,618 (7)   $ (37,507 )(6)   $ 111 (6)(7)   $ 0.45     $ 0.44     $     $  
3/31/2006
  $ 874,700     $ 133,745     $ 69,650     $ 8,944 (8)   $ 78,594 (8)   $ 0.83     $ 0.81     $ 0.93     $ 0.91  
12/31/2005
  $ 687,263     $ 97,891     $ 48,761 (9)   $ 8,657     $ 57,418 (9)   $ 0.58     $ 0.57     $ 0.68     $ 0.67  
 
 
(1) Includes a $120.3 million gain on the sale of SECI.
 
(2) Includes $4.8 million of income associated with the reversal of reserve for preliminary project costs associated with the Empire Connector project.
 
(3) Includes a $2.3 million of income associated with the reversal of a purchased gas expense accrual related to the resolution of a contingency.
 
(4) Includes a $1.9 million positive earnings impact associated with the discontinuance of hedge accounting on an interest rate collar.
 
(5) Includes expense of $29.1 million related to the impairment of oil and gas producing properties.
 
(6) Includes expense of $39.5 million related to the impairment of oil and gas producing properties.
 
(7) Includes income of $6.1 million related to income tax adjustments.
 
(8) Includes income of $5.1 million related to income tax adjustments.
 
(9) Includes income of $2.6 million related to a regulatory adjustment.
 
Note N — Market for Common Stock and Related Shareholder Matters (unaudited)
 
At September 30, 2007, there were 16,989 registered shareholders of Company common stock. The common stock is listed and traded on the New York Stock Exchange. Information related to restrictions on the payment of dividends can be found in Note E — Capitalization and Short-Term Borrowings. The quarterly price

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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
ranges (based on intra-day prices) and quarterly dividends declared for the fiscal years ended September 30, 2007 and 2006, are shown below:
 
                         
    Price Range        
Quarter Ended
  High     Low     Dividends Declared  
 
2007
                       
9/30/2007
  $ 47.00     $ 40.95     $ .31  
6/30/2007
  $ 47.87     $ 42.75     $ .31  
3/31/2007
  $ 43.79     $ 36.94     $ .30  
12/31/2006
  $ 40.21     $ 35.02     $ .30  
2006
                       
9/30/2006
  $ 39.16     $ 34.95     $ .30  
6/30/2006
  $ 36.75     $ 31.33     $ .30  
3/31/2006
  $ 35.43     $ 30.60     $ .29  
12/31/2005
  $ 35.27     $ 29.25     $ .29  
 
Note O — Supplementary Information for Oil and Gas Producing Activities (unaudited)
 
The following supplementary information is presented in accordance with SFAS 69, “Disclosures about Oil and Gas Producing Activities,” and related SEC accounting rules. All monetary amounts are expressed in U.S. dollars.
 
Capitalized Costs Relating to Oil and Gas Producing Activities
 
                 
    At September 30  
    2007     2006  
    (Thousands)  
 
Proved Properties(1)
  $ 1,583,956     $ 1,884,049  
Unproved Properties
    20,005       41,930  
                 
      1,603,961       1,925,979  
Less — Accumulated Depreciation, Depletion and Amortization
    627,073       929,921  
                 
    $ 976,888     $ 996,058  
                 
 
 
(1) Includes asset retirement costs of $40.9 million and $42.2 million at September 30, 2007 and 2006, respectively.
 
Costs related to unproved properties 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. Following is a summary of costs excluded from amortization at September 30, 2007:
 
                                         
    Total
               
    as of
               
    September 30,
  Year Costs Incurred
    2007   2007   2006   2005   Prior
    (Thousands)
 
Acquisition Costs
  $ 20,005     $ 5,957     $ 12,485     $ 1,099     $ 464  


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities
 
                         
    Year Ended September 30  
    2007     2006     2005  
    (Thousands)  
 
United States
                       
Property Acquisition Costs:
                       
Proved
  $ 2,621     $ 5,339     $ 287  
Unproved
    3,210       8,844       1,215  
Exploration Costs
    26,891       64,087       32,456  
Development Costs
    113,206       87,738       49,016  
Asset Retirement Costs
    2,139       10,965       8,051  
                         
      148,067       176,973       91,025  
                         
Canada — Discontinued Operations
                       
Property Acquisition Costs:
                       
Proved
    (1,404 )     (427 )     (1,551 )
Unproved
    (1,142 )     6,492       4,668  
Exploration Costs
    20,134       20,778       22,943  
Development Costs
    11,414       14,385       12,198  
Asset Retirement Costs
    167       279       292  
                         
      29,169       41,507       38,550  
                         
Total
                       
Property Acquisition Costs:
                       
Proved
    1,217       4,912       (1,264 )
Unproved
    2,068       15,336       5,883  
Exploration Costs
    47,025       84,865       55,399  
Development Costs
    124,620       102,123       61,214  
Asset Retirement Costs
    2,306       11,244       8,343  
                         
    $ 177,236     $ 218,480     $ 129,575  
                         
 
For the years ended September 30, 2007, 2006 and 2005, the Company spent $30.3 million, $55.6 million and $19.2 million, respectively, developing proved undeveloped reserves.


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Results of Operations for Producing Activities
 
                         
    Year Ended September 30  
    2007     2006     2005  
    (Thousands, except per Mcfe amounts)  
 
United States
                       
Operating Revenues:
                       
Natural Gas (includes revenues from sales to affiliates of $325, $106 and $77, respectively)
  $ 135,399     $ 152,451     $ 151,004  
Oil, Condensate and Other Liquids
    189,539       195,050       160,145  
                         
Total Operating Revenues(1)
    324,938       347,501       311,149  
Production/Lifting Costs
    48,410       41,354       38,442  
Accretion Expense
    3,704       2,412       2,220  
Depreciation, Depletion and Amortization ($1.97, $1.74 and $1.58 per Mcfe of production)
    77,452       66,488       67,097  
Income Tax Expense
    78,928       88,104       74,110  
                         
Results of Operations for Producing Activities (excluding corporate overheads and interest charges)
    116,444       149,143       129,280  
                         
Canada — Discontinued Operations
                       
Operating Revenues:
                       
Natural Gas
    39,114       54,819       49,275  
Oil, Condensate and Other Liquids
    10,313       13,985       12,875  
                         
Total Operating Revenues(1)
    49,427       68,804       62,150  
Production/Lifting Costs
    14,846       14,628       12,683  
Accretion Expense
    249       258       228  
Depreciation, Depletion and Amortization ($1.67, $2.95 and $2.36 per Mcfe of production)
    12,787       27,439       23,108  
Impairment of Oil and Gas Producing Properties(2)
          104,739        
Income Tax Expense (Benefit)
    3,703       (31,987 )     8,577  
                         
Results of Operations for Producing Activities (excluding corporate overheads and interest charges)
    17,842       (46,273 )     17,554  
                         
 


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                         
    Year Ended September 30  
    2007     2006     2005  
    (Thousands, except per Mcfe amounts)  
 
Total
                       
Operating Revenues:
                       
Natural Gas (includes revenues from sales to affiliates of $325, $106 and $77, respectively)
    174,513       207,270       200,279  
Oil, Condensate and Other Liquids
    199,852       209,035       173,020  
                         
Total Operating Revenues(1)
    374,365       416,305       373,299  
Production/Lifting Costs
    63,256       55,982       51,125  
Accretion Expense
    3,953       2,670       2,448  
Depreciation, Depletion and Amortization ($1.92, $1.98 and $1.72 per Mcfe of production)
    90,239       93,927       90,205  
Impairment of Oil and Gas Producing Properties(2)
          104,739        
Income Tax Expense
    82,631       56,117       82,687  
                         
Results of Operations for Producing Activities (excluding corporate overheads and interest charges)
  $ 134,286     $ 102,870     $ 146,834  
                         
 
 
(1) Exclusive of hedging gains and losses. See further discussion in Note F — Financial Instruments.
 
(2) See discussion of impairment in Note A — Summary of Significant Accounting Policies.

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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
Reserve Quantity Information
 
The Company’s proved oil and gas reserves are located in the United States. The estimated quantities of proved reserves disclosed in the table below are based upon estimates by qualified Company geologists and engineers and are audited by independent petroleum engineers. Such estimates are inherently imprecise and may be subject to substantial revisions as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions.
 
                                                         
          Gas MMcf  
          U. S.              
          Gulf
    West
                Canada
       
          Coast
    Coast
    Appalachian
    Total
    (Discontinued
    Total
 
          Region     Region     Region     U.S.     Operations)     Company  
 
Proved Developed and Undeveloped Reserves:
                                                       
September 30, 2004
            27,734       67,444       78,760       173,938       50,846       224,784  
Extensions and Discoveries
            17,165             5,461       22,626       4,849       27,475  
Revisions of Previous Estimates
            6,039       7,067       3,733       16,839       (1,600 )     15,239  
Production
            (12,468 )     (4,052 )     (4,650 )     (21,170 )     (8,009 )     (29,179 )
Sales of Minerals in Place
                        (179 )     (179 )           (179 )
                                                         
September 30, 2005
            38,470       70,459       83,125       192,054       46,086       238,140  
Extensions and Discoveries
            11,763       1,815       11,132       24,710       6,229       30,939  
Revisions of Previous Estimates
            679       5,757       (7,776 )     (1,340 )     (11,096 )     (12,436 )
Production
            (9,110 )     (3,880 )     (5,108 )     (18,098 )     (7,673 )     (25,771 )
Purchases of Minerals in Place
                  1,715             1,715             1,715  
Sales of Minerals in Place
                                    (12 )     (12 )
                                                         
September 30, 2006
            41,802       75,866       81,373       199,041       33,534       232,575  
Extensions and Discoveries
            3,577             29,676       33,253       1,333       34,586  
Revisions of Previous Estimates
            (9,851 )     1,238       1,618       (6,995 )     11,634       4,639  
Production
            (10,356 )     (3,929 )     (5,555 )     (19,840 )     (6,426 )     (26,266 )
Sales of Minerals in Place
            (36 )           (34 )     (70 )     (40,075 )     (40,145 )
                                                         
September 30, 2007
            25,136       73,175       107,078       205,389             205,389  
                                                         
Proved Developed Reserves:
                                                       
September 30, 2004
            25,827       53,035       78,760       157,622       46,223       203,845  
September 30, 2005
            23,108       58,692       83,125       164,925       43,980       208,905  
September 30, 2006
            32,345       64,196       81,373       177,914       33,534       211,448  
September 30, 2007
            25,136       66,017       96,674       187,827             187,827  
 


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    Oil Mbbl  
    U.S.              
          West
                Canada
       
    Gulf Coast
    Coast
    Appalachian
    Total
    (Discontinued
    Total
 
    Region     Region     Region     U.S.     Operations)     Company  
 
Proved Developed and Undeveloped Reserves:
                                               
September 30, 2004
    2,080       60,882       147       63,109       2,104       65,213  
Extensions and Discoveries
    99             63       162       204       366  
Revisions of Previous Estimates
    105       (1,253 )     3       (1,145 )     (186 )     (1,331 )
Production
    (989 )     (2,544 )     (36 )     (3,569 )     (300 )     (3,869 )
Sales of Minerals in Place
                            (122 )     (122 )
                                                 
September 30, 2005
    1,295       57,085       177       58,557       1,700       60,257  
Extensions and Discoveries
    39       172       108       319       128       447  
Revisions of Previous Estimates
    595       (80 )     57       572       101       673  
Production
    (685 )     (2,582 )     (69 )     (3,336 )     (272 )     (3,608 )
Purchases of Minerals in Place
          274             274             274  
Sales of Minerals in Place
                            (25 )     (25 )
                                                 
September 30, 2006
    1,244       54,869       273       56,386       1,632       58,018  
Extensions and Discoveries
    63             281       344       108       452  
Revisions of Previous Estimates
    851       (6,822 )     84       (5,887 )     (76 )     (5,963 )
Production
    (717 )     (2,403 )     (124 )     (3,244 )     (206 )     (3,450 )
Sales of Minerals in Place
    (6 )           (7 )     (13 )     (1,458 )     (1,471 )
                                                 
September 30, 2007
    1,435       45,644       507       47,586             47,586  
                                                 
Proved Developed Reserves:
                                               
September 30, 2004
    2,061       38,631       148       40,840       2,104       42,944  
September 30, 2005
    1,229       41,701       177       43,107       1,700       44,807  
September 30, 2006
    1,217       42,522       273       44,012       1,632       45,644  
September 30, 2007
    1,435       36,509       483       38,427             38,427  
 
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves
 
The Company cautions that the following presentation of the standardized measure of discounted future net cash flows is intended to be neither a measure of the fair market value of the Company’s oil and gas properties, nor an estimate of the present value of actual future cash flows to be obtained as a result of their development and production. It is based upon subjective estimates of proved reserves only and attributes no value to categories of reserves other than proved reserves, such as probable or possible reserves, or to unproved acreage. Furthermore, it is based on year-end prices and costs adjusted only for existing contractual changes, and it assumes an arbitrary discount rate of 10%. Thus, it gives no effect to future price and cost changes certain to occur under widely fluctuating political and economic conditions.
 
The standardized measure is intended instead to provide a means for comparing the value of the Company’s proved reserves at a given time with those of other oil- and gas-producing companies than is provided by a simple comparison of raw proved reserve quantities.
 

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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                         
    Year Ended September 30  
    2007     2006     2005  
    (Thousands)  
 
United States
                       
Future Cash Inflows
  $ 4,879,496     $ 3,911,059     $ 6,138,522  
Less:
                       
Future Production Costs
    872,536       758,258       777,417  
Future Development Costs
    229,987       205,497       188,795  
Future Income Tax Expense at Applicable Statutory Rate
    1,423,707       1,019,307       1,868,548  
                         
Future Net Cash Flows
    2,353,266       1,927,997       3,303,762  
Less:
                       
10% Annual Discount for Estimated Timing of Cash Flows
    1,292,804       1,066,338       1,812,230  
                         
Standardized Measure of Discounted Future Net Cash Flows
    1,060,462       861,659       1,491,532  
                         
Canada — Discontinued Operations
                       
Future Cash Inflows
          197,227       601,210  
Less:
                       
Future Production Costs
          92,234       136,338  
Future Development Costs
          11,520       12,197  
Future Income Tax Expense at Applicable Statutory Rate
          (151 )     137,524  
                         
Future Net Cash Flows
          93,624       315,151  
Less:
                       
10% Annual Discount for Estimated Timing of Cash Flows
          19,375       108,508  
                         
Standardized Measure of Discounted Future Net Cash Flows
          74,249       206,643  
                         
Total
                       
Future Cash Inflows
    4,879,496       4,108,286       6,739,732  
Less:
                       
Future Production Costs
    872,536       850,492       913,755  
Future Development Costs
    229,987       217,017       200,992  
Future Income Tax Expense at Applicable Statutory Rate
    1,423,707       1,019,156       2,006,072  
                         
Future Net Cash Flows
    2,353,266       2,021,621       3,618,913  
Less:
                       
10% Annual Discount for Estimated Timing of Cash Flows
    1,292,804       1,085,713       1,920,738  
                         
Standardized Measure of Discounted Future Net Cash Flows
  $ 1,060,462     $ 935,908     $ 1,698,175  
                         

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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The principal sources of change in the standardized measure of discounted future net cash flows were as follows:
 
                         
    Year Ended September 30  
    2007     2006     2005  
    (Thousands)  
 
United States
                       
Standardized Measure of Discounted Future
                       
Net Cash Flows at Beginning of Year
  $ 861,659     $ 1,491,532     $ 935,369  
Sales, Net of Production Costs
    (276,529 )     (306,147 )     (272,707 )
Net Changes in Prices, Net of Production Costs
    539,895       (941,545 )     1,093,353  
Purchases of Minerals in Place
          7,607        
Sales of Minerals in Place
    484             (762 )
Extensions and Discoveries
    98,751       66,975       100,102  
Changes in Estimated Future Development Costs
    (83,199 )     (83,750 )     (89,805 )
Previously Estimated Development Costs Incurred
    58,710       67,048       25,038  
Net Change in Income Taxes at Applicable Statutory Rate
    (174,920 )     404,176       (362,956 )
Revisions of Previous Quantity Estimates
    (140,203 )     4,850       25,055  
Accretion of Discount and Other
    175,814       150,913       38,845  
                         
Standardized Measure of Discounted Future Net Cash Flows at End of Year
    1,060,462       861,659       1,491,532  
                         
Canada — Discontinued Operations
                       
Standardized Measure of Discounted Future
                       
Net Cash Flows at Beginning of Year
    74,249       206,643       110,730  
Sales, Net of Production Costs
    (34,581 )     (54,176 )     (49,467 )
Net Changes in Prices, Net of Production Costs
    35,628       (180,216 )     174,985  
Purchases of Minerals in Place
                 
Sales of Minerals in Place
    (151,236 )     (238 )     (3,751 )
Extensions and Discoveries
    6,908       10,369       31,028  
Changes in Estimated Future Development Costs
    5,722       (3,282 )     (11,007 )
Previously Estimated Development Costs Incurred
    5,798       4,450       12,032  
Net Change in Income Taxes at Applicable Statutory Rate
    (10,075 )     82,966       (51,541 )
Revisions of Previous Quantity Estimates
    34,998       (15,478 )     (5,990 )
Accretion of Discount and Other
    32,589       23,211       (376 )
                         
Standardized Measure of Discounted Future Net Cash Flows at End of Year
          74,249       206,643  
                         
 


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NATIONAL FUEL GAS COMPANY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                         
    Year Ended September 30  
    2007     2006     2005  
    (Thousands)  
 
Total
                       
Standardized Measure of Discounted Future
                       
Net Cash Flows at Beginning of Year
    935,908       1,698,175       1,046,099  
Sales, Net of Production Costs
    (311,110 )     (360,323 )     (322,174 )
Net Changes in Prices, Net of Production Costs
    575,523       (1,121,761 )     1,268,338  
Purchases of Minerals in Place
          7,607        
Sales of Minerals in Place
    (150,752 )     (238 )     (4,513 )
Extensions and Discoveries
    105,659       77,344       131,130  
Changes in Estimated Future Development Costs
    (77,477 )     (87,032 )     (100,812 )
Previously Estimated Development Costs Incurred
    64,508       71,498       37,070  
Net Change in Income Taxes at Applicable Statutory Rate
    (184,995 )     487,142       (414,497 )
Revisions of Previous Quantity Estimates
    (105,205 )     (10,628 )     19,065  
Accretion of Discount and Other
    208,403       174,124       38,469  
                         
Standardized Measure of Discounted Future Net Cash Flows at End of Year
  $ 1,060,462     $ 935,908     $ 1,698,175  
                         
 
Schedule II — Valuation and Qualifying Accounts
 
                                         
          Additions
                   
    Balance
    Charged
    Additions
          Balance
 
    at
    to
    Charged
          at
 
    Beginning
    Costs
    to
          End
 
    of
    and
    Other
          of
 
Description
  Period     Expenses     Accounts     Deductions(3)     Period  
    (Thousands)  
 
Year Ended September 30, 2007
                                       
Allowance for Uncollectible Accounts
  $ 31,427     $ 27,652     $ 1,414 (1)   $ 31,839     $ 28,654  
                                         
Year Ended September 30, 2006
                                       
Allowance for Uncollectible Accounts
  $ 26,940     $ 29,088     $ 907 (1)   $ 25,508     $ 31,427  
Deferred Tax Valuation Allowance
  $ 2,877     $ (2,877 )   $     $     $  
                                         
Year Ended September 30, 2005
                                       
Allowance for Uncollectible Accounts
  $ 17,440     $ 31,113     $ 2,480 (2)   $ 24,093     $ 26,940  
Deferred Tax Valuation Allowance
  $ 2,877     $     $     $     $ 2,877  
                                         
 
 
(1) Represents the discount on accounts receivable purchased in accordance with the Utility segment’s 2005 New York rate agreement.
 
(2) Represents amounts reclassified from regulatory asset and regulatory liability accounts under various rate settlements ($4.5 million). Also includes amounts removed with the sale of U.E. (-$2.02 million).
 
(3) Amounts represent net accounts receivable written-off.

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Item 9    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None
 
Item 9A    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 SEC’s 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 company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. The Company’s management, including the Chief Executive Officer and Principal Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2007.
 
Management’s Report on Internal Control over Financial Reporting
 
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
 
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2007. In making this assessment, management used the framework and criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on this assessment, management concluded that the Company maintained effective internal control over financial reporting as of September 30, 2007.
 
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements included in this Annual Report on Form 10-K, has issued a report on the effectiveness of the Company’s internal control over financial reporting as of September 30, 2007. The report appears in Part II, Item 8 of this Annual Report on Form 10-K.
 
Changes in Internal Control over Financial Reporting
 
There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
Item 9B    Other Information
 
None
 
PART III
 
Item 10    Directors, Executive Officers and Corporate Governance
 
The information required by this item concerning the directors of the Company and corporate governance is omitted pursuant to Instruction G of Form 10-K since the Company’s definitive Proxy Statement for its 2008


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Annual Meeting of Stockholders will be filed with the SEC not later than 120 days after September 30, 2007. The information concerning directors is set forth in the definitive Proxy Statement under the headings entitled “Nominees for Election as Directors for Three-Year Terms to Expire in 2011,” “Directors Whose Terms Expire in 2010,” “Directors Whose Terms Expire in 2009,” and “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by reference. The information concerning corporate governance is set forth in the definitive Proxy Statement under the heading entitled “Meetings of the Board of Directors and Standing Committees” and is incorporated herein by reference. Information concerning the Company’s executive officers can be found in Part I, Item 1, of this report.
 
The Company has adopted a Code of Business Conduct and Ethics that applies to the Company’s directors, officers and employees and has posted such Code of Business Conduct and Ethics on the Company’s website, www.nationalfuelgas.com, together with certain other corporate governance documents. Copies of the Company’s Code of Business Conduct and Ethics, charters of important committees, and Corporate Governance Guidelines will be made available free of charge upon written request to Investor Relations, National Fuel Gas Company, 6363 Main Street, Williamsville, New York 14221.
 
The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or a waiver from, a provision of its code of ethics that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, and that relates to any element of the code of ethics definition enumerated in paragraph (b) of Item 406 of the SEC’s Regulation S-K, by posting such information on its website, www.nationalfuelgas.com.
 
Item 11    Executive Compensation
 
The information required by this item is omitted pursuant to Instruction G of Form 10-K since the Company’s definitive Proxy Statement for its 2008 Annual Meeting of Stockholders will be filed with the SEC not later than 120 days after September 30, 2007. The information concerning executive compensation is set forth in the definitive Proxy Statement under the headings “Executive Compensation” and “Compensation Committee Interlocks and Insider Participation” and, excepting the “Report of the Compensation Committee,” is incorporated herein by reference.
 
Item 12    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Equity Compensation Plan Information
 
The information required by this item is omitted pursuant to Instruction G of Form 10-K since the Company’s definitive Proxy Statement for its 2008 Annual Meeting of Stockholders will be filed with the SEC not later than 120 days after September 30, 2007. The equity compensation plan information is set forth in the definitive Proxy Statement under the heading “Equity Compensation Plan Information” and is incorporated herein by reference.
 
Security Ownership and Changes in Control
 
(a)   Security Ownership of Certain Beneficial Owners
 
The information required by this item is omitted pursuant to Instruction G of Form 10-K since the Company’s definitive Proxy Statement for its 2008 Annual Meeting of Stockholders will be filed with the SEC not later than 120 days after September 30, 2007. The information concerning security ownership of certain beneficial owners is set forth in the definitive Proxy Statement under the heading “Security Ownership of Certain Beneficial Owners and Management” and is incorporated herein by reference.
 
(b)   Security Ownership of Management
 
The information required by this item is omitted pursuant to Instruction G of Form 10-K since the Company’s definitive Proxy Statement for its 2008 Annual Meeting of Stockholders will be filed with the SEC not later than 120 days after September 30, 2007. The information concerning security ownership of


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management is set forth in the definitive Proxy Statement under the heading “Security Ownership of Certain Beneficial Owners and Management” and is incorporated herein by reference.
 
(c)   Changes in Control
 
None
 
Item 13    Certain Relationships and Related Transactions, and Director Independence
 
The information required by this item is omitted pursuant to Instruction G of Form 10-K since the Company’s definitive Proxy Statement for its 2008 Annual Meeting of Stockholders will be filed with the SEC not later than 120 days after September 30, 2007. The information regarding certain relationships and related transactions is set forth in the definitive Proxy Statement under the headings “Compensation Committee Interlocks and Insider Participation” and “Related Person Transactions” and is incorporated herein by reference. The information regarding director independence is set forth in the definitive Proxy Statement under the heading “Director Independence” and is incorporated herein by reference.
 
Item 14    Principal Accountant Fees and Services
 
The information required by this item is omitted pursuant to Instruction G of Form 10-K since the Company’s definitive Proxy Statement for its 2008 Annual Meeting of Stockholders will be filed with the SEC not later than 120 days after September 30, 2007. The information concerning principal accountant fees and services is set forth in the definitive Proxy Statement under the heading “Audit Fees” and is incorporated herein by reference.
 
PART IV
 
Item 15    Exhibits and Financial Statement Schedules
 
(a)1.  Financial Statements
 
Financial statements filed as part of this report are listed in the index included in Item 8 of this Form 10-K, and reference is made thereto.
 
(a)2.  Financial Statement Schedules
 
Financial statement schedules filed as part of this report are listed in the index included in Item 8 of this Form 10-K, and reference is made thereto.
 
(a)3.  Exhibits
 
         
Exhibit
  Description of
Number
 
Exhibits
 
  3(i)     Articles of Incorporation:
      Restated Certificate of Incorporation of National Fuel Gas Company dated September 21, 1998 (Exhibit 3.1, Form 10-K for fiscal year ended September 30, 1998 in File No. 1-3880)
      Certificate of Amendment of Restated Certificate of Incorporation (Exhibit 3(ii), Form 8-K dated March 14, 2005 in File No. 1-3880)
  3(ii)     By-Laws:
      National Fuel Gas Company By-Laws as amended June 7, 2007 (Exhibit 3.1, Form 8-K dated June 8, 2007 in File No. 1-3880)
  4     Instruments Defining the Rights of Security Holders, Including Indentures:
      Indenture, dated as of October 15, 1974, between the Company and The Bank of New York (formerly Irving Trust Company) (Exhibit 2(b) in File No. 2-51796)
      Third Supplemental Indenture, dated as of December 1, 1982,to Indenture dated as of October 15, 1974, between the Company and The Bank of New York (formerly Irving Trust Company) (Exhibit 4(a)(4) in File No. 33-49401)


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Exhibit
  Description of
Number
 
Exhibits
 
      Eleventh Supplemental Indenture, dated as of May 1, 1992, to Indenture dated as of October 15, 1974, between the Company and The Bank of New York (formerly Irving Trust Company) (Exhibit 4(b), Form 8-K dated February 14, 1992 in File No. 1-3880)
      Twelfth Supplemental Indenture, dated as of June 1, 1992, to Indenture dated as of October 15, 1974, between the Company and The Bank of New York (formerly Irving Trust Company) (Exhibit 4(c), Form 8-K dated June 18, 1992 in File No. 1-3880)
      Thirteenth Supplemental Indenture, dated as of March 1, 1993, to Indenture dated as of October 15, 1974, between the Company and The Bank of New York (formerly Irving Trust Company) (Exhibit 4(a)(14) in File No. 33-49401)
      Fourteenth Supplemental Indenture, dated as of July 1, 1993,to Indenture dated as of October 15, 1974, between the Company and The Bank of New York (formerly Irving Trust Company) (Exhibit 4.1, Form 10-K for fiscal year ended September 30, 1993 in File No. 1-3880)
      Fifteenth Supplemental Indenture, dated as of September 1, 1996, to Indenture dated as of October 15, 1974, between the Company and The Bank of New York (formerly Irving Trust Company) (Exhibit 4.1, Form 10-K for fiscal year ended September 30, 1996 in File No. 1-3880)
      Indenture dated as of October 1, 1999, between the Company and The Bank of New York (Exhibit 4.1, Form 10-K for fiscal year ended September 30, 1999 in File No. 1-3880)
      Officers Certificate Establishing Medium-Term Notes, dated October 14, 1999 (Exhibit 4.2, Form 10-K for fiscal year ended September 30, 1999 in File No. 1-3880)
      Officers Certificate establishing 5.25% Notes due 2013, dated February 18, 2003 (Exhibit 4, Form 10-Q for the quarterly period ended March 31, 2003 in File No. 1-3880)
  4 .1   Amended and Restated Rights Agreement, dated as of September 1, 2007, between the Company and The Bank of New York
  10     Material Contracts:
        Contracts other than compensatory plans, contracts or arrangements:
      Form of Indemnification Agreement, dated September 2006, between the Company and each Director (Exhibit 10.1, Form 8-K dated September 18, 2006 in File No. 1-3880)
      Credit Agreement, dated as of August 19, 2005, among the Company, the Lenders Party Thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (Exhibit 10.1, Form 10-K for fiscal year ended September 30, 2005 in File No. 1-3880)
        Compensatory plans, contracts or arrangements:
  10 .1   Form of Employment Continuation and Noncompetition Agreement among the Company, a subsidiary of the Company and each of Philip C. Ackerman, Anna Marie Cellino, Paula M. Ciprich, Donna L. DeCarolis, John R. Pustulka, James D. Ramsdell, David F. Smith and Ronald J. Tanski
  10 .2   Employment Continuation and Noncompetition Agreement, dated as of September 20, 2007, among the Company, Seneca Resources Corporation and Matthew D. Cabell
      Letter Agreement between the Company and Matthew D. Cabell, dated November 17, 2006 (Exhibit 10.1, Form 10-Q for the quarterly period ended December 31, 2006 in File No. 1-3880)
      National Fuel Gas Company 1993 Award and Option Plan, dated February 18, 1993 (Exhibit 10.1, Form 10-Q for the quarterly period ended March 31, 1993 in File No. 1-3880)
      Amendment to National Fuel Gas Company 1993 Award and Option Plan, dated October 27, 1995 (Exhibit 10.8, Form 10-K for fiscal year ended September 30, 1995 in File No. 1-3880)
      Amendment to National Fuel Gas Company 1993 Award and Option Plan, dated December 11, 1996 (Exhibit 10.8, Form 10-K for fiscal year ended September 30, 1996 in File No. 1-3880)
      Amendment to National Fuel Gas Company 1993 Award and Option Plan, dated December 18, 1996 (Exhibit 10, Form 10-Q for the quarterly period ended December 31, 1996 in File No. 1-3880)
      National Fuel Gas Company 1993 Award and Option Plan, amended through June 14, 2001 (Exhibit 10.1, Form 10-K for fiscal year ended September 30, 2001 in File No. 1-3880)

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Exhibit
  Description of
Number
 
Exhibits
 
      National Fuel Gas Company 1993 Award and Option Plan, amended through September 8, 2005 (Exhibit 10.2, Form 10-K for fiscal year ended September 30, 2005 in File No. 1-3880)
      Administrative Rules with Respect to At Risk Awards under the 1993 Award and Option Plan (Exhibit 10.14, Form 10-K for fiscal year ended September 30, 1996 in File No. 1-3880)
      National Fuel Gas Company 1997 Award and Option Plan, as amended and restated as of February 15, 2007 (Exhibit 10.2, Form 10-Q for the quarterly period ended March 31, 2007 in File No. 1-3880)
      Form of Award Notice under National Fuel Gas Company 1997 Award and Option Plan (Exhibit 10.1, Form 8-K dated March 28, 2005 in File No. 1-3880)
      Form of Award Notice under National Fuel Gas Company 1997 Award and Option Plan (Exhibit 10.1, Form 8-K dated May 16, 2006 in File No. 1-3880)
      Form of Restricted Stock Award Notice under National Fuel Gas Company 1997 Award and Option Plan (Exhibit 10.2, Form 10-Q for the quarterly period ended December 31, 2006 in File No. 1-3880)
      Form of Stock Option Award Notice under National Fuel Gas Company 1997 Award and Option Plan (Exhibit 10.3, Form 10-Q for the quarterly period ended December 31, 2006 in File No. 1-3880)
      Administrative Rules with Respect to At Risk Awards under the 1997 Award and Option Plan amended and restated as of September 8, 2005 (Exhibit 10.4, Form 10-K for fiscal year ended September 30, 2005 in File No. 1-3880)
      National Fuel Gas Company 2007 Annual At Risk Compensation Incentive Program (Exhibit 10.1, Form 10-Q for the quarterly period ended March 31, 2007 in File No. 1-3880)
      Description of performance goals for Chief Executive Officer under the Company’s Annual At Risk Compensation Incentive Program (Exhibit 10, Form 10-Q for the quarterly period ended December 31, 2004 in File No. 1-3880)
      Description of performance goals for Chief Executive Officer under the Company’s Annual At Risk Compensation Incentive Program (Exhibit 10.2, Form 10-Q for the quarterly period ended December 31, 2005 in File No. 1-3880)
      Description of performance goals for certain executive officers under the Company’s Annual At Risk Compensation Incentive Program (Exhibit 10.8, Form 10-Q for the quarterly period ended December 31, 2006 in File No. 1-3880)
      Administrative Rules of the Compensation Committee of the Board of Directors of National Fuel Gas Company, as amended and restated effective December 6, 2006 (Exhibit 10.6, Form 10-Q for the quarterly period ended December 31, 2006 in File No. 1-3880)
      National Fuel Gas Company Deferred Compensation Plan, as amended and restated through May 1, 1994 (Exhibit 10.7, Form 10-K for fiscal year ended September 30, 1994 in File No. 1-3880)
      Amendment to National Fuel Gas Company Deferred Compensation Plan, dated September 27, 1995 (Exhibit 10.9, Form 10-K for fiscal year ended September 30, 1995 in File No. 1-3880)
      Amendment to National Fuel Gas Company Deferred Compensation Plan, dated September 19, 1996 (Exhibit 10.10, Form 10-K for fiscal year ended September 30, 1996 in File No. 1-3880)
      National Fuel Gas Company Deferred Compensation Plan, as amended and restated through March 20, 1997 (Exhibit 10.3,Form 10-K for fiscal year ended September 30, 1997 in File No. 1-3880)
      Amendment to National Fuel Gas Company Deferred Compensation Plan, dated June 16, 1997 (Exhibit 10.4, Form 10-K for fiscal year ended September 30, 1997 in File No. 1-3880)
      Amendment No. 2 to the National Fuel Gas Company Deferred Compensation Plan, dated March 13, 1998 (Exhibit 10.1, Form 10-K for fiscal year ended September 30, 1998 in File No. 1-3880)
      Amendment to the National Fuel Gas Company Deferred Compensation Plan, dated February 18, 1999 (Exhibit 10.1,Form 10-Q for the quarterly period ended March 31, 1999 in File No. 1-3880)
      Amendment to National Fuel Gas Company Deferred Compensation Plan, dated June 15, 2001 (Exhibit 10.3, Form 10-K for fiscal year ended September 30, 2001 in File No. 1-3880)
      Amendment to the National Fuel Gas Company Deferred Compensation Plan, dated October 21, 2005 (Exhibit 10.5, Form 10-K for fiscal year ended September 30, 2005 in File No. 1-3880)

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Exhibit
  Description of
Number
 
Exhibits
 
      Form of Letter Regarding Deferred Compensation Plan and Internal Revenue Code Section 409A, dated July 12, 2005 (Exhibit 10.6, Form 10-K for fiscal year ended September 30, 2005 in File No. 1-3880)
      National Fuel Gas Company Tophat Plan, effective March 20, 1997 (Exhibit 10, Form 10-Q for the quarterly period ended June 30, 1997 in File No. 1-3880)
      Amendment No. 1 to National Fuel Gas Company Tophat Plan, dated April 6, 1998 (Exhibit 10.2, Form 10-K for fiscal year ended September 30, 1998 in File No. 1-3880)
      Amendment No. 2 to National Fuel Gas Company Tophat Plan, dated December 10, 1998 (Exhibit 10.1, Form 10-Q for the quarterly period ended December 31, 1998 in File No. 1-3880)
      Form of Letter Regarding Tophat Plan and Internal Revenue Code Section 409A, dated July 12, 2005 (Exhibit 10.7, Form 10-K for fiscal year ended September 30, 2005 in File No. 1-3880)
      National Fuel Gas Company Tophat Plan, Amended and Restated December 7, 2005 (Exhibit 10.1, Form 10-Q for the quarterly period ended December 31, 2005 in File No. 1-3880)
  10 .3   National Fuel Gas Company Tophat Plan, as amended September 20, 2007
      Amended and Restated Split Dollar Insurance and Death Benefit Agreement, dated September 17, 1997 between the Company and Philip C. Ackerman (Exhibit 10.5, Form 10-K for fiscal year ended September 30, 1997 in File No. 1-3880)
      Amendment Number 1 to Amended and Restated Split Dollar Insurance and Death Benefit Agreement by and between the Company and Philip C. Ackerman, dated March 23, 1999 (Exhibit 10.3, Form 10-K for fiscal year ended September 30, 1999 in File No. 1-3880)
      Amended and Restated Split Dollar Insurance and Death Benefit Agreement, dated September 15, 1997, between the Company and Dennis J. Seeley (Exhibit 10.9, Form 10-K for fiscal year ended September 30, 1999 in File No. 1-3880)
      Amendment Number 1 to Amended and Restated Split Dollar Insurance and Death Benefit Agreement by and between the Company and Dennis J. Seeley, dated March 29, 1999 (Exhibit 10.10, Form 10-K for fiscal year ended September 30, 1999 in File No. 1-3880)
      Split Dollar Insurance and Death Benefit Agreement, dated September 15, 1997, between the Company and David F. Smith (Exhibit 10.13, Form 10-K for fiscal year ended September 30, 1999 in File No. 1-3880)
      Amendment Number 1 to Split Dollar Insurance and Death Benefit Agreement by and between the Company and David F. Smith, dated March 29, 1999 (Exhibit 10.14, Form 10-K for fiscal year ended September 30, 1999 in File No. 1-3880)
      National Fuel Gas Company Parameters for Executive Life Insurance Plan (Exhibit 10.1, Form 10-K for fiscal year ended September 30, 2004 in File No. 1-3880)
      National Fuel Gas Company and Participating Subsidiaries Executive Retirement Plan as amended and restated through November 1, 1995 (Exhibit 10.10, Form 10-K for fiscal year ended September 30, 1995 in File No. 1-3880)
      Amendments to National Fuel Gas Company and Participating Subsidiaries Executive Retirement Plan, dated September 18, 1997 (Exhibit 10.9, Form 10-K for fiscal year ended September 30, 1997 in File No. 1-3880)
      Amendments to National Fuel Gas Company and Participating Subsidiaries Executive Retirement Plan, dated December 10, 1998 (Exhibit 10.2, Form 10-Q for the quarterly period ended December 31, 1998 in File No. 1-3880)
      Amendments to National Fuel Gas Company and Participating Subsidiaries Executive Retirement Plan, effective September 16, 1999 (Exhibit 10.15, Form 10-K for fiscal year ended September 30, 1999 in File No. 1-3880)
      Amendment to National Fuel Gas Company and Participating Subsidiaries Executive Retirement Plan, effective September 5, 2001 (Exhibit 10.4, Form 10-K/A for fiscal year ended September 30, 2001, in File No. 1-3880)

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Table of Contents

         
Exhibit
  Description of
Number
 
Exhibits
 
      National Fuel Gas Company and Participating Subsidiaries Executive Retirement Plan, Amended and Restated as of January 1, 2007 (Exhibit 10.5, Form 10-Q for the quarterly period ended December 31, 2006 in File No. 1-3880)
  10 .4   National Fuel Gas Company and Participating Subsidiaries Executive Retirement Plan, Amended and Restated as of September 20, 2007
      National Fuel Gas Company and Participating Subsidiaries 1996 Executive Retirement Plan Trust Agreement (II), dated May 10, 1996 (Exhibit 10.13, Form 10-K for fiscal year ended September 30, 1996 in File No. 1-3880)
      National Fuel Gas Company Participating Subsidiaries Executive Retirement Plan 2003 Trust Agreement(I), dated September 1, 2003 (Exhibit 10.2, Form 10-K for fiscal year ended September 30, 2004 in File No. 1-3880)
      National Fuel Gas Company Performance Incentive Program (Exhibit 10.1, Form 8-K dated June 3, 2005 in File No. 1-3880)
      Excerpts of Minutes from the National Fuel Gas Company Board of Directors Meeting of March 20, 1997 regarding the Retainer Policy for Non-Employee Directors (Exhibit 10.11, Form 10-K for fiscal year ended September 30, 1997 in File No. 1-3880)
  10 .5   Amended and Restated Retirement Benefit Agreement for David F. Smith, dated September 20, 2007,among the Company, National Fuel Gas Supply Corporation and David F. Smith
      Description of performance goals for certain executive officers (Exhibit 10.1, Form 10-Q for the quarterly period ended March 31, 2005 in File No. 1-3880)
      Description of bonuses awarded to executive officer (Exhibit 10.1, Form 10-Q for the quarterly period ended March 31, 2006 in File No. 1-3880)
      Description of performance goals for certain executive officers (Exhibit 10.2, Form 10-Q for the quarterly period ended March 31, 2006 in File No. 1-3880)
      Noncompete and Restrictive Covenant Agreement, dated February 1, 2006, between the Company and Dennis J. Seeley (Exhibit 10.3, Form 10-Q for the quarterly period ended March 31, 2006 in File No. 1-3880)
      Description of salaries of certain executive officers (Exhibit 10.4, Form 10-Q for the quarterly period ended March 31, 2006 in File No. 1-3880)
      Description of assignment of interests in certain life insurance policies (Exhibit 10.1, Form 10-Q for the quarterly period ended June 30, 2006 in File No. 1-3880)
      Description of long-term performance incentives under the National Fuel Gas Company Performance Incentive Program (Exhibit 10.2, Form 10-Q for the quarterly period ended June 30, 2006 in File No. 1-3880)
      Description of long-term performance incentives under the National Fuel Gas Company Performance Incentive Program (Exhibit 10.7, Form 10-Q for the quarterly period ended December 31, 2006 in File No. 1-3880)
      Description of agreement between the Company and Philip C. Ackerman regarding death benefit (Exhibit 10.3, Form 10-Q for the quarterly period ended June 30, 2006 in File No. 1-3880)
      Agreement, dated September 24, 2006, between the Company and Philip C. Ackerman regarding death benefit (Exhibit 10.1, Form 10-K for the fiscal year ended September 30, 2006 in File No. 1-3880)
      Retirement Agreement, dated July 1, 2006, between the Company and James A. Beck (Exhibit 10.4, Form 10-Q for the quarterly period ended June 30, 2006 in File No. 1-3880)
      Contract for Consulting Services, dated July 1, 2006, between the Company and James A. Beck (Exhibit 10.5, Form 10-Q for the quarterly period ended June 30, 2006 in File No. 1-3880)
  12     Statements regarding Computation of Ratios: Ratio of Earnings to Fixed Charges for the fiscal years ended September 30, 2003 through 2007
  21     Subsidiaries of the Registrant
  23     Consents of Experts:

124


Table of Contents

         
Exhibit
  Description of
Number
 
Exhibits
 
  23 .1   Consent of Netherland, Sewell & Associates, Inc. regarding Seneca Resources Corporation
  23 .2   Consent of Independent Registered Public Accounting Firm
  31     Rule 13a-14(a)/15d-14(a) Certifications:
  31 .1   Written statements of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act
  31 .2   Written statements of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act
  32     Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  99     Additional Exhibits:
  99 .1   Report of Netherland, Sewell & Associates, Inc. regarding Seneca Resources Corporation
  99 .2   Company Maps
      Incorporated herein by reference as indicated.
        All other exhibits are omitted because they are not applicable or the required information is shown elsewhere in this Annual Report on Form 10-K
  ••     In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the material contained in Exhibit 32 is “furnished” and not deemed “filed” with the SEC and is not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933 or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing, except to the extent that the Registrant specifically incorporates it by reference

125


Table of Contents

 
Signatures
 
Pursuant to the requirements of Section 13 or 15(d) 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)
 
  By 
/s/  P. C. Ackerman
P. C. Ackerman
Chairman of the Board and Chief Executive Officer
 
Date: November 29, 2007
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
             
Signature
 
Title
   
 
         
/s/  P. C. Ackerman

P. C. Ackerman
  Chairman of the Board, Chief Executive Officer and Director   Date: November 29, 2007
         
/s/  R. T. Brady

R. T. Brady
  Director   Date: November 29, 2007
         
/s/  R. D. Cash

R. D. Cash
  Director   Date: November 29, 2007
         
/s/  S. E. Ewing

S. E. Ewing
  Director   Date: November 29, 2007
         
/s/  R. E. Kidder

R. E. Kidder
  Director   Date: November 29, 2007
         
/s/  C. G. Matthews

C. G. Matthews
  Director   Date: November 29, 2007
         
/s/  G. L. Mazanec

G. L. Mazanec
  Director   Date: November 29, 2007
         
/s/  R. G. Reiten

R. G. Reiten
  Director   Date: November 29, 2007
         
/s/  J. F. Riordan

J. F. Riordan
  Director   Date: November 29, 2007
         
/s/  D. F. Smith

D. F. Smith
  President, Chief Operating Officer and Director   Date: November 29, 2007


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Table of Contents

             
Signature
 
Title
   
 
         
/s/  R. J. Tanski

R. J. Tanski
  Treasurer and Principal Financial Officer   Date: November 29, 2007
         
/s/  K. M. Camiolo

K. M. Camiolo
  Controller and Principal Accounting Officer   Date: November 29, 2007


127

 

Exhibit 4.1
NATIONAL FUEL GAS COMPANY
and
THE BANK OF NEW YORK, Rights Agent
RIGHTS AGREEMENT
Amended and Restated as of September 1, 2007

 


 

TABLE OF CONTENTS
Page
         
Section 1. Certain Definitions
    2  
 
 
Section 2. Appointment of Rights Agent
    6  
 
 
Section 3. Issue of Right Certificates
    6  
 
 
Section 4. Form of Right Certificates
    8  
 
Section 5. Countersignature and Registration
    8  
 
Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates
    9  
 
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights
    10  
 
Section 8. Cancellation and Destruction of Right Certificates
    11  
 
Section 9. Reservation and Availability of Shares of Common Stock
    12  
 
Section 10. Common Stock Record Date
    13  
 
Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights
    13  
 
Section 12. Certificate of Adjusted Purchase Price or Number of Shares
    20  
 
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power
    20  
 
Section 14. Fractional Rights and Fractional Shares
    22  
 
Section 15. Rights of Action
    23  
 
Section 16. Agreement of Right Holders
    23  
 
Section 17. Right Certificate Holder Not Deemed a Stockholder
    24  
 
Section 18. Concerning the Rights Agent
    24  
 
Section 19. Merger or Consolidation or Change of Name of Rights Agent
    25  
 
Section 20. Duties of Rights Agent
    26  
 
Section 21. Change of Rights Agent
    28  
 
Section 22. Issuance of New Right Certificates
    28  
 
Section 23. Redemption and Termination
    29  

i


 

Page
         
Section 24. Exchange
    30  
 
Section 25. Notice of Certain Events
    31  
 
Section 26. Notices
    31  
 
Section 27. Supplements and Amendments
    32  
 
Section 28. Successors; Assignment
    33  
 
Section 29. Determinations and Actions by the Board of Directors
    33  
 
Section 30. Benefits of This Agreement
    33  
 
Section 31. Severability
    33  
 
Section 32. Governing Law
    34  
 
Section 33. Counterparts
    34  
 
Section 34. Descriptive Headings
    34  
 
       
Exhibit A - Form of Right Certificate
    A-1  
Form of Assignment
    A-4  
Certificate
    A-5  
Notice
    A-6  
Form of Election to Purchase
    A-7  
Exhibit B - Summary of Rights to Purchase Common Stock
    B-1  

ii


 

AMENDED AND RESTATED RIGHTS AGREEMENT
This AMENDED AND RESTATED RIGHTS AGREEMENT, dated as of September 1, 2007 (the “Agreement”), between NATIONAL FUEL GAS COMPANY, a New Jersey corporation (the “Company”), and THE BANK OF NEW YORK, a banking corporation organized under the laws of the State of New York (the “Rights Agent”).
W I T N E S S E T H
     WHEREAS, the Company and HSBC Bank USA, National Association, as successor in interest to Marine Midland Bank (the “Original Rights Agent”), have heretofore entered into that certain Rights Agreement, dated as of June 12, 1996 (the “Original Agreement”); and
     WHEREAS, the Board of Directors of the Company on March 19, 1996 (the “Rights Dividend Declaration Date”) authorized and declared a dividend distribution (the “Distribution”) of one Right for each share of Common Stock, $1.00 par value, of the Company (the “Common Stock”) outstanding at the close of business on July 31, 1996 (the “Record Date”), the record date established by the Board of Directors on June 13, 1996; and
     WHEREAS, on the Rights Dividend Declaration Date, the Board of Directors further authorized and directed the issuance of one Right (as such number may be adjusted pursuant to the provisions of Section 11(i) hereof) for each share of Common Stock issued (whether originally issued or delivered from the Company’s treasury stock) between the Record Date and the earlier of the Distribution Date or the Expiration Date (as such terms are hereinafter defined), each Right initially representing the right to purchase one-half of one share of Common Stock, upon the terms and subject to the conditions hereinafter set forth (the “Rights”); and
     WHEREAS, the Company and the Original Rights Agent entered into that certain Amended and Restated Rights Agreement, dated as of April 30, 1999, as further amended and restated on June 8, 2007 (the “Amended and Restated Agreement”); and
     WHEREAS, pursuant to Section 27 of the Amended and Restated Agreement, the Company is authorized to amend the Amended and Restated Agreement from time to time and, so long as its interests are not adversely affected thereby, the Rights Agent has undertaken to execute any such amendment; and
     WHEREAS, the Board of Directors of the Company has determined that it is necessary and desirable that the Amended and Restated Agreement be amended in certain respects; and
     WHEREAS, the Rights Agent has determined that the amendments to the Amended and Restated Agreement proposed by the Company and reflected in this Agreement (i) are in compliance with the terms of Section 27 of the Amended and Restated Agreement and (ii) will not adversely affect its interests thereunder; and

 


 

     WHEREAS, on September 7, 2001, the Company effectuated a two-for-one split of its Common Stock and in connection therewith executed a Certificate of Amendment pursuant to Section 27 as a result of which (i) the purchase price per share of Common Stock upon the exercise of the Rights was adjusted pursuant to Section 11(a)(i) to $65.00 (being $32.50 per half share) and (ii) the price at which the Rights may be redeemed was adjusted pursuant to Section 23(a) to $.005 per Right; and
     WHEREAS, effective September 1, 2007, the Original Rights Agent resigned as Rights Agent hereunder and, pursuant to Section 21 of the Amended and Restated Agreement, the Company substituted The Bank of New York as successor Rights Agent; and
     WHEREAS, the Company and the Rights Agent have agreed that, for ease and convenience of reference, it is desirable to incorporate such amendments into an instrument which restates in its entirety the Amended and Restated Agreement, as so amended;
     NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows:
     Section 1. Certain Definitions . For purposes of this Agreement, the following terms have the meanings indicated:
     (a) “Acquiring Person” shall mean any Person (as such term is hereinafter defined) who or which, together with all Affiliates and Associates (as such terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as such term is hereinafter defined) of securities of the Company constituting a Substantial Block (as such term is hereinafter defined), but shall not include (i) the Company, any Subsidiary (as such term is hereinafter defined) of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company or any Person organized, appointed or established by the Company or any Subsidiary of the Company for or pursuant to the terms of any such plan, (ii) any Person who becomes the Beneficial Owner of a Substantial Block of the shares of Voting Stock then outstanding as a result of a reduction in the number of shares of Voting Stock outstanding due to the repurchase of shares of Voting Stock by the Company unless and until such Person, after becoming aware that such Person has become the Beneficial Owner of a Substantial Block of the then outstanding shares of Voting Stock, acquires beneficial ownership of additional shares of Voting Stock representing one percent (1%) or more of the shares of Voting Stock then outstanding or (iii) any Person who otherwise would be an Acquiring Person but whom the Board of Directors determines, in good faith, to have become such inadvertently (including, without limitation, because (A) such person was unaware that he or it was the Beneficial Owner of a percentage of Common Stock that otherwise would cause such person to be an Acquiring Person, or (B) such Person was aware of the extent to which he or it is the Beneficial Owner of Common Stock but had no actual knowledge of the consequences of being such a Beneficial Owner under this Agreement) and without any intention of changing or influencing control of the Company, and if such Person, after being advised of such determination and within a period of time set by the Board of Directors, divests himself or itself of a sufficient number of shares of Common Stock so that such Person would no longer be the Beneficial Owner of a Substantial Block of the Common Stock of the Company then outstanding, then such Person shall not be deemed to be or to have become an Acquiring Person for any purposes of this Agreement; and during any period of time (x) prior to the time the Board of Directors shall have

2


 

become aware that such Person would have become an Acquiring Person but for the provisions of this clause (iii), (y) during which the Board of Directors is making the determination called for under this clause (iii), and (z) during which such Person is divesting himself or itself of a sufficient number of shares of Common Stock so that such Person no longer would be the Beneficial Owner of a Substantial Block of the Common Stock of the Company then outstanding, such Person shall not be deemed to be or to have become an Acquiring Person for any purpose under this Agreement.
     (b) “Act” shall have the meaning set forth in Section 9(c) hereof.
     (c) “Adjustment Shares” shall have the meaning set forth in Section 11(a)(ii) hereof.
     (d) “Affiliate” and “Associate” shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as in effect on the date hereof.
     (e) “Agreement” shall have the meaning set forth in the introduction hereto.
     (f) A Person shall be deemed the “Beneficial Owner” of, and shall be deemed to “beneficially own,” any securities:
     (i) which such Person or any of such Person’s Affiliates or Associates has, directly or indirectly, the right to acquire (whether such right is exercisable immediately or only after the passage of time or upon the occurrence of an event) pursuant to any agreement, arrangement or understanding (whether or not in writing), or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the “Beneficial Owner” of, or to “beneficially own,” (1) securities tendered pursuant to a tender or exchange offer made by such Person or any of such Person’s Affiliates or Associates until such tendered securities are accepted for purchase or exchange, (2) securities issuable upon exercise of Rights at any time prior to the occurrence of a Triggering Event (as such term is hereinafter defined), or (3) securities issuable upon exercise of Rights from and after the occurrence of a Triggering Event, which Rights were acquired by such Person or any of such Person’s Affiliates or Associates prior to the Distribution Date or pursuant to Section 3(a) hereof (“Original Rights”) or pursuant to Section 11(i) or Section 22 hereof in connection with an adjustment made with respect to Original Rights; or
     (ii) which such Person or any of such Person’s Affiliates or Associates has, directly or indirectly, the right to vote or dispose of or has “beneficial ownership” of (as determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Exchange Act), including pursuant to any agreement, arrangement or understanding (whether or not in writing); provided, however, that a Person shall not be deemed the “Beneficial Owner” of, or to “beneficially own,” any security under this subparagraph (ii) if the agreement, arrangement or understanding to vote such security (1) arises solely from a revocable proxy given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations of the Exchange Act and (2)

3


 

is not then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); or
     (iii) which are beneficially owned, directly or indirectly, by any other Person with which such Person or any of such Person’s Affiliates or Associates has any agreement, arrangement or understanding (whether or not in writing) for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in the proviso to subparagraph (ii) of this paragraph (f)) or disposing of any securities of the Company.
Notwithstanding the foregoing, nothing contained in this definition shall cause a Person ordinarily engaged in business as an underwriter of securities to be the “Beneficial Owner” of, or to “beneficially own,” any securities acquired in a bona fide firm commitment underwriting pursuant to an underwriting agreement with the Company.
     (g) “Business Day” shall mean any day other than a Saturday, Sunday, or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close.
     (h) “Certification” shall have the meaning set forth in Section 18 hereof.
     (i) “Close of business” on any given day shall mean 5:00 P.M., New York, New York time, on such day; provided, however, that if such day is not a Business Day, it shall mean 5:00 P.M., New York, New York time, on the next succeeding Business Day.
     (j) “Common Stock,” when used with reference to the Company, shall mean the shares of common stock, $1.00 par value, of the Company. “Common Stock,” when used with reference to any Person other than the Company, shall mean either the capital stock with the greatest voting power of such other Person or, if such Person is a Subsidiary of another Person, the equity securities or other equity interest having power to control or direct the management of such Person.
     (k) “Common Stock Equivalent” shall have the meaning set forth in Section 11(a)(iii).
     (l) “Company” shall have the meaning set forth in the introduction hereto.
     (m) “Current Market Price” shall have the meaning set forth in Section 11(d) hereof.
     (n) “Current Value” shall have the meaning set forth in Section 11(a)(iii) hereof.
     (o) “Distribution” shall have the meaning set forth in the recitals hereto.
     (p) “Distribution Date” shall have the meaning set forth in Section 3(a) hereof.
     (q) “Equivalent Common Stock” shall have the meaning set forth in Section 11(b) hereof.

4


 

     (r) “Exchange Act” shall have the meaning set forth in the definitions of “Affiliate” and “Associate” above.
     (s) “Exchange Ratio” shall have the meaning set forth in Section 24(a) hereof.
     (t) “Expiration Date” shall have the meaning set forth in Section 7(a) hereof.
     (u) “Final Expiration Date” shall have the meaning set forth in Section 7(a) hereof.
     (v) [Intentionally omitted]
     (w) “Original Rights” shall have the meaning set forth in the definition of “Beneficial Owner” above.
     (x) “Person” shall mean any individual, firm, corporation, limited liability company, partnership (general, limited or limited liability), trust or other entity, and shall include any successor (by merger or otherwise) of such entity.
     (y) “Principal Party” shall have the meaning set forth in Section 13(b) hereof.
     (z) Purchase Price” shall have the meaning set forth in Section 4(a) hereof.
     (aa) “Record Date” shall have the meaning set forth in the recitals hereto.
     (bb) “Redemption Price” shall have the meaning set forth in Section 23(a) hereof.
     (cc) “Right Certificate” shall have the meaning set forth in Section 3(a) hereof.
     (dd) “Rights” shall have the meaning set forth in the recitals hereto.
     (ee) “Rights Agent” shall have the meaning set forth in the introduction hereto.
     (ff) “Rights Dividend Declaration Date” shall have the meaning set forth in the recitals hereto.
     (gg) “Section 11(a)(ii) Event” shall mean any event described in Section 11(a)(ii).
     (hh) “Section 11(a)(ii) Trigger Date” shall have the meaning set forth in Section 11(a)(iii).
     (ii) “Section 13 Event” shall mean any event described in Section 13(a).
     (jj) “Shares Acquisition Date” shall mean the first date of public announcement (which, for purposes of this definition, includes a report filed pursuant to Section 13(d) of the Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has become such.
     (kk) “Spread” shall have the meaning set forth in Section 11(a)(iii) hereof.

5


 

     (ll) “Subsidiary” shall mean, with reference to any Person, any corporation (or other entity) of which an amount of voting securities (or comparable ownership interests) sufficient to elect at least a majority of the directors (or comparable individuals) of such corporation (or other entity) is beneficially owned or otherwise controlled, directly or indirectly, by such Person.
     (mm) “Substantial Block” shall mean a number of shares of Voting Stock which have 10% or more of the aggregate voting power of all outstanding shares of Voting Stock.
     (nn) “Substitution Period” shall have the meaning set forth in Section 11(a)(iii) hereof.
     (oo) “Summary of Rights” shall have the meaning set forth in Section 3(b) hereof.
     (pp) “Trading Day” shall have the meaning set forth in Section 11(d) hereof.
     (qq) “Triggering Event” shall mean any Section 11(a)(ii) Event or Section 13 Event.
     (rr) “Voting Stock,” as of the date of any determination, shall mean the shares of Common Stock, $1.00 par value, then outstanding and any other shares of capital stock of the Company which are entitled to vote generally in the election of directors.
     Section 2. Appointment of Rights Agent . The Company hereby appoints the Rights Agent to act as agent for the Company in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company shall act as Co-Rights Agent and may from time to time appoint such other Co-Rights Agents as it may deem necessary or desirable upon ten calendar days’ written notice to the Rights Agent. In no event shall the Rights Agent have any duty to supervise or in any way be liable for such Co-Rights Agents.
     Section 3. Issue of Right Certificates . (a) Until the earlier of (i) the close of business on the tenth calendar day after the Shares Acquisition Date (or, if the tenth day after the Shares Acquisition Date occurs before the Record Date, the close of business on the Record Date) or (ii) the close of business on the tenth business day (or such later date as the Board shall determine) after the date of the commencement of, or of the first public announcement of the intention of any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company or any Person organized, appointed or established by the Company or any Subsidiary of the Company for or pursuant to the terms of any such plan) to commence, a tender or exchange offer if, upon consummation thereof, such Person would become an Acquiring Person (the earlier of the dates in subsection (i) and (ii) hereof being herein referred to as the “Distribution Date”) (x) the Rights will be evidenced (subject to the provisions of paragraph (b) of this Section 3) by the certificates for the Common Stock registered in the names of the holders of the Common Stock (which certificates for Common Stock shall be deemed also to be Right Certificates) and not by separate Right Certificates, and (y) the right to receive Right Certificates will be transferable only in connection with the transfer of Common Stock. As soon as practicable after receipt by the Rights Agent of written notice from the Company of the Distribution Date, the Rights Agent, at the Company’s expense, will send by first-class, postage prepaid mail, to each record holder of Common Stock as of the close of

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business on the Distribution Date, at the address of such holder shown on the records of the Company, a Right Certificate, in substantially the form of Exhibit A hereto (a “Right Certificate”), evidencing one Right for each share of Common Stock so held, subject to adjustment as provided herein. As of the Distribution Date, the Rights will be evidenced solely by such Right Certificates.
     (b) As soon as practicable following the Record Date, the Company will send a copy of a Summary of Rights to Purchase Common Stock, in substantially the form attached hereto as Exhibit B (the “Summary of Rights”), by first-class, postage prepaid mail, to each record holder of Common Stock as of the close of business on the Record Date, at the address of such holder shown on the records of the Company. With respect to certificates for Common Stock outstanding as of the Record Date, until the Distribution Date, the Rights will be evidenced by such certificates for Common Stock, and the registered holders of Common Stock shall also be the registered holders of the associated Rights. Until the Distribution Date (or earlier redemption or expiration of the Rights), the surrender for transfer of any of the certificates for Common Stock outstanding on the Record Date shall also constitute the transfer of the Rights associated with Common Stock represented by such certificate.
     (c) Rights shall be issued in respect of all shares of Common Stock issued after the Record Date but prior to the earlier of the Distribution Date or the Expiration Date (as such term is defined in Section 7), or, in certain circumstances provided in Section 22 hereof, after the Distribution Date. Certificates representing such shares of Common Stock shall have impressed on, printed on, written on or otherwise affixed to them the following legend:
     This certificate also evidences and entitles the holder hereof to certain Rights as set forth in a Rights Agreement between National Fuel Gas Company and Marine Midland Bank (subsequently known as HSBC Bank USA) dated as of June 12, 1996, as amended or restated from time to time (the “Rights Agreement”), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of National Fuel Gas Company. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. National Fuel Gas Company will mail to the holder of this certificate a copy of the Rights Agreement as in effect on the date of mailing without charge within five Business Days after receipt of a written request therefor. Under certain circumstances set forth in the Rights Agreement, Rights beneficially owned by an Acquiring Person may become null and void.
          After the due execution of any supplement or amendment to this Agreement in accordance with the terms hereof, the reference to this Agreement in the foregoing legend shall mean the Agreement as so supplemented or amended. Until the Distribution Date, the Rights associated with Common Stock represented by certificates containing the foregoing legend shall be evidenced by such certificates alone, and the surrender for transfer of any of such certificates shall also constitute the transfer of the Rights associated with Common Stock represented by such certificates. In the event that the Company purchases or acquires any shares of Common Stock after the Record Date but prior to the Distribution Date, any Rights associated with such Common Stock shall be deemed canceled and retired so that the Company shall not be entitled to exercise any Rights associated with the shares of Common Stock which are no longer outstanding. The

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failure to print the foregoing legend on any such Common Stock certificate or any other defect therein shall not affect in any manner whatsoever the application or interpretation of the provisions of Section 7(e) hereof.
     Section 4. Form of Right Certificates . (a) The Right Certificates (and the forms of election to purchase shares and of assignment to be printed on the reverse thereof) shall be substantially the same as Exhibit A hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Rights may from time to time be listed, or to conform to usage. The Right Certificates shall be in machine-printable format and in a form reasonably satisfactory to the Rights Agent. Subject to the provisions of Section 11 and Section 22 hereof, the Right Certificates, whenever distributed, shall be dated as of the Record Date (or, with respect to Rights appurtenant to shares of Common Stock issued or, in the case of Company treasury stock, delivered thereafter, dated as of the date of issuance or delivery of such shares), shall show the date of countersignature, and on their face shall entitle the holders thereof to purchase such number of shares of Common Stock (or following a Triggering Event, other securities, cash or other assets, as the case may be) as shall be set forth therein at the price set forth therein (such exercise price per share of Common Stock, the “Purchase Price”), but the number of such shares and the Purchase Price shall be subject to adjustment as provided herein.
     (b) Any Right Certificate issued pursuant to Section 3(a), Section 11(i) or Section 22 hereof that represents Rights beneficially owned by: (i) an Acquiring Person or any Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such, or (iii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person with whom such Acquiring Person has any continuing agreement, arrangement or understanding (whether or not in writing) regarding the transferred Rights or (B) a transfer which the Board of Directors of the Company has determined is part of a plan, arrangement or understanding (whether or not in writing) which has as a primary purpose or effect the avoidance of Section 7(e) hereof; and any Right Certificate issued pursuant to Section 6 or Section 11 hereof, upon transfer, exchange, replacement or adjustment of any other Right Certificate referred to in this sentence, shall contain (to the extent feasible) the following legend, modified as applicable to apply to such Person:
     The Rights represented by this Right Certificate are or were beneficially owned by a Person who was or became an Acquiring Person or an Affiliate or Associate of an Acquiring Person (as such terms are defined in the Rights Agreement). Accordingly, this Right Certificate and the Rights represented hereby may become null and void in the circumstances specified in Section 7(e) of such Agreement.
     Section 5. Countersignature and Registration . The Right Certificates shall be executed on behalf of the Company by one of its authorized officers either manually or by

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facsimile signature. The Right Certificates shall be countersigned by an authorized signatory of the Rights Agent either manually or by facsimile signature and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any of the Right Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Right Certificates, nevertheless, may be countersigned by the Rights Agent, issued and delivered with the same force and effect as though the person who signed such Right Certificates had not ceased to be such officer of the Company; and any Right Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Right Certificate, shall be a proper officer of the Company to sign such Right Certificate, although at the date of the execution of this Rights Agreement any such person was not such an officer.
     In case any authorized signatory of the Rights Agent who shall have countersigned any of the Right Certificates shall cease to be such signatory before delivery by the Company, such Right Certificates, nevertheless, may be issued and delivered by the Company with the same force and effect as though the person who countersigned such Right Certificates had not ceased to be such signatory; and any Right Certificates may be countersigned on behalf of the Rights Agent by any person who, at the actual date of the countersignature of such Right Certificate, shall be a proper signatory of the Rights Agent to countersign such Right Certificate, although at the date of the execution of this Rights Agreement any such person was not such a signatory.
     Following the Distribution Date, the Rights Agent will keep or cause to be kept, at its office designated for such purpose, books for registration and transfer of the Right Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Right Certificates issued hereunder, the number of Rights evidenced on its face by each of the Right Certificates, the date of each of the Right Certificates and the date of countersignature of each of the Right Certificates.
     Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates . Subject to the provisions of Section 14 hereof, at any time after the close of business on the Distribution Date, and at or prior to the close of business on the Expiration Date, any Right Certificate or Right Certificates (other than any Right Certificate or Rights Certificates representing Rights that may have been exchanged pursuant to Section 24 hereof) may be transferred, split up, combined or exchanged for another Right Certificate or Right Certificates, entitling the registered holder to purchase a like number of shares of Common Stock (or following a Triggering Event, other securities, cash or other assets, as the case may be) as the Right Certificate or Right Certificates surrendered then entitled such holder (or, in the case of a transfer, such former holder) to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Right Certificate or Right Certificates shall make such request in writing delivered to the Rights Agent, and shall surrender the Right Certificate or Right Certificates to be transferred, split up, combined or exchanged at the office of the Rights Agent designated for such purpose, along with a signature guarantee and such other and further documentation as the Rights Agent may reasonably request. Neither the Rights Agent nor the Company shall be obligated to take any action whatsoever with respect to the transfer of any such surrendered Right Certificate until the registered holder shall have completed and signed the certificate contained in the form of assignment on the reverse side of such Right Certificate and shall have provided such additional evidence, as the Company shall reasonably request, of the

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identity of the Beneficial Owner, Affiliates or Associates of such Beneficial Owner or holder, or of any other Person with which such holder or any of such holder’s Affiliates or Associates has any agreement, arrangement or understanding (whether or not in writing) for the purpose of acquiring, holding, voting or disposing of securities of the Company. Thereupon the Rights Agent shall, subject to Section 14 and Section 20(k) hereof, countersign and deliver to the Person entitled thereto a Right Certificate or Right Certificates, as the case may be, as so requested. The Company may require payment from a Right Certificates holder of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of Right Certificates.
     Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Right Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, along with a signature guarantee and such other and further documentation as the Rights Agent may reasonably request, and if requested by the Company, reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Right Certificate if mutilated, the Company will make and deliver a new Right Certificate of like tenor to the Rights Agent for delivery to the registered owner in lieu of the Right Certificate so lost, stolen, destroyed or mutilated.
     Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights . (a) Subject to Section 7(e) hereof, the registered holder of any Right Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein, including, without limitation, the restrictions on exercisability set forth in Sections 9 (c), 11 (a) (iii), 23 (a) and 24 (b) hereof) in whole or in part at any time after the Distribution Date upon surrender of the Right Certificate, with the form of election to purchase on the reverse side thereof duly executed, to the Rights Agent at the designated office of the Rights Agent, together with payment of the aggregate Purchase Price for the total number of shares of Common Stock (or other securities, cash or other assets, as the case may be) as to which the Rights are then exercisable, at or prior to the earliest of (i) the close of business on July 31, 2008 (the “Final Expiration Date”), (ii) the time at which the Rights are redeemed as provided in Section 23 hereof or (iii) the time at which all exercisable Rights are exchanged as provided in Section 24 hereof, (such earliest date being herein referred to as the “Expiration Date”).
     (b) The Purchase Price for each full share of Common Stock pursuant to the exercise of a Right shall be $65.00 (being $32.50 per half share of Common Stock), shall be subject to adjustment from time to time as provided in Sections 11 and 13 hereof and shall be payable in accordance with paragraph (c) below.
     (c) Upon receipt of a Right Certificate representing exercisable Rights, with the form of election to purchase and the certificate duly executed and completed, accompanied by payment of the Purchase Price for the number of shares of Common Stock (or other securities, cash or other assets, as the case may be) to be purchased and an amount equal to any applicable transfer tax, the Rights Agent shall thereupon, subject to Section 20(k), promptly (i) requisition from the Company certificates for the total number of shares of Common Stock to be purchased, (ii) when appropriate, requisition from the Company the amount of cash to be paid in lieu of issuance of fractional shares in accordance with Section 14, (iii) promptly after receipt of such certificates,

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cause the same to be delivered to or upon the order of the registered holder of such Right Certificate, registered in such name or names as may be designated by such holder and (iv) when appropriate, after receipt promptly deliver such payment to or upon the order of the registered holder of such Right Certificate. The payment of the Purchase Price must be made by certified bank check or bank draft or money order payable to the order of the Company or the Rights Agent. In the event that the Company is obligated to issue securities, distribute property or make payment pursuant to section 11(a)(iii) hereof, the Company will make all arrangements necessary so that check, property or securities are available for issuance, distribution or payment by the Rights Agent, if and when appropriate.
     (d) In case the registered holder of any Right Certificate shall exercise less than all the Rights evidenced thereby, a new Right Certificate evidencing Rights equivalent to the Rights remaining unexercised shall be issued by the Rights Agent to the registered holder of such Right Certificate or to his duly authorized assigns, subject to the provisions of Section 14 hereof.
     (e) Notwithstanding anything in this Agreement to the contrary, from and after the first occurrence of a Section 11(a)(ii) Event, any Rights beneficially owned by (i) an Acquiring Person or an Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such, or (iii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person which whom the Acquiring Person has any continuing agreement, arrangement or understanding (whether or not in writing) regarding the transferred Rights or (B) a transfer which the Board of Directors of the Company has determined is part of a plan, arrangement or understanding (whether or not in writing) which has as a primary purpose or effect the avoidance of this section 7(e), shall become null and void without any further action and no holder of such Rights shall have any rights whatsoever with respect to such Rights, whether under any provision of this Agreement or otherwise. The Company shall use all reasonable efforts to insure that the provisions of this Section 7(e) and Section 4(b) hereof are complied with, but shall have no liability to any holder of Right Certificates or other Person as a result of its failure to make any determinations with respect to an Acquiring Person, or any of its Affiliates, Associates or transferees hereunder.
     (f) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company shall be obligated to undertake any action with respect to a registered holder upon the occurrence of any purported exercise as set forth in this Section 7 unless such registered holder shall have (i) completed and signed the certificate contained in the form of election to purchase set forth on the reverse side of the Right Certificate surrendered for such exercise, and (ii) provided such additional evidence of the identity of the Beneficial Owner, Affiliates or Associates of such Beneficial Owner or holder, or of any other Person with which such holder or any of such holder’s Affiliates or Associates has any agreement, arrangement or understanding (whether or not in writing) for the purpose of acquiring, holding, voting or disposing of any securities of the Company as the Company shall reasonably request.
     Section 8. Cancellation and Destruction of Right Certificates . All Right Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange

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shall, if surrendered to the Company or to any of its agents, be delivered to the Rights Agent for cancellation or in canceled form, or, if surrendered to the Rights Agent, shall be canceled by it, and no Right Certificates shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Rights Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any other Right Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all canceled Right Certificates to the Company, or shall, at the written request of the Company, destroy such canceled Right Certificates, and in such case shall deliver a certificate of destruction thereof to the Company.
     Section 9. Reservation and Availability of Shares of Common Stock . (a) The Company covenants and agrees that it will use every reasonable effort to reserve and make available out of its authorized and unissued shares of Common Stock (and following the occurrence of a Triggering Event, out of its authorized and unissued other securities), or out of its authorized and issued shares of Common Stock (and, following the occurrence of a Triggering Event, out of its authorized and issued other securities) held in its treasury, the number of shares of Common Stock (and, following the occurrence of a Triggering Event, other securities) that will be sufficient to permit the exercise in full of all outstanding Rights (it being understood that any of the foregoing shares or securities may also be reserved for other purposes) or will take such other steps as are appropriate to assure that the number of such shares or securities (or their equivalents) sufficient to permit the exercise in full of all outstanding Rights will be available upon such exercise. The Company shall use every reasonable effort to obtain, as soon as practicable following the occurrence of a Triggering Event (to the extent not theretofore obtained), such regulatory approvals and take such other action as may be necessary for it to issue and/or sell securities purchasable upon the exercise of the Rights.
     (b) So long as the shares of Common Stock (and, following the occurrence of a Triggering Event, other securities) issuable upon the exercise of Rights may be listed on any national securities exchange, the Company shall use its best efforts to cause, from and after such time as the Rights become exercisable (but only to the extent that it is reasonably likely that the Rights will be exercised), all shares reserved for such issuance to be listed on such exchange upon official notice of issuance upon such exercise.
     (c) The Company shall use its best efforts to (i) file, as soon as practicable following the first occurrence of a Section 11(a)(ii) Event, or as soon as required by law, as the case may be, a registration statement under the Securities Act of 1933, as amended (the “Act”), with respect to the securities purchasable upon exercise of the Rights on an appropriate form, (ii) cause such registration statement to become effective as soon as practicable after such filing, and (iii) cause such registration statement to remain effective (with a prospectus at all times meeting the requirements of the Act) until the earlier of (A) the date as of which the Rights are no longer exercisable for such securities, and (B) the Expiration Date. The Company will also take such action as may be appropriate under the blue sky laws of the various states. The Company may temporarily suspend, for a period of time not to exceed ninety (90) days after the date set forth in clause (i) of the first sentence of this Section 9(c), the exercisability of the Rights in order to prepare and file such registration statement and permit it to become effective. Upon any such suspension, the Company shall issue a public announcement and shall give simultaneous written notice to the Rights Agent stating that the exercisability of the Rights has been temporarily

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suspended, as well as a public announcement and notice to the Rights Agent at such time as the suspension is no longer in effect. In addition, if the Company shall determine that a registration statement is required following the Distribution Date, the Company may temporarily suspend the exercisability of the Rights until such time as a registration statement has been declared effective. Notwithstanding any provision of this Agreement to the contrary, the Rights shall not be exercisable in any jurisdiction unless the requisite qualifications in such jurisdiction shall have been obtained.
     (d) The Company covenants and agrees that it will take all such action as may be necessary to ensure that all shares of Common Stock (and following the occurrence of a Triggering Event, other securities) delivered upon exercise of Rights shall, at the time of delivery of the certificates for such shares (subject to payment of the Purchase Price), be duly and validly authorized and issued and fully paid and nonassessable.
     (e) The Company further covenants and agrees that it will pay when due and payable any and all federal and state transfer taxes and charges which may be payable in respect of the issuance or delivery of the Right Certificates or of any shares of the Common Stock (or other securities, as the case may be) upon the exercise of Rights. The Company shall not, however, be required (a) to pay any transfer tax which may be payable in respect of any transfer involved in the transfer or delivery of Right Certificates or the issuance or delivery of certificates for Common Stock (or other securities, as the case may be) in a name other than that of the registered holder of the Right Certificate evidencing Rights surrendered for exercise or (b) to issue or deliver any certificates for a number of shares of Common Stock (or other securities, as the case may be) upon the exercise of any Rights until any such tax shall have been paid (any such tax being payable by the holder of such Right Certificate at the time of surrender) or until it has been established to the Company’s satisfaction that no such tax is due.
     Section 10. Common Stock Record Date . Each Person in whose name any certificate for any number of shares of Common Stock (or other securities, as the case may be) is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of the shares of Common Stock (or other securities, as the case may be) represented thereby on, and such certificate shall be dated the date upon which the Right Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and any applicable transfer taxes) was made and shall show the date of countersignature; provided, however, that if the date of such surrender and payment is a date upon which Common Stock (or other securities, as the case may be) transfer books of the Company are closed, such Person shall be deemed to have become the record holder of such shares on, and such certificate shall be dated, the next succeeding Business Day on which the Common Stock (or other securities, as the case may be) transfer books of the Company are open. Prior to the exercise of the Rights evidenced thereby, the holder of a Right Certificate shall not be entitled to any rights of a stockholder of the Company with respect to shares for which the Rights shall be exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided herein.
     Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights . The Purchase Price, the number of shares covered by each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11.

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     (a) (i) In the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Common Stock payable in shares of the Common Stock, (B) subdivide the outstanding Common Stock, (C) combine the outstanding Common Stock into a smaller number of shares or (D) issue any shares of its capital stock in a reclassification of Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 11(a) and Section 7(e) hereof, the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of Common Stock or capital stock, as the case may be, issuable on such date, shall be proportionately adjusted so that the holder of any Right exercised after such time shall be entitled to receive, upon payment of the Purchase Price then in effect, the aggregate number and kind of shares of capital stock which, if such Right had been exercised immediately prior to such date and at a time when Common Stock (or other securities) transfer books of the Company were open, he or she would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification. If an event occurs which would require an adjustment under both this Section 11(a)(i) and Section 11(a)(ii), the adjustment provided for in this Section 11(a)(i) shall be in addition to, and shall be made prior to, any adjustment required pursuant to Section 11(a)(ii).
     (ii) Subject to Section 24 of this Agreement, in the event any Person, alone or together with its Affiliates and Associates, becomes at any time after the Rights Dividend Declaration Date, an Acquiring Person except as the result of a transaction set forth in Section 13(a) hereof, then, prior to the later of (x) the date on which the Company’s rights of redemption pursuant to Section 23(a) expire, or (y) five (5) days after the date of the first occurrence of a Section 11(a)(ii) Event, proper provision shall be made so that each holder of a Right, except as provided in Section 7(e) hereof, shall thereafter have a right to receive, upon exercise thereof at the then current Purchase Price in accordance with the terms of this Agreement, such number of shares of Common Stock of the Company as shall equal the result obtained by (x) multiplying the then current Purchase Price for a full share of Common Stock by the number of shares of Common Stock for which a Right is then exercisable and dividing that product by (y) 50% of the Current Market Price per share of Common Stock of the Company (determined pursuant to Section 11(d)) on the date of the occurrence of the event described above in this subparagraph (ii) (such number of shares is hereinafter referred to as the “Adjustment Shares”), provided that the Purchase Price and the number of Adjustment Shares shall be further adjusted as provided in this Agreement to reflect any events occurring after the date of such first occurrence.
     (iii) If (x) the number of shares of Common Stock which are authorized by the Company’s certificate of incorporation but not outstanding or reserved for issuance for purposes other than upon exercise of the Rights is not sufficient to permit the exercise in full of the Rights in accordance with the foregoing subparagraph (ii), or (y) any regulatory approvals necessary for the issuance of such Common Stock have not been obtained by the Company, or (z) the issuance of Common Stock of the Company shall not then be permitted under the Company’s certificate of incorporation or any applicable law or administrative or judicial regulation or order, the Company shall (A) determine the excess of (1) the value of the Adjustment Shares issuable upon the exercise of a Right (the “Current Value”) over (2) the Purchase Price (such excess, the “Spread”), and (B) with

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respect to each Right, but subject to Section 9 hereof and, if and to the extent required, to the receipt by the Company of any necessary regulatory approvals, make adequate provision to substitute for the Adjustment Shares, upon exercise of the Rights and payment of the applicable Purchase Price, (1) cash, (2) a reduction in the Purchase Price, (3) other equity securities of the Company (including, without limitation, shares of preferred stock which the Board of Directors of the Company has deemed to have the same value as shares of Common Stock (such shares of preferred stock, “Common Stock Equivalents”)), (4) debt securities of the Company, (5) other assets, or (6) any combination of the foregoing, having an aggregate value equal to the Current Value, where such aggregate value has been determined by the Board of Directors of the Company based upon the advice of a nationally recognized investment banking firm selected by the Board of Directors of the Company; provided, however, that if the Company shall not have made adequate provision to deliver value pursuant to clause (B) above within thirty (30) days following the later of (x) the first occurrence of a Section 11(a)(ii) Event and (y) the date on which the Company’s rights of redemption pursuant to Section 23(a) expire (the later of (x) and (y) being referred to herein as the “Section 11(a)(ii) Trigger Date”), then the Company shall be obligated to deliver, upon the surrender for exercise of a Right and without requiring payment of the Purchase Price, shares of Common Stock (to the extent available and subject to receipt by the Company of any necessary regulatory approvals) and then, if necessary, cash, which shares and/or cash have an aggregate value equal to the Spread. If the Board of Directors of the Company shall determine in good faith that it is likely that sufficient additional shares of Common Stock could be authorized for issuance upon exercise in full of the Rights and that any necessary regulatory approvals for such issuance could be obtained, the thirty (30) day period set forth above may be extended to the extent necessary, but not more than ninety (90) days after the Section 11(a)(ii) Trigger Date, in order that the Company may seek stockholder approval for the authorization of such additional shares and/or regulatory approvals for the issuance of such additional shares (such period, as it may be extended, the “Substitution Period”). To the extent that the Company determines that some action need be taken and/or additional regulatory approvals obtained pursuant to the first and/or second sentences of this subparagraph (iii), the Company (x) shall provide, subject to Section 7(e) hereof, that such action shall apply uniformly to all outstanding Rights, and (y) may suspend the exercisability of the Rights until the expiration of the Substitution Period in order to seek any authorization of additional shares, to obtain any required regulatory approvals and/or to decide the appropriate form of distribution to be made pursuant to such first sentence and to determine the value thereof. In the event of any such suspension, the Company shall issue a public announcement and shall give concurrent written notice to the Rights Agent stating that the exercisability of the Rights has been temporarily suspended, as well as a public announcement and notice to the Rights Agent at such time as the suspension is no longer in effect. For purposes of this subparagraph (iii), the value of the Common Stock shall be the Current Market Price (as determined pursuant to Section 11(d) hereof) per share of Common Stock on the Section 11 (a) (ii) Trigger Date and the value of any Common Stock Equivalent shall be deemed to be the same as the value of Common Stock on such date. The Company shall give the Rights Agent notice of the selection of any Common Stock Equivalent under this subparagraph (iii).

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     (b) In case the Company shall fix a record date for the issuance of rights, options or warrants to all holders of Common Stock entitling them (for a period expiring within 45 calendar days after such record date) to subscribe for or purchase Common Stock (or securities having substantially the same rights, privileges and preferences as the shares of Common Stock (“Equivalent Common Stock”) or convertible into Common Stock or Equivalent Common Stock) at a price per share of Common Stock or Equivalent Common Stock (or having a conversion price per share, if a security convertible into Common Stock or Equivalent Common Stock) less than the Current Market Price (as defined in Section 11(d) per share of Common Stock or Equivalent Common Stock, as the case may be) on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on such record date plus the number of shares of Common Stock or Equivalent Common Stock which the aggregate offering price of the total number of shares of Common Stock or Equivalent Common Stock so to be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such Current Market Price and of which the denominator shall be the number of shares of Common Stock outstanding on such record date plus the number of additional shares of Common Stock and/or Equivalent Common Stock to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible). In case such subscription price may be paid by delivery of consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent. Shares of Common Stock owned by or held for the account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such rights, options or warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed.
     (c) In case the Company shall fix a record date for the making of a distribution to all holders of Common Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing or surviving corporation) of evidences of indebtedness or assets (other than a regular periodic cash dividend or a dividend payable in Common Stock) or subscription rights or warrants (excluding those referred to in Section 11(b)), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, of which the numerator shall be the Current Market Price per share of Common Stock (as defined in Section 11(d)) on such record date, less the fair market value (as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent) of the portion of the assets or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to one share of Common Stock and of which the denominator shall be such Current Market Price per share of Common Stock. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Purchase Price shall again be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed.
     (d) For the purpose of any computation hereunder, other than computations made pursuant to Section 11(a)(iii), the “Current Market Price” per share of Common Stock on any

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date shall be deemed to be the average of the daily closing prices per share of such Common Stock for the thirty (30) consecutive Trading Days (as such term is hereinafter defined in this paragraph (d)) immediately prior to such date and, for purposes of computations made pursuant to Section 11(a)(iii) hereof, the Current Market Price per share of Common Stock on any date shall be deemed to be the average of the daily closing prices per share of such Common Stock for the ten (10) consecutive Trading Days immediately following such date; provided, however, that in the event that the Current Market Price per share of Common Stock is determined during the period following the announcement by the issuer of such Common Stock of (A) a dividend or distribution on such Common Stock payable in shares of such Common Stock or securities convertible into shares of such Common Stock (other than the Rights) or (B) any subdivision, combination or reclassification of such Common Stock, and prior to the expiration of the requisite 30 Trading Day or 10 Trading Day period, as set forth above, after the ex-dividend date for such dividend or distribution or the record date for such subdivision, combination or reclassification, then, and in each such case, the Current Market Price shall be appropriately adjusted to take into account ex-dividend trading. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the shares of the Common Stock are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the shares of the Common Stock are listed or admitted to trading or, if the shares of the Common Stock are not listed or admitted to trading on any national securities exchange, the last quoted price, or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System (“NASDAQ”) or such other system then in use, or, if on any such date the shares of Common Stock are not quoted by such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in Common Stock selected by the Board of Directors of the Company. If on any such date no market maker is making a market in the Common Stock, the fair value of such shares on such date shall be as determined by the Board of Directors of the Company upon the advice of a nationally-recognized, independent investment banking firm selected by the Board of Directors, whose determination shall be described in a statement filed with the Rights Agent and shall be conclusive for all purposes. The term “Trading Day” shall mean a day on which the principal national securities exchange on which the shares of Common Stock are listed or admitted to trading is open for the transaction of business or, if the shares of Common Stock are not listed or admitted to trading on any national securities exchange, a Monday, Tuesday, Wednesday, Thursday or Friday on which banking institutions in the State of New York are not authorized or obligated by law or executive order to close. If the Common Stock is not publicly held or not so listed or traded, “Current Market Price” per share shall mean the fair value per share as determined by the Board of Directors of the Company upon the advice of a nationally-recognized, independent investment banking firm selected by the Board of Directors, whose determination shall be described in a statement filed with the Rights Agent and shall be conclusive for all purposes.
     (e) Anything herein to the contrary notwithstanding, no adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price; provided, however, that any adjustments which by reason of this Section 11(e) are not required to be made shall be carried forward and taken into account in any subsequent

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adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest ten-thousandth of a share of Common Stock. Notwithstanding the first sentence of this Section 11(e), any adjustment required by this Section 11 shall be made no later than the earlier of (i) three years from the date of the transaction which mandates such adjustment or (ii) the Expiration Date.
     (f) If, as a result of an adjustment made pursuant to Section 11(a) or Section 13(a), the holder of any Right thereafter exercised shall become entitled to receive any shares of capital stock other than shares of Common Stock, thereafter the number of such other shares so receivable upon exercise of any Right and the Purchase Price thereof shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in Section 11(a) through (p), inclusive, and the provisions of Sections 7, 9, 10, 13 and 14 with respect to Common Stock shall apply on like terms to any such other shares.
     (g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of shares of Common Stock purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein.
     (h) Unless the Company shall have exercised its election as provided in Section 11(i), upon each adjustment of the Purchase Price as a result of the calculations made in Section 11(b) and (c), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of shares (calculated to the nearest tenth-thousandth) obtained by (i) multiplying (x) the number of shares covered by a Right immediately prior to this adjustment by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price and (ii) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price.
     (i) The Company may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights, in substitution for any adjustment in the number of shares of Common Stock purchasable upon the exercise of a Right. Each of the Rights outstanding after such adjustment of the number of Rights shall be exercisable for the number of shares of Common Stock for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest ten-thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after the adjustment of the Purchase Price. The Company shall make a public announcement and shall give simultaneous written notice to the Rights Agent of its election to adjust the number of Rights, indicating the record date for the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Right Certificates have been issued, shall be at least 10 days later than the date of the public announcement. If Right Certificates have been issued, upon each adjustment of the number of Rights pursuant to this subparagraph (i), the Company shall, as promptly as practicable, cause to be distributed to holders of Right Certificates on such record date Right Certificates evidencing, subject to Section 14, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and

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replacement for the Right Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Right Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Right Certificates so to be distributed shall be issued, executed and countersigned in the manner provided for herein (and may bear, at the option of the Company, the adjusted Purchase Price) and shall be registered in the names of the holders of record of Right Certificates on the record date specified in the public announcement.
     (j) Irrespective of any adjustment or change in the Purchase Price or the number of shares of Common Stock issuable upon the exercise of the Rights, the Right Certificates theretofore and thereafter issued may continue to express the Purchase Price per share and the number of shares which were expressed in the initial Right Certificates issued hereunder.
     (k) Before taking any action that would cause an adjustment reducing the Purchase Price below the then par value, if any, of a share of Common Stock issuable upon exercise of the Rights, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue such number of fully paid and nonassessable shares of such Common Stock at such adjusted Purchase Price.
     (l) In any case in which this Section 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuance to the holder of any Right exercised after such record date of the number of shares of Common Stock and other capital stock or securities of the Company, if any, issuable upon such exercise over and above the number of shares of Common Stock and other capital stock or securities of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; provided, however, that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder’s right to receive such additional shares upon the occurrence of the event requiring such adjustment.
     (m) Anything in this Section 11 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that the Board of Directors of the Company shall determine to be advisable in order that any consolidation or subdivision of shares of Common Stock, issuance wholly for cash of any shares of Common Stock at less than the Current Market Price, issuance wholly for cash of the Common Stock or securities which by their terms are convertible into or exchangeable for Common Stock, stock dividends or issuance of rights, options or warrants referred to hereinabove in this Section 11 hereafter made by the Company to holders of its Common Stock shall not be taxable to such stockholders.
     (n) The Company covenants and agrees that, after the Distribution Date, it will not, except as permitted by Sections 23, 24 and 27 hereof, take (nor will it permit any of its Subsidiaries to take) any action if at the time such action is taken it is reasonably foreseeable that such action will diminish substantially or otherwise eliminate the benefits intended to be afforded by the Rights.

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     (o) The Company covenants and agrees that it shall not, at any time after the Distribution Date, (i) consolidate with any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(n)), (ii) merge with or into any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(n)), or (iii) sell or transfer (or permit any of its Subsidiaries to sell or transfer), in one or more transactions, assets or earning power aggregating more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the Company and/or any of its Subsidiaries in one or more transactions each of which complies with Section 11(n)) if (x) at the time of or immediately after such consolidation, merger or sale there are any rights, warrants or other instruments or securities outstanding or agreements in effect which would substantially diminish or otherwise eliminate the benefits intended to be afforded by the Rights or (y) prior to, simultaneously with or immediately after such consolidation, merger or sale, the stockholders of the Person who constitutes, or would constitute, the “Principal Party” for purposes of Section 13(a) hereof shall have received a distribution of Rights previously owned by such Person or any of its Affiliates and Associates.
     (p) Notwithstanding anything in this Agreement to the contrary, prior to the Distribution Date, the Company may, in lieu of making any adjustment to the Purchase Price, the number of shares of Common Stock eligible for purchase on exercise of each Right or the number of Rights outstanding, which adjustment would otherwise be required by Section 11(a)(i), 11(b), 11(c), 11(h) or 11(i), make such other equitable adjustment or adjustments thereto as the Board of Directors (whose determination shall be conclusive) deems appropriate in the circumstances and not inconsistent with the objectives of the Board of Directors in adopting this Agreement and such Sections.
     Section 12. Certificate of Adjusted Purchase Price or Number of Shares . Whenever an adjustment is made as provided in Sections 11 and 13, the Company shall (a) promptly prepare a certificate setting forth such adjustment, a brief statement of the facts accounting for such adjustment and the adjusted Purchase Price, (b) promptly file with the Rights Agent and with each transfer agent for the Common Stock a copy of such certificate and (c) mail a brief summary thereof to each holder of a Right Certificate in accordance with Section 26. The Rights Agent shall be fully protected in relying on any such certificate and on any adjustment therein contained.
     Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power . (a) In the event that, following the Shares Acquisition Date, directly or indirectly, (x) the Company shall consolidate with, or merge with or into, any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(n)) and the Company shall not be the continuing or surviving corporation of such consolidation or merger, (y) any Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(n)) shall consolidate, merge with or into the Company and the Company shall be the continuing or surviving corporation of such consolidation or merger and in connection with such consolidation or merger, all or part of the Common Stock shall be changed into or exchanged for stock or other securities of any other Person or cash or any other property, or (z) the Company shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise transfer), in one or more transactions, assets or earning power aggregating more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the Company or any of

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its Subsidiaries in one or more transactions each of which complies with Section 11(n) hereof), then, and in each such case, proper provision shall be made so that (i) each holder of a Right (except as provided in Section 7(e)) shall thereafter have the right to receive, upon the exercise thereof at the then current Purchase Price in accordance with the terms of this Agreement, such number of validly issued, fully paid, nonassessable and freely tradable shares of Common Stock of the Principal Party (as hereinafter defined) , not subject to any liens, encumbrances, rights of call or first refusal, or other adverse claims as shall be equal to the result obtained by (1) multiplying the then current Purchase Price for a full share of Common Stock by the number of shares of Common Stock for which a Right is exercisable immediately prior to the first occurrence of a Section 13 Event (or, if a Section 11(a) (ii) Event has occurred prior to the first occurrence of a Section 13 Event, multiplying the number of such shares for which a Right was exercisable immediately prior to the first occurrence of a Section 11(a) (ii) Event by the Purchase Price for a full share of Common Stock in effect immediately prior to such first occurrence), and dividing that product (which, following the first occurrence of a Section 13 Event, shall be referred to as the “Purchase Price” for each Right and for all purposes of this Agreement) by (2) 50% of the Current Market Price per share of the Common Stock of such Principal Party (determined in the manner described in Section 11 (d) ) on the date of consummation of such consolidation, merger, sale or transfer; (ii) the Principal Party shall thereafter be liable for, and shall assume, by virtue of such Section 13 Event, all the obligations and duties of the Company pursuant to this Agreement; (iii) the term “Company” shall thereafter be deemed to refer to such Principal Party, it being specifically intended that the provisions of Section 11 shall thereafter apply to such Principal Party, (iv) such Principal Party shall take such steps (including, but not limited to, the reservation of a sufficient number of shares of its Common Stock in accordance with Section 9) in connection with such consummation as may be necessary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to the shares of its Common Stock thereafter deliverable upon the exercise of the Rights, and (v) the provisions of Section 11(a)(ii) hereof shall be of no effect following the first occurrence of any Section 13 Event.
     (b) “Principal Party” shall mean
          (1) in the case of any transaction described in (x) or (y) of the first sentence of Section 13(a), the Person that is the issuer of any securities into which shares of Common Stock of the Company are converted in such merger or consolidation and, if no securities are so issued, the Person that is the other party to the merger or consolidation; and
          (2) in the case of any transaction described in (z) of the first sentence in Section 13(a), the Person that is the party receiving the greatest portion of the assets or earning power transferred pursuant to such transaction or transactions; provided, however, that in any such case, (x) if the Common Stock of such Person is not at such time and has not been continuously over the preceding 12-month period registered under Section 12 of the Exchange Act, and such Person is a direct or indirect Subsidiary of another corporation the Common Stock of which is and has been so registered, “Principal Party” shall refer to such other corporation and (y) if such Person is a Subsidiary, directly or indirectly, of more than one corporation, the Common Stocks of two or more of which are and have been so registered, “Principal Party” shall refer to whichever of such corporations is the issuer of the Common Stock having the greatest market value.

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          (3) The Company shall not consummate any Section 13 Event unless the Principal Party shall have a sufficient number of authorized shares of its Common Stock which are neither outstanding nor reserved for issuance to permit the exercise in full of the Rights in accordance with this Section 13 and unless prior thereto the Company and such Principal Party shall have executed and delivered to the Rights Agent a supplemental agreement providing for the terms set forth in paragraphs (a) and (b) of this Section 13 and further providing that, as soon as practicable after the date of any consolidation, merger or sale of assets mentioned in paragraph (a) of this Section 13, the Principal Party
                (i) will prepare and file a registration statement under the Act with respect to the Rights and the securities purchasable upon exercise of the Rights on an appropriate form, will use its best efforts to cause such registration statement to become effective as soon as practicable after such filing and will use its best efforts to cause such registration statement to remain effective (with a prospectus at all times meeting the requirements of the Act) until the Expiration Date;
               (ii) shall take all such other action as may be necessary to enable the Principal Party to issue the securities purchasable upon exercise of the Rights, including but not limited to the registration or qualification of such securities under all requisite securities laws of jurisdictions of the various states and the listing of such securities on such exchanges and trading markets as may be necessary or appropriate; and
               (iii) will deliver to holders of the Rights historical financial statements for the Principal Party and each of its Affiliates which comply in all respects with the requirements for registration on Form 10 under the Exchange Act.
The provisions of this Section 13 shall similarly apply to successive Section 13 Events. In the event that a Section 13 Event shall occur at any time after the occurrence of a Section 11(a)(ii) Event, the Rights which have not theretofore been exercised shall thereafter become exercisable in the manner described in Section 13(a).
     Section 14. Fractional Rights and Fractional Shares . (a) The Company shall not be required to issue fractions of Rights or to distribute Right Certificates which evidence fractional Rights. In lieu of such fractional Rights, the Company shall pay to the registered holders of the Right Certificates with regard to which such fractional Rights would otherwise be issuable an amount in cash equal to the same fraction of the current market value of a whole Right. For the purposes of this Section 14(a), the current market value of a whole Right shall be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable. The closing price for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Rights are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Rights are listed or admitted to trading or, if the Rights are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the

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over-the-counter market, as reported by NASDAQ or such other system then in use, or, if on any such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Board of Directors of the Company. If on any such date no such market maker is making a market in the Rights, the fair value of the Rights on such date, as determined in good faith by the Board of Directors of the Company, shall be used.
     (b) The Company shall not be required to issue fractions of shares of Common Stock or Common Stock Equivalents (i) upon exercise or exchange of the Rights or (ii) following the occurrence of a Triggering Event, or to distribute certificates which evidence fractional shares of Common Stock or Common Stock Equivalents. In lieu of fractional shares of Common Stock or Common Stock Equivalents, the Company may pay to the registered holders of Right Certificates at the time the Rights evidenced thereby are exercised or exchanged as herein provided an amount in cash equal to the same fraction of the current market value of Common Stock or Common Stock Equivalents. For purposes of this Section 14(b), the current market value of one share of Common Stock shall be the closing price of a share of Common Stock (as determined pursuant to Section 11(d)) for the Trading Day immediately prior to the date of such exercise or exchange, as the case may be, and the current market value of any Common Stock Equivalent shall be the same as the current market value of the Common Stock on such date.
     (c) The holder of a Right by the acceptance of the Right expressly waives his right to receive any fractional Rights or any fractional shares upon exercise or exchange of a Right, except as otherwise permitted by this Section 14.
     Section 15. Rights of Action . All rights of action in respect of this Agreement are vested in the respective registered holders of the Right Certificates (and, prior to the Distribution Date, the registered holders of the Common Stock); and any registered holder of any Right Certificate (or, prior to the Distribution Date, of the Common Stock), without the consent of the Rights Agent or of the holder of any other Right Certificate (or, prior to the Distribution Date, of the Common Stock), may, in his own behalf and for his own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, his right to exercise the Rights evidenced by such Right Certificate in the manner provided in such Right Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations hereunder and injunctive relief against actual or threatened violations of the obligations hereunder of any Person subject to this Agreement.
     Section 16. Agreement of Right Holders . Every holder of a Right by accepting the same consents and agrees with the Company and the Rights Agent and with every other holder of a Right that:
     (a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of the Common Stock;
     (b) after the Distribution Date, the Right Certificates will be transferable only on the registry books of the Rights Agent if surrendered at the office of the Rights Agent designated

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for such purpose, duly endorsed or accompanied by a proper instrument of transfer and with the appropriate forms and certificates fully executed, along with a signature guarantee and such other and further documentation as the Rights Agent may reasonably request;
     (c) subject to Section 6 and Section 7(f) hereof, the Company and the Rights Agent may deem and treat the Person in whose name the Right Certificate (or, prior to the Distribution Date, the associated Common Stock certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Right Certificates or the associated Common Stock certificate made by anyone other than the Company or the Rights Agent) for all purposes whatever, and neither the Company nor the Rights Agent shall be affected by any notice to the contrary;
     (d) notwithstanding anything in this Agreement to the contrary, neither the Company nor the Rights Agent shall have any liability to any holder of a Right or other Person as a result of its inability to perform any of its obligations under this Agreement by reason of any preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a governmental, regulatory or administrative agency or commission, or any statute, rule, regulation or executive order promulgated or enacted by any governmental authority, prohibiting or otherwise restraining performance of such obligation; provided, however, that the Company must use its best efforts to have any such order, decree or ruling lifted or otherwise overturned as soon as possible.
     Section 17. Right Certificate Holder Not Deemed a Stockholder . No holder, as such, of any Right Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the number of shares of Common Stock or any other securities of the Company that may at any time be issuable on the exercise of the Rights represented thereby, nor shall anything contained herein or in any Right Certificate be construed to confer upon the holder of any Right Certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in Section 25), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Right Certificate shall have been exercised or exchanged for Common Stock in accordance with the provisions hereof.
     Section 18. Concerning the Rights Agent . The agreements set forth in this Section 18 shall survive termination of the Agreement and the payments of all amounts hereunder. The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability or expense, incurred without negligence or willful misconduct on the part of the Rights Agent (including the reasonable fees and expenses of counsel), for anything done or omitted by the Rights Agent in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability in the premises.

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     The Rights Agent shall be protected and shall incur no liability for or in respect of any action taken, suffered or omitted by it in connection with its administration of this Agreement in reliance upon any Right Certificate or certificate for Common Stock or other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, instruction, adjustment notice, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper Person or Persons.
     In addition to the foregoing, the Rights Agent shall be protected and shall incur no liability for, or in respect of, any action taken or omitted by it in connection with its administration of this Agreement in reliance upon (i) the proper execution of the certification appended to the Form of Assignment and the Form of Election to Purchase included as part of Exhibit A hereto (the “Certification”), unless the Rights Agent shall have actual knowledge that, as executed, the Certification is untrue or (ii) the non-execution or failure to complete the Certification including, without limitation, any refusal to honor any otherwise permissible assignment or election by reason of such nonexecution or failure.
     Notwithstanding anything in this Agreement to the contrary, in no event shall the Rights Agent be liable for special, indirect or consequential loss or damage of any kind whatsoever (including but not limited to lost profit), even if the Rights Agent has been advised of the likelihood of such loss or damage and regardless of the form of the action, and the Company agrees to indemnify the Rights Agent and to hold it harmless against any loss, liability or expense incurred as a result of claims for special, indirect or consequential loss or damages of any kind whatsoever.
     Section 19. Merger or Consolidation or Change of Name of Rights Agent . Any corporation into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any corporation succeeding to the corporate trust business of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such corporation would be eligible for appointment as a successor Rights Agent under the provisions of Section 21. In case at the time such successor Rights Agent shall succeed to the agency created by this Agreement, any of the Right Certificates shall have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of the predecessor so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, any successor Rights Agent may countersign such Right Certificates either in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Agreement.
     In case at any time the name of the Rights Agent shall be changed and at such time any of the Right Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, the Rights Agent may countersign such Right Certificates either in its prior name or

25


 

in its changed name; and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Agreement.
     Section 20. Duties of Rights Agent . The Rights Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Right Certificates, by their acceptance thereof, shall be bound:
     (a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Rights Agent or the Company), and the opinion of such counsel shall be full and complete authorization and protection to the Rights Agent as to any action taken or omitted by it in good faith and in accordance with such opinion.
     (b) Whenever in the performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by any one of the Chairman of the Board, the President, any Senior Vice President, any Vice President, the Treasurer or the Secretary of the Company and delivered to the Rights Agent; and such certificate shall be full authorization to the Rights Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate.
     (c) The Rights Agent shall be liable hereunder only for its own negligence, bad faith or willful misconduct. The issuance or non-issuance of a Right Certificate or Common Stock or other security issued in lieu of Common Stock in accordance with instructions given to the Rights Agent by the Company pursuant to Section 20(k) hereof or in accordance with the terms hereof shall not constitute negligence, bad faith or willful misconduct; provided, however, that in no event shall the Rights Agent be liable for special, indirect or consequential loss or damages of any kind whatsoever.
     (d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Right Certificates (except its countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only.
     (e) The Rights Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Right Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Right Certificate; nor shall it be responsible for any adjustment required under the provisions of Section 11 or 13 or responsible for the manner, method or amount of any such adjustment or the ascertaining of the existence of facts that would require any such adjustment (except with respect to the exercise of Rights evidenced by Right Certificates after actual notice of any such adjustment); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any shares of Common Stock to be issued pursuant to this Agreement or any Right Certificate or as to whether

26


 

any shares of Common Stock will, when issued, be validly authorized and issued, fully paid and nonassessable.
     (f) The Company agrees that it will perform, execute, acknowledge and deliver, or cause to be performed, executed, acknowledged and delivered, all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement.
     (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder and certificates delivered pursuant to any provision hereof from any one of the Chairman of the Board, the President, any Senior Vice President, any Vice President, the Secretary or the Treasurer of the Company, and is authorized to apply to such officers for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered to be taken by it in good faith in accordance with instructions of any such officer. An application by the Rights Agent for instructions may set forth in writing any action proposed to be taken or omitted by the Rights Agent with respect to its duties and obligations under this Agreement and the date on and/or after which such action shall be taken, and the Rights Agent shall not be liable for any action taken or omitted in accordance with a proposal included in any such application on or after the date specified therein (which date shall not be less than one Business Day after the Company receives such application) without the consent of the Company unless, prior to taking or omitting such action, the Rights Agent has received written instructions in response to an application specifying the actions to be taken or omitted.
     (h) The Rights Agent and any stockholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company, or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other legal entity.
     (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either by itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys or agents or for any loss to the Company resulting from any such act, default, neglect or misconduct; provided, however, that reasonable care was exercised in the selection thereof.
     (j) No provision of this Agreement shall require the Rights Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if there shall be reasonable grounds for believing that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it.
     (k) If, with respect to any Right Certificate surrendered to the Rights Agent for exercise or transfer, the certificate attached to the form of assignment or form of election to purchase, as the case may be, either has not been completed or does not indicate an affirmative response, the Rights Agent shall not take any further action with respect to such requested exercise

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or transfer without first consulting the Company. The Company shall give the Rights Agent prompt written instructions as to the action to be taken regarding the Right Certificates involved. The Rights Agent shall not be liable for acting in accordance with such instructions.
     Section 21. Change of Rights Agent . The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon thirty (30) days’ notice in writing mailed to the Company by registered or certified mail, and, at the Company’s expense, to the holders of the Right Certificates by first class mail. The Company may remove the Rights Agent or any successor Rights Agent upon thirty (30) days’ notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Stock by registered or certified mail, and to the holders of the Right Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company shall fail to make such appointment within a period of thirty (30) days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Right Certificate (who shall, with such notice, submit his Right Certificate for inspection by the Company), then the Company shall become the temporary Rights Agent and the registered holder of any Right Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be a corporation organized and doing business under the laws of the United States or of the State of New York (or of any other state of the United States so long as such corporation is authorized to do business as a banking institution in the State of New York), in good standing, which is authorized under such laws to exercise corporate trust powers, is subject to supervision or examination by federal or state authority, and has at the time of its appointment as Rights Agent a combined capital and surplus of at least $25 million. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Stock, and mail a notice thereof in writing to the registered holders of the Right Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. Predecessor Rights Agent shall be released and discharged from any and all further responsibility incurred after its termination as Rights Agent.
     Section 22. Issuance of New Right Certificates . Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Right Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price and the number or kind or class of shares or other securities or property purchasable under the Right Certificates made in accordance with the provisions of this Agreement. In addition, in connection with the issuance or sale of shares of Common Stock following the Distribution Date and prior to the redemption or expiration of the Rights, the Company (a) shall, with respect to shares of Common Stock so issued or sold pursuant to the exercise of stock options or under any employee plan or arrangement, or

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upon the exercise, conversion or exchange of securities hereinafter issued by the Company, and (b) may, in any other case, if deemed necessary or appropriate by the Board of Directors of the Company, issue Right Certificates representing the appropriate number of Rights in connection with such issuance or sale; provided, however, that (i) no such Right Certificate shall be issued if, and to the extent that, the Company shall be advised by counsel that such issuance would create a significant risk of material adverse tax consequences to the Company or the Person to whom such Right Certificate would be issued, and (ii) no such Right Certificate shall be issued if, and to the extent that, appropriate adjustment shall otherwise have been made in lieu of the issuance thereof.
     Section 23. Redemption and Termination . (a) The Board of Directors of the Company, upon the affirmative vote of three-fourths of the entire Board of Directors, may, at its option, at any time prior to the earlier of (x) the close of business on the tenth day following the Shares Acquisition Date (or if the Shares Acquisition Date shall have occurred prior to the Record Date, the close of business on the tenth day following the Record Date), or (y) the Final Expiration Date, redeem all but not less than all of the then outstanding Rights at a redemption price of $.005 per Right as appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such redemption price being hereinafter referred to as the “Redemption Price”), and the Company may, at its option, pay the Redemption Price in shares of its Common Stock (valued at their Current Market Price as defined in Section 11(d) on the date of the redemption), other securities, cash, other assets or any other form of consideration deemed appropriate by the Board of Directors. Notwithstanding anything contained in this Agreement to the contrary, the Rights shall not be exercisable after the first occurrence of a Section 11(a)(ii) Event until such time as the Company’s right of redemption hereunder has expired.
     (b) In deciding whether or not to exercise the Company’s right of redemption hereunder, the Board of Directors of the Company shall act in good faith, in a manner they reasonably believe to be in the best interests of the Company and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances, and they may consider the long-term and short-term effects of any action upon employees, customers and creditors of the Company and upon communities in which offices or other establishments of the Company are located, and all other pertinent factors.
     (c) Immediately upon the action of the Board of Directors of the Company ordering the redemption of the Rights, and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price for each Right held. Within 10 days after the action of the Board of Directors ordering the redemption of the Rights, the Company shall give notice of such redemption to the holders of the then outstanding Rights by mailing such notice to the Rights Agent and to all such holders at their last addresses as they appear upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the Transfer Agent for the Common Stock. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Neither the Company nor any of its Affiliates or Associates may redeem, acquire or purchase for value any Rights at any time in any manner other than that specifically set forth in this Section 23, and other than in connection with the repurchase of Common Stock prior to the Distribution Date.

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     Section 24. Exchange . (a) The Board of Directors of the Company, upon the affirmative vote of three-fourths of the entire Board of Directors, may, at its option but subject to the receipt by the Company of any required regulatory approvals, at any time and from time to time on or after a Section 11(a)(ii) Event, exchange all or part of the then outstanding and exercisable Rights (which shall not include Rights that have become void pursuant to the provisions of Section 7(e) hereof) for shares of Common Stock at an exchange ratio of one share of Common Stock per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date of this Agreement (such exchange ratio being hereinafter referred to as the “Exchange Ratio”). Notwithstanding the foregoing, the Board of Directors of the Company shall not be empowered to effect such exchange at any time after any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or any such Subsidiary, or any entity holding Common Stock for or pursuant to the terms of any such plan), together with all Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or more of the Common Stock then outstanding.
     (b) Immediately upon the action of the Board of Directors of the Company ordering the exchange of any Rights pursuant to subsection (a) of this Section 24 and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive that number of shares of Common Stock equal to the number of such Rights held by such holder multiplied by the Exchange Ratio. The Company shall promptly give public notice of any such exchange; provided, however, that the failure to give, or any defect in, such notice shall not affect the validity of such exchange. The Company promptly shall mail a notice of any such exchange to all of the holders of such Rights at their last addresses as they appear upon the registry books of the Rights Agent. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange will be effected and, in the event of any partial exchange, the number of Rights which will be exchanged. Any partial exchange shall be effected pro rata based on the number of Rights (other than Rights which have become void pursuant to the provisions of Section 7(e) hereof) held by each holder of Rights.
     (c) In the event that there shall not be sufficient shares of Common Stock issued but not outstanding, or authorized but unissued to permit any exchange of Rights as contemplated in accordance with this Section 24, the Company shall take all such action as may be necessary to authorize additional shares of Common Stock or for issuance upon exchange of the Rights, subject, however, to Section 24(d) hereof.
     (d) In any exchange pursuant to this Section 24, the Company, at its option but subject to the receipt by the Company of any required regulatory approvals, may substitute for any share of Common Stock exchangeable for a Right (i) Common Stock Equivalents, (ii) cash, (iii) debt securities of the Company, (iv) other assets, or (v) any combination of the foregoing, having an aggregate value which three-fourths of the entire Board of Directors of the Company shall have determined in good faith to be equal to the Current Market Price of one share of Common Stock (determined pursuant to Section 11(d) hereof) on the Trading Day immediately preceding the date of exchange pursuant to this Section 24.

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     (e) The Company shall not be required to issue fractions of shares of Common Stock or to distribute certificates which evidence fractional shares of Common Stock. In lieu of such fractional shares of Common Stock, there shall be paid to the registered holders of the Rights Certificates with regard to which such fractional shares of Common Stock would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a whole share of Common Stock. For the purposes of this subsection (e), the current market value of a whole share of Common Stock shall be the closing price of a share of Common Stock (as determined pursuant to Section 11(d) hereof) for the Trading Day immediately prior to the date of exchange pursuant to this Section 24.
     Section 25. Notice of Certain Events . In case the Company shall propose at any time following the Distribution Date (a) to pay any dividend payable in stock of any class to the holders of Common Stock or to make any other distribution to the holders of Common Stock (other than a regular periodic cash dividend), or (b) to offer to the holders of Common Stock rights or warrants to subscribe for or to purchase any additional shares of Common Stock or shares of stock of any class or any other securities, rights or options, or (c) to effect any reclassification of Common Stock (other than a reclassification involving only the subdivision of outstanding Common Stock), or (d) to effect any consolidation or merger into or with any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(n) hereof), or to effect any sale or other transfer (or to permit one or more of its Subsidiaries to effect any sale or other transfer), in one or more transactions, of more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to, any other Person or Persons (other than the Company and/or any of its Subsidiaries in one or more transactions each of which complies with Section 11(n) hereof), or (e) to effect the liquidation, dissolution or winding up of the Company, then, in each such case, the Company shall give to the Rights Agent and to each holder of a Right, in accordance with Section 26, a notice of such proposed action, which shall specify the record date for the purposes of such stock dividend, distribution of rights or Rights, or the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution, or winding up is to take place and the date of participation therein by the holders of the Common Stock, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (a) or (b) above at least twenty (20) days prior to the record date for determining holders of the Common Stock for purposes of such action, and in the case of any such other action, at least twenty (20)) days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the Common Stock, whichever shall be the earlier.
     In case a Section 11(a)(ii) Event shall occur, then, in any such case, the Company shall as soon as practicable thereafter give to the Rights Agent and to each holder of a Right, to the extent feasible and in accordance with Section 26 a notice of the occurrence of such event, which shall specify the event and the consequences of the event to holders of Rights under Section 11(a)(ii).
     Section 26. Notices . Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Right Certificate to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (unless and until another address is filed in writing with the Rights Agent) as follows:

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National Fuel Gas Company
6363 Main Street
Williamsville, New York 14221
Attention: Corporate Secretary
Subject to the provisions of Section 21, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Right Certificate to or on the Rights Agent shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Company) as follows:
The Bank of New York
101 Barclay Street – 11 East
New York, New York 10286
Attention: Stock Transfer Division
Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Right Certificate shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company.
     Section 27. Supplements and Amendments . Prior to the earlier of the Distribution Date or the Shares Acquisition Date and subject to the penultimate sentence of this Section 27, the Company may from time to time supplement or amend this Agreement in writing without the approval of any holders of Right Certificates; provided that any such supplement or amendment shall have been approved by the affirmative vote of three-fourths of the entire Board of Directors. From and after the earlier of the Distribution Date or the Shares Acquisition Date, and subject to the penultimate sentence of this Section 27, the Company, pursuant to a like three-fourths vote of its Board of Directors, may from time to time supplement or amend this Agreement in writing without the approval of any holders of Right Certificates in order (i) to cure any ambiguity, (ii) to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, (iii) to lengthen the time period during which the Rights may be redeemed following the Shares Acquisition Date for up to an additional twenty days beyond the time period set forth in Section 23 (a), or (iv) to change or supplement the provisions hereunder in any manner which the Company may deem necessary or desirable and which shall not adversely affect the interests of the holders of Right Certificates (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person). Upon the delivery of a certificate from an appropriate officer of the Company which states that the proposed supplement or amendment is in compliance with the terms of this Section 27, the Rights Agent shall execute such supplement or amendment unless the Rights Agent shall have determined in good faith that such supplement or amendment would adversely affect its interests under this Agreement. Notwithstanding anything in this Agreement to the contrary, no supplement or amendment shall be made on or after the Distribution Date which changes the Redemption Price, the Final Expiration Date, the Purchase Price or the number of shares of Common Stock for which a Right is then exercisable. Prior to the earlier of the Shares Acquisition Date or the Distribution Date, the interests of the holders of Rights shall be deemed coincident with the interests of the holders of Common Stock.

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     Section 28. Successors; Assignment . All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. The Agreement shall extend to and shall be binding upon the parties hereto and their respective successors and assigns; provided however, that this Agreement shall not be assignable by either party without the prior written consent of the other party; and provided, further, that (a) the foregoing proviso shall not apply to assignments by the Rights Agent to an affiliate or subsidiary of the Rights Agent (provided such assignments are made in compliance with Section 21 hereof) and (b) any reorganization, merger, consolidation, sale of assets or other form of business combination by the Rights Agent shall not be deemed to constitute an assignment of this Agreement.
     Section 29. Determinations and Actions by the Board of Directors . For all purposes of this Agreement, any calculation of the number of shares of Common Stock outstanding at any particular time, including for purposes of determining the particular percentage of such outstanding shares of Common Stock of which any Person is the Beneficial owner, shall be made in accordance with the provisions of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act. The Board of Directors of the Company shall have the exclusive power and authority to administer this Agreement and to exercise all rights and powers specifically granted to the Board or the Company, or as may be necessary or advisable in the administration of this Agreement, including, without limitation, the right and power to (i) interpret the provisions of this Agreement, and (ii) make all determinations deemed necessary or advisable for the administration of this Agreement (including a determination to redeem or not redeem the Rights or to amend the Agreement); and, where specifically prescribed herein, such Board actions, calculations, interpretations and determinations shall be undertaken or made only pursuant to the affirmative vote of three-fourths of the entire Board of Directors. All such actions, calculations, interpretations and determinations (including, for the purpose of clause (ii) below, all omissions with respect to the foregoing) which are done or made by the Board in good faith, shall (i) be final, conclusive and binding on the Company, the Rights Agent, the holders of the Right Certificates and all other parties, and (ii) not subject the Board to any liability to the holders of the Right Certificates.
     Section 30. Benefits of This Agreement . Nothing in this Agreement shall be construed to give to any Person other than the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Stock) any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, registered holders of the Common Stock).
     Section 31. Severability . If any term, provision, covenant, or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated; provided, however, that notwithstanding anything in this Agreement to the contrary, if any such term, provision, covenant or restriction is held by such court or authority to be invalid, void or unenforceable and the Board of Directors of the Company determines in its good faith judgment that severing the invalid language from this Agreement would adversely affect the purpose or effect of this Agreement, the right of redemption set forth in Section 23, hereof, if then

33


 

expired, shall be reinstated and shall not expire until the close of business on the tenth day following the date of such determination by the Board of Directors.
     Section 32. Governing Law . This Agreement and each Right Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. Notwithstanding anything to the contrary contained herein, any dispute regarding the carrying out of its obligations hereunder by the Rights Agent shall be governed by the laws of New York.
     Section 33. Counterparts . This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument.
     Section 34. Descriptive Headings . Descriptive headings of the several Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof.
     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written.
         
  NATIONAL FUEL GAS COMPANY
 
 
  By:   /s/ Philip C. Ackerman    
    Name:   Philip C. Ackerman   
    Title: Chief Executive Officer   
 
Attest:
         
By:
  /s/ James R. Peterson    
 
 
 
Name: James R. Peterson
   
 
  Title: Assistant Secretary    
[SEAL]
         
  THE BANK OF NEW YORK
 
 
  By:   /s/ Phil Triolo    
    Name:   Phil Triolo   
    Title: Assistant Vice President   
 
Attest:
         
By:
  /s/ Eli Guardiola
 
Name: Eli Guardiola
   
 
  Title: Assistant Treasurer    

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EXHIBIT A
[Form of Right Certificate]
     
Certificate No. R-   _________ Rights
NOT EXERCISABLE AFTER JULY 31, 2008 OR EARLIER IF NOTICE OF REDEMPTION OR EXCHANGE IS GIVEN. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT $.005 PER RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS MAY NOT BE EXERCISABLE AND THE RIGHTS AGREEMENT MAY BE AMENDED WITHOUT THE APPROVAL OF THE RIGHTS OWNERS.
NATIONAL FUEL GAS COMPANY
Right Certificate
     This certifies that, or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Rights Agreement dated as of June 12, 1996, as amended and restated [___], and as the same may from time to time be amended in accordance with its terms (as amended, the “Rights Agreement”) between National Fuel Gas Company, a New Jersey corporation (the “Company”) and                                           (the “Rights Agent”), to purchase from the Company at any time after the Distribution Date (as such term is defined in the Rights Agreement) and prior to 5:00 P.M. (New York, New York time) on July 31, 2008 at the designated office of the Rights Agent, or its successors as Rights Agent, in                      , New York, one-half of one fully paid, nonassessable share of the Common Stock, $1.00 par value (the “Common Stock”), of the Company, at a purchase price of $65.00 per share (the “Purchase Price”), being $32.50 per half share, upon presentation and surrender of this Right Certificate with the Form of Election to Purchase and related certificate duly executed, along with a signature guarantee and such other and further documentation as the Rights Agent may reasonably request. The number of Rights evidenced by this Right Certificate (and the number of shares which may be purchased upon exercise thereof) set forth above, and the Purchase Price per share set forth above, are the number and Purchase Price as of                                           , based on the Common Stock of the Company as constituted at such date.
     Upon the occurrence of a Section 11(a)(ii) Event (as such term is defined in the Rights Agreement), if the Rights evidenced by this Right Certificate are beneficially owned by (i) an Acquiring Person or an Affiliate or Associate of any such Acquiring Person (as such terms are defined in the Rights Agreement), (ii) a transferee of any such Acquiring Person, Associate or Affiliate, or (iii) under certain circumstances specified in the Rights Agreement, a transferee of a person who after such transfer, became an Acquiring Person, such Rights shall become null and void and no holder hereof shall have any right with respect to such Rights from and after the occurrence of such Section 11(a)(ii) Event.
     As provided in the Rights Agreement, the Purchase Price and the number and kind of shares of Common Stock (or, in certain circumstances, other securities) which may be

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purchased upon the exercise of the Rights evidenced by this Right Certificate are subject to modification and adjustment upon the happening of certain events, including Triggering Events (as such term is defined in the Rights Agreement).
     This Right Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Right Certificates. Copies of the Rights Agreement are on file at the above-mentioned office of the Rights Agent, and at the executive offices of the Company.
     This Right Certificate, with or without other Right Certificates, upon surrender at the designated office of the Rights Agent, along with a signature guarantee and such other and further documentation as the Rights Agent may reasonably request, may be exchanged for another Right Certificate or Right Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of shares of Common Stock as the Rights evidenced by the Right Certificate or Right Certificates surrendered shall have entitled such holder to purchase. If this Right Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof, along with a signature guarantee and such other and further documentation as the Rights Agent may reasonably request, another Right Certificate or Right Certificates for the number of whole Rights not exercised.
     Subject to the provisions of the Rights Agreement, the Rights evidenced by this Certificate (a) may be redeemed by the Company at its option at a redemption price of $.005 per Right prior to the earlier of the close of business on (i) the tenth day following the Shares Acquisition Date and (ii) the Final Expiration Date or (b) may be exchanged in whole or in part for shares of Common Stock and/or other securities, cash or other assets of the Company deemed to have the same value as shares of Common Stock, at any time after a Section 11(a)(ii) Event. The Rights Agreement may be amended without the approval of the holders of the Rights as and to the extent set forth therein.
     No fractional shares of Common Stock will be issued upon the exercise or exchange of any Right or Rights evidenced hereby, but in lieu thereof a cash payment will be made, as provided in the Rights Agreement.
     No holder of this Right Certificate shall be entitled to vote or receive dividends or be deemed for any purpose the holder of the Common Stock or of any other securities of the Company which may at any time be issuable on the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Right Certificate shall have been exercised or exchanged for Common Stock as provided in the Rights Agreement.

A-2


 

     This Right Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent.
     WITNESS the facsimile signature of the proper officers of the Company and its corporate seal. Dated as of                                           .
[SEAL]
         
  NATIONAL FUEL GAS COMPANY
 
 
  By:      
    Name:      
    Title:      
 
Attest:
         
By:
       
 
 
 
   
 
  Name:    
 
  Title:    
                 
    Countersigned:    
 
               
 
        ,    
             
    as Rights Agent    
 
               
 
  By:            
 
               
 
      Authorized Signature        
 
               
 
      Date:        

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[Form of Reverse Side of Right Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the Right Certificates.)
     FOR VALUE RECEIVED                                      hereby sells, assigns and transfers unto                                                    this Right
(please print name and address of transferee)
Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint                                           Attorney, to transfer the within Right Certificate on the books of the within-named Company, with full power of substitution.
     
 
                                                                
Dated:                                           
  Signature
Signature Guaranteed:
(Signatures must be guaranteed.)

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CERTIFICATE
     The undersigned hereby certifies by checking the appropriate space that:
     Exercising this Right Certificate will ___will not ___enable the undersigned, its Affiliates, its Associates and/or any other Person with which the undersigned or any of the undersigned’s Affiliates or Associates has any agreement, arrangement or understanding (whether or not in writing) for the purpose of acquiring, holding, voting or disposing of securities of the Company to obtain, individually or in the aggregate, beneficial ownership of Common Stock or other securities that have 10% or more of the aggregate voting power of the outstanding shares of the Common Stock and other securities having voting power.
     
Dated:                                           
                                                                
 
  Signature
Signature Guaranteed:
(Signatures must be guaranteed.)

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NOTICE
     The signature to the foregoing Assignment and Certificate must correspond to the name as written upon the face of this Right Certificate in every particular, without alteration or enlargement or any change whatsoever.

A-6


 

FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise Rights evidenced by the Right Certificate.)
To National Fuel Gas Company:
     The undersigned hereby irrevocably elects to exercise ___Rights represented by this Right Certificate to purchase the shares of Common Stock issuable upon the exercise of such Rights (or such other securities of the Company or of any other Person which may be issuable upon the exercise of the Rights) and requests that certificates for such shares be issued in the name of:
     
 
 
 
 
 
(Please print name and address)
 
   
 
 
 
 
  (Please insert social security or other taxpayer identifying number)
     If such number of Rights shall not be all the Rights evidenced by this Right Certificate, a new Right Certificate for the balance remaining of such Rights shall be registered in the name of and delivered to:
     
 
   
    (Please print name and address)
 
   
 
 
 
 
  (Please insert social security or other taxpayer identifying number)
Dated:                      , ____
                                                              
Signature
Signature Guaranteed:
(Signatures must be guaranteed.)

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EXHIBIT B
SUMMARY OF RIGHTS TO PURCHASE COMMON STOCK
     On March 19, 1996, the Board of Directors (the “Board”) of National Fuel Gas Company (the “Company”) authorized the Company to enter into the Rights Agreement, dated as of June 12, 1996 (the “Original Rights Agreement”), between the Company and Marine Midland Bank, as rights agent. In connection therewith, the Board authorized and declared a dividend distribution of one right (collectively, the “Rights”) for each outstanding share of Common Stock, $1.00 par value, of the Company (the “Common Stock”). Rights were distributed to the holders of record of Common Stock outstanding at the close of business on July 31, 1996 (the “Record Date”), the record date established by the Board on June 13, 1996. Each Right entitles the registered holder to purchase from the Company one-half of a share of Common Stock at a price of $65 per share (the “Purchase Price”), being $32.50 per half share, subject to adjustment.
     On September 17, 1998, the Board approved certain amendments to the Original Rights Agreement and authorized the Company to enter into an Amended and Restated Rights Agreement to reflect those amendments. On April 30, 1999, the Company entered into the Amended and Restated Rights Agreement, dated as of April 30, 1999 (the Original Rights Agreement, as amended and restated, being hereinafter referred to as the “Rights Agreement”), with HSBC Bank USA, (formerly known as Marine Midland Bank) as rights agent. Among the amendments made to the Original Rights Agreement are (i) a two-year extension of the term of the Rights Agreement to July 31, 2008, (ii) the qualification of certain obligations of the Company under the Rights Agreement by reference to any regulatory approvals that may be required in connection therewith, and (iii) in connection with the voting standard required under the Rights Agreement for certain Board actions, the substitution of the affirmative vote of three-fourths of the entire Board for the “Independent Director” vote required under the Original Rights Agreement.
     On June 7, 2007, the Board approved certain amendments to the Amended and Restated Rights Agreement and authorized the Company to enter into a second Amended and Restated Rights Agreement to reflect those amendments. On June 7, 2007, the Company entered into the second Amended and Restated Rights Agreement, dated as of June 8, 2007 (the Original Rights Agreement, as amended and restated, being hereinafter referred to as the “Rights Agreement”), with HSBC Bank USA, National Association (a national banking association formerly known as Marine Midland Bank and as HSBC Bank USA) as rights agent. Among the amendments made to the Original Rights Agreement are (i) a change in the definition of “Acquiring Person” under the Rights Agreement, (ii) certain changes to the date on which the Rights are distributed to shareholders in the event of a tender or exchange offer, (iii) a change to permit the Company to pay the redemption price in respect of the rights in cash, shares of common stock, or any other form of consideration deemed appropriate by the Board and (iv) changes to effect certain other technical amendments.
     On [___], 2007, HSBC Bank USA, National Association, resigned as Rights Agent and the Company subsititued The Bank of New York as successor Rights Agent.

B-1


 

     Currently, the Rights are attached to all Common Stock certificates representing shares presently outstanding and the Rights will be attached to any new Common Stock certificates representing shares hereafter issued.
Distribution Date; Transfer of Rights
     Until the earlier to occur of (i) ten days following the date (the “Shares Acquisition Date”) of the public announcement that a person or group of affiliated or associated persons (an “Acquiring Person”) has acquired, or obtained the right to acquire, beneficial ownership of Common Stock or other voting securities (“Voting Stock”) that have 10% or more of the voting power of the outstanding shares of Voting Stock or (ii) ten business days following the commencement or announcement of an intention to make a tender offer or exchange offer the consummation of which would result in such person acquiring, or obtaining the right to acquire, beneficial ownership of Voting Stock having 10% or more of the voting power of the outstanding shares of Voting Stock (the earlier of such dates being called the “Distribution Date”), the Rights will be evidenced, with respect to any of the Company’s Common Stock certificates outstanding as of the Record Date, by such Common Stock certificate. The Rights Agreement provides that, until the Distribution Date, the Rights will be transferred with and only with the Company’s Common Stock. Until the Distribution Date (or earlier redemption or expiration of the Rights), new Common Stock certificates issued after the Record Date upon transfer or new issuance of the Company’s Common Stock will contain a notation incorporating the Rights Agreement by reference. Until the Distribution Date (or earlier redemption or expiration of the Rights), the surrender for transfer of any of the Company’s Common Stock certificates outstanding as of the Record Date will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights (“Right Certificates”) will be mailed to holders of record of the Company’s Common Stock as of the close of business on the Distribution Date and such separate Right Certificates alone will evidence the Rights.
     The Rights are not exercisable until the Distribution Date. The Rights will expire at the close of Business on July 31, 2008, unless earlier redeemed or exchanged by the Company as described below.
Exercise of Rights for Common Stock of the Company
     Subject to redemption or exchange of the Rights, at any time following the Distribution Date, each holder of a Right will thereafter have the right to receive, upon exercise, Common Stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to two times the Purchase Price of the Right then in effect. Notwithstanding any of the foregoing, following the occurrence of such event set forth in this paragraph, all Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person will be null and void.
Exercise of Rights for Shares of the Acquiring Company
     In the event that, at any time following the Shares Acquisition Date, (i) the Company is acquired in a merger or other business combination transaction, or (ii) 50% or more of

B-2


 

the Company’s assets or earning power is sold or transferred, each holder of a Right (except Rights which previously have been voided as set forth above) shall thereafter have the right to receive, upon exercise, Common Stock of the acquiring company having a value equal to two times the Purchase Price of the Right then in effect.
Adjustments to Purchase Price
     The Purchase Price payable, and the number of shares of Common Stock (or other securities, as the case may be) issuable upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Common Stock, (ii) upon the grant to holders of the Common Stock of certain rights or warrants to subscribe for or purchase shares of the Common Stock or convertible securities at less than the then Current Market Price of the Common Stock or (iii) upon the distribution to holders of the Common Stock of evidences of indebtedness or assets (excluding regular periodic cash dividends or dividends payable in the Common Stock) or of subscription rights or warrants (other than those referred to above). Prior to the Distribution Date, the Board of Directors of the Company may make such equitable adjustments as it deems appropriate in the circumstances in lieu of any adjustment otherwise required by the foregoing.
     With certain exceptions, no adjustment in the Purchase Price will be required until the earlier of (i) three years from the date of the event giving rise to such adjustment or (ii) the time at which cumulative adjustments require an adjustment of at least 1% in such Purchase Price. No fractional shares of Common Stock will be issued and, in lieu thereof, an adjustment in cash will be made based on the market price of the Common Stock on the last trading date prior to the date of exercise.
Redemption and Exchange of Rights
     At any time prior to 5:00 P.M. New York, New York time on the tenth day following the Shares Acquisition Date, the Company may redeem the Rights in whole, but not in part, at a price of $.005 per Right (the “Redemption Price”). The decision to redeem shall require the affirmative vote of three-fourths of the entire Board of Directors. Immediately upon the action of the Board of Directors of the Company electing to redeem the Rights, the Company shall make announcement thereof, and upon such action, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price.
     At any time after the occurrence of the event set forth under the heading “Exercise of Rights for Common Stock of the Company” above, the Board of Directors, acting by the affirmative vote of three-fourths of the entire Board of Directors, may exchange the Rights (other than Rights owned by an Acquiring Person, which have become void), in whole or in part, at an exchange ratio of one share of Common Stock, and/or other securities, cash or other assets deemed to have the same value as one share of Common Stock, per Right, subject to adjustment.
     Until a Right is exercised or exchanged for Common Stock, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. While the distribution of the Rights will not be taxable to stockholders or to the Company, stockholders may, depending upon the circumstances, recognize

B-3


 

taxable income in the event that the Rights become exercisable for Common Stock or other consideration of the Company or for the stock of the Acquiring Person as set forth above, or are exchanged as provided in the preceding paragraph.
Amendments to Terms of the Rights
     Any of the provisions of the Rights Agreement may be amended by the Board of Directors of the Company without the consent of the holders of the Rights prior to the Distribution Date; provided that any such amendment is approved by the affirmative vote of three-fourths of the entire Board of Directors. Thereafter, the provisions of the Rights Agreement may be amended by the Board of Directors, acting by a like three-fourths vote, in order to cure any ambiguity, defect or inconsistency, or to make changes which do not adversely affect the interests of holders of Rights (excluding the interest of any Acquiring Person); provided, however, that no supplement or amendment may be made on or after the Distribution Date which changes those provisions relating to the principal economic terms of the Rights. The Board of Directors may also, by a like three-fourths vote, extend the redemption period for up to an additional 20 days.
     A copy of the Rights Agreement has been filed with the Securities and Exchange Commission as an Exhibit to a Registration Statement on Form 8-A dated June 12, 1996 (as such may be amended from time to time). A copy of the Rights Agreement is available free of charge from the Company. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, which is hereby incorporated herein by reference.

B-4

 

Exhibit 10.1
FORM ECNA
EMPLOYMENT CONTINUATION AND
NONCOMPETITION AGREEMENT
     THIS AGREEMENT between [Subsidiary Corporation], a [State] corporation (the “Company”), NATIONAL FUEL GAS COMPANY, a New Jersey corporation (“National”), and                      (the “Executive”), dated as of the [          ] day of [                      ], 200[7].
W I T N E S S E T H :
     WHEREAS, the Company and National wish to attract and retain well-qualified executive and key personnel and to assure continuity of management, which will be essential to its ability to evaluate and respond to any actual or threatened Change in Control (as defined below) in the best interests of shareholders;
     WHEREAS, the Executive is a valuable employee of the Company, an integral part of its management team and a key participant in the decision making process relative to short-term and long-term planning and policy for the Company;
     WHEREAS, the Company and National understand that any actual or threatened Change in Control will present significant concerns for the Executive with respect to his financial and job security;
     WHEREAS, the Company and National wish to encourage the Executive to continue his career and services with the Company for the period during and after an actual or threatened Change in Control and to assure to the Company the Executive’s services during the period in which such a Change in Control is threatened, and to provide the Executive certain financial assurances to enable the Executive to perform the responsibilities of his position without undue distraction and to exercise his judgment without bias due to his personal circumstances; and
     WHEREAS, the Board of Directors of National has determined that it would be in the best interests of National and its shareholders to assure continuity in the management of National in the event of a Change in Control by entering into an employment continuation and noncompete agreement with Executive;
     WHEREAS, to achieve these objectives, the Company, National and the Executive desire to enter into an agreement providing the Company and the Executive with certain rights and obligations upon the occurrence of a Change in Control or Potential Change in Control (as defined in Section 2).

 


 

     NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is hereby agreed by and between the Company, National and the Executive as follows:
     1. Operation of Agreement. (a) Effective Date. The effective date of this Agreement shall be the date on which a Change in Control occurs (the “Effective Date”), provided that, except as provided in Section 1(b), if the Executive is not employed by the Company, National or any of their subsidiaries on the Effective Date, this Agreement shall be void and without effect.
     (b) Termination of Employment Following a Potential Change in Control. Notwithstanding Section 1(a), if (i) the Executive’s employment is terminated by the Company Without Cause (as defined in Section 6(c)) after the occurrence of a Potential Change in Control and prior to the occurrence of a Change in Control and (ii) a Change in Control occurs within two years of such termination, the Executive shall be deemed, solely for purposes of determining his rights under this Agreement, to have remained employed until the date such Change in Control occurs and to have been terminated by the Company Without Cause immediately after this Agreement becomes effective.
     2. Definitions. (a) Change in Control. For the purposes of this Agreement, a “Change in Control” shall be deemed to have occurred if any of the following have occurred:
     (i) either (a) the Company or National shall receive a report on Schedule 13D, or an amendment to such a report, filed with the Securities and Exchange Commission pursuant to Section 13(d) of the Securities Exchange Act of 1934 (the “1934 Act”) disclosing that any person (as such term is used in Section 13(d) of the 1934 Act) (“Person”), is the beneficial owner, directly or indirectly, of twenty (20) percent or more of the outstanding stock of National or (b) the Company or National has actual knowledge of facts which would require any Person to file such a report on Schedule 13D, or to make an amendment to such a report, with the SEC (or would be required to file such a report or amendment upon the lapse of the applicable period of time specified in Section 13(d) of the 1934 Act) disclosing that such Person is the beneficial owner, directly or indirectly, of twenty (20) percent or more of the outstanding stock of National;
     (ii) purchase by any Person, other than National or a wholly-owned subsidiary of National or an employee benefit plan sponsored or maintained by National or a wholly-owned subsidiary of National, of shares pursuant to a tender or exchange offer to acquire any stock of National (or securities convertible into stock) for cash, securities or any other consideration provided that, after consummation of the offer, such Person is the beneficial owner (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of twenty (20) percent or more of the outstanding stock of National (calculated as provided in paragraph (d) of Rule 13d-3 under the 1934 Act in the case of rights to acquire stock);

2


 

     (iii) approval by the shareholders of National of (a) any consolidation or merger of National in which National is not the continuing or surviving corporation or pursuant to which shares of stock of National would be converted into cash, securities or other property, other than a consolidation or merger of National in which holders of its stock immediately prior to the consolidation or merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the consolidation or merger as immediately before, or (b) any consolidation or merger in which National is the continuing or surviving corporation but in which the common shareholders of National immediately prior to the consolidation or merger do not hold at least a majority of the outstanding common stock of the continuing or surviving corporation (except where such holders of common stock hold at least a majority of the common stock of the corporation which owns all of the common stock of National), or (c) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of National; or
     (iv) a change in the majority of the members of the Board of Directors of National (the “Board”) within a 24-month period unless the election or nomination for election by National’s shareholders of each new director was approved by the vote of at least two-thirds of the directors then still in office who were in office at the beginning of the 24-month period.
     (b) Potential Change in Control. For the purposes of this Agreement, a Potential Change in Control shall be deemed to have occurred if:
     (i) a Person commences a tender offer (with adequate financing) for securities representing at least twenty (20) percent of the outstanding stock of National (calculated as provided in paragraph (d) of Rule 13d-3 under the 1934 Act in the case of rights to acquire stock);
     (ii) National enters into an agreement the consummation of which would constitute a Change in Control;
     (iii) proxies for the election of directors of National are solicited by anyone other than National; or
     (iv) any other event occurs which is deemed to be a Potential Change in Control by the Board.
     3. Employment Period. Subject to Section 6 of this Agreement, the Company agrees to continue the Executive in its employ, and the Executive agrees to remain in the employ of the Company, for the period (the “Employment Period”) commencing on the Effective Date and ending on the earlier to occur of (i) the third anniversary of the Effective Date and (ii) the date on which the Executive attains age 65.

3


 

     4. Position and Duties. During the Employment Period, the Executive’s position (including titles), authority and responsibilities shall be at least commensurate with those held, exercised and assigned immediately prior to the Effective Date. It is understood that, for purposes of this Agreement, such position, authority and responsibilities shall not be regarded as not commensurate merely by virtue of the fact that a successor shall have acquired all or substantially all of the business and/or assets of the Company as contemplated by Section 12(b) of this Agreement. The Executive’s services shall be performed in the United States and within 30 miles of the location where the Executive was employed immediately preceding the Effective Date.
     5. Compensation. (a) Base Salary. During the Employment Period, the Executive shall receive a base salary at a monthly rate at least equal to the monthly salary paid to the Executive by the Company and any of its affiliated companies immediately prior to the Effective Date. The base salary shall be reviewed at least once each year after the Effective Date, and shall be increased annually at a rate at least equal to the greater of (i) the average percentage increase for the same period in the compensation of salaried employees of National and its subsidiaries who are not executives and (ii) the percentage increase in the national Consumer Price Index for the last completed calendar year. The Executive’s base salary, as it shall be increased from time to time, shall hereafter be referred to as “Base Salary”. Neither the Base Salary nor any increase in Base Salary after the Effective Date shall serve to limit or reduce any other obligation of the Company hereunder.
     (b) Annual Bonus. During the Employment Period, in addition to the Base Salary, for each fiscal year of the Company ending during the Employment Period, the Executive shall be afforded the opportunity to receive an annual bonus on terms and conditions no less favorable to the Executive (taking into account reasonable changes in the Company’s goals and objectives) than the annual bonus opportunity that had been made available to the Executive for the fiscal year ended immediately prior to the Effective Date (the “Annual Bonus Opportunity”). Any amount payable in respect of the Annual Bonus Opportunity shall be paid as soon as practicable following the year for which the amount (or prorated portion) is earned or awarded, unless electively deferred by the Executive pursuant to any deferral programs or arrangements that the Company may make available to the Executive.
     (c) Long-term Incentive Compensation Programs. During the Employment Period, the Executive shall participate in all long-term incentive compensation programs for key executives at a level that is commensurate with the Executive’s participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter.
     (d) Benefit Plans. During the Employment Period, the Executive (and, to the extent applicable, his dependents) shall be entitled to

4


 

participate in or be covered under all pension, retirement, deferred compensation, savings, medical, dental, health, disability, group life, accidental death and travel accident insurance plans and programs of the Company and its affiliated companies at a level that is commensurate with the Executive’s participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter.
     (e) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies and procedures of the Company as in effect immediately prior to the Effective Date. Notwithstanding the foregoing, the Company may apply the policies and procedures in effect after the Effective Date to the Executive, if such policies and procedures are not less favorable to the Executive than those in effect immediately prior to the Effective Date.
     (f) Vacation and Fringe Benefits. During the Employment Period, the Executive shall be entitled to paid vacation and fringe benefits at a level that is commensurate with the paid vacation and fringe benefits available to the Executive immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available from time to time to the Executive or other similarly situated officers at any time thereafter.
     (g) Indemnification. During and after the Employment Period, National and the Company shall indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive’s performance as an officer, director or employee of National or the Company or any of their subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive serves at the request of National or the Company to the maximum extent permitted by applicable law and the Company’s Certificate of Incorporation and By-Laws (the “Governing Documents”), provided that in no event shall the protection afforded to the Executive hereunder be less than that afforded under the Governing Documents as in effect immediately prior to the Effective Date.
     6. Termination. (a) Death, Disability or Retirement. Subject to the provisions of Section 1 hereof, this Agreement shall terminate automatically upon the Executive’s death, termination due to “Disability” (as defined below) or voluntary retirement under any of the Company’s retirement plans as in effect from time to time. For purposes of this Agreement, Disability shall mean the Executive’s inability to perform the duties of his position, as determined in accordance with the policies and procedures applicable with respect to the Company’s long-term disability plan, as in effect immediately prior to the Effective Date.
     (b) Voluntary Termination. Notwithstanding anything in this Agreement to the contrary, following a Change in Control the Executive

5


 

may, upon not less than 30 days’ written notice to the Company, voluntarily terminate employment for any reason (including early retirement under the terms of any of the Company’s retirement plans as in effect from time to time), provided that any termination by the Executive pursuant to Section 6(d) on account of Good Reason (as defined therein) shall not be treated as a voluntary termination
under this Section 6(b).
     (c) Cause. The Company may terminate the Executive’s employment for Cause. For purposes of this Agreement, “Cause” means the Executive’s gross misconduct, fraud or dishonesty, which has resulted or is likely to result in material economic damage to the Company or National, as determined in good faith by a vote of at least two-thirds of the non-employee directors of National at a meeting of the Board at which the Executive is provided an opportunity to be heard (with representation by counsel of his choosing, should he so desire).
     (d) Good Reason. Following the occurrence of a Change in Control, the Executive may terminate his employment for Good Reason. For purposes of this Agreement, “Good Reason” means the occurrence of any of the following, without the express written consent of the Executive, after the occurrence of a Change in Control:
(i) a material diminution in (A) the Executive’s authority, duties, or responsibilities, (B) the Executive’s base compensation or (C) the budget over which the Executive retains authority;
(ii) a material diminution in the authority, duties, or responsibilities of the supervisor to whom the Executive is required to report, including a requirement that the Executive report to a corporate officer or employee instead of reporting directly to the board of directors of a corporation; or
(iii) the Company’s requiring the Executive to be based at any office or location outside of the United States and/or more than 30 miles from that location at which he performed his services specified under the provisions of Section 4 immediately prior to the Change in Control, except for travel reasonably required in the performance of the Executive’s responsibilities; or
(iv) any other action or inaction that constitutes a material breach by the Company of this Agreement;
provided, however, that to constitute Good Reason the Company shall have a period of 30 days to cure any acts which would otherwise give Executive the right to terminate his employment for Good Reason. Such 30-day period shall commence as of the date of receipt by the Company of the Notice of Termination.
In no event shall the mere occurrence of a Change in Control, absent any further impact on the Executive, be deemed to constitute Good Reason. In the event that the Executive shall in good faith give a

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Notice of Termination for Good Reason and it shall thereafter be determined that Good Reason did not exist, the Executive shall, unless the Company and the Executive shall otherwise mutually agree, return to employment with the Company within 5 business days of such decision, without any impairment or other limitation of his rights hereunder, except that he shall not be paid his base salary for any period he did not perform services and his annual bonus opportunity for such year may be reduced to reflect his period of absence.
     (e) Notice of Termination. Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by Notice of Termination given in accordance with Section 13(e). For purposes of this Agreement, a “Notice of Termination” means a written notice given, in the case of a termination for Cause, within 30 business days of the Company’s having actual knowledge of the events giving rise to such termination, and in the case of a termination for Good Reason, within 90 days of the Executive’s having actual knowledge of the events giving rise to such termination, and which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated, and (iii) specifies the date the Executive’s employment shall terminate (which date shall be not less than 30 nor more than 60 days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder.
     (f) Date of Termination. For the purpose of this Agreement, the term “Date of Termination” means (i) in the case of a termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, and (ii) in all other cases, the actual date on which the Executive’s employment terminates during the Employment Period.
     7. Obligations of the Company upon Termination. (a) Death or Disability. If the Executive’s employment is terminated during the Employment Period by reason of the Executive’s death or Disability, this Agreement shall terminate without further obligations to the Executive or the Executive’s legal representatives under this Agreement other than those obligations accrued hereunder at the Date of Termination, and the Company shall pay to the Executive (or his beneficiary or estate) (i) the Executive’s full Base Salary through the Date of Termination (the “Earned Salary”), (ii) any vested amounts or benefits owing to the Executive under the Company’s otherwise applicable employee benefit plans and programs, including any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Company and any amounts payable pursuant any individual agreement with Executive (the “Accrued Obligations”), and (iii) any other benefits payable due to the

7


 

Executive’s death or Disability under the Company’s plans, policies or programs (the “Additional Benefits”).
     Any Earned Salary shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 15 days (or at such earlier date required by law), following the Date of Termination. Accrued Obligations and Additional Benefits shall be paid in accordance with the terms of the applicable plan, program or arrangement.
     (b) Cause and Voluntary Termination. If, during the Employment Period, the Executive’s employment shall be terminated for Cause or voluntarily terminated by the Executive (other than on account of Good Reason following a Change in Control), the Company shall pay the Executive (i) the Earned Salary in cash in a single lump sum as soon as practicable, but in no event more than 10 days, following the Date of Termination, and (ii) the Accrued Obligations in accordance with the terms of the applicable plan, program or arrangement.
     (c) Termination by the Company other than for Cause and Termination by the Executive for Good Reason. Subject to Section 7(f) below, if, during the Employment Period, the Company terminates the Executive’s employment other than for Cause, or the Executive terminates his employment for Good Reason, the Company shall pay to the Executive the following amounts:
     (i) Severance Benefits. The Executive shall be paid the following:
     (A) the Executive’s Earned Salary;
     (B) a cash amount (the “Severance Amount”) equal to
     (1) 1.99; times
     (2) the sum of
(i) the Executive’s annual Base Salary; and
(ii) the average of the annual at risk compensation incentive program bonuses or other bonuses (excluding sign-on bonuses) payable to the Executive (including, for the purposes of this calculation, any amount of such bonuses paid in the form of restricted stock (in lieu of cash), to be valued at the date of grant) for the two fiscal years of the Company ending immediately prior to the Effective Date (the “Average Bonus”); and
     (C) the Accrued Obligations.
The Earned Salary and Severance Amount shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination; provided however that if the date payment would otherwise

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be due hereunder is after September 30, payment of the Severance Amount shall be paid on the first business day in the following January.
Accrued Obligations shall be paid in accordance with the terms of the applicable plan, program or arrangement.
     (ii) Continuation of Welfare Benefits. If, during the Employment Period, the Company terminates the Executive’s employment other than for Cause, or following a Change in Control the Executive terminates his employment for Good Reason, the Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the earlier of (1) the eighteen month anniversary of the Date of Termination (the “End Date”) and (2) the date the Executive becomes eligible for comparable benefits under a similar plan, policy or program of a subsequent employer, to continue participation in all of the Company’s employee and executive welfare and fringe benefit plans, excluding further vacation pay (the “Benefit Plans”). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company’s general assets. The Executive’s participation in the Benefit Plans will be on the same terms and conditions that would have applied had the Executive continued to be employed by the Company through the End Date.
     (iii) Qualification for Early Retirement. If the Executive is at least age 52 at his Date of Termination, the Executive shall be deemed to have earned, and to have become vested in, the retirement benefits (including, without limitation, any early retirement subsidy or supplement, retiree life coverage or retiree medical benefits) that would have been payable or made available to the Executive under any employee benefit plan sponsored or maintained by the Company or any of its subsidiaries for which the Executive was eligible at the Date of Termination had he continued in service for three additional years after the Date of Termination. The purpose and intent of this provision is to provide the Executive with vesting and to bridge any gap of three or fewer years of service to qualify for any additional benefits available for an early retiree (such as the benefits under the Executive Retirement Plan (“ERP”) or the benefits available under the Retirement Plan (“RP”) including the so-called Rule of 90), and not to increase the service taken into account for purpose of determining the amount of benefits payable to the Executive beyond his actual period of service through the Date of Termination.
     The operation of this provision is illustrated by the following examples:
     Example 1: Assume that, at the Executive’s Date of Termination, the Executive is exactly 53 years old, and has exactly 4 years of service for purposes of the ERP. Assume further that the relevant RP and ERP provisions have not changed since the date of the execution of this Agreement. The Executive would receive a benefit (in the form of a single life annuity) under the RP and ERP in the aggregate in the form of a benefit beginning at age 56, equal to 4/5 times what he would otherwise have received under a combination of those plans beginning at

9


 

age 56. (Or, he could elect commencement of benefits at age 55 in reduced amounts per the terms of the relevant plans.) Five is used in the denominator because the current ERP vesting policy is attainment of age 55 and at least 5 years of service.
     Example 2: The assumptions are the same as in example 1, except that the Executive has exactly 32 years of service (instead of 4). By reason of the additional credit provided under this Agreement, the Executive would receive a benefit calculated as though payable under the RP (in the form of a single life annuity), under the RP’s “Rule of 90,” that would begin at age 55-1/2 and would equal [(53 + 32)/90] times what he would otherwise have received under the RP under the Rule of 90 beginning at age 55-1/2 (the earliest date at which he otherwise could have retired and commenced receiving benefits determined under the Rule of 90).
     In both examples, (i) any portion of the incremental benefit that could not be paid under the RP will be paid from the ERP or the Company’s general assets, (ii) final average salaries would be determined under those plans as of the Executive’s Date of Termination and (iii) the Executive would be entitled to elect forms of benefit other than the single life annuity.
     Other fact patterns, and examples respecting other post-retirement benefits, would use similar principles, but might use different math. For example, the current provisions concerning an executive’s vesting in early retirement benefits under the RP, and concerning retiree medical benefit vesting, have years of service requirements in excess of five years.
     (d) Discharge of the Company’s Obligations. Except as expressly provided in the last sentence of this Section 7(d), the amounts payable to the Executive pursuant to this Section 7 (whether or not reduced pursuant to Section 7(e)) following termination of his employment shall be in full and complete satisfaction of the Executive’s rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its subsidiaries. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and, upon the Executive’s receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive’s employment with the Company and its subsidiaries. Nothing in this Section 7(d) shall be construed to release the Company from its commitment to indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive’s performance as an officer, director or employee of the Company or any of its subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive served at the request of the Company to the maximum extent permitted by applicable law and the Governing Documents.

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     (e) Limit on Payments by the Company.
     (i) Application of Section 7(e). In the event that any amount or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any affiliated company (collectively, the “Covered Payments”), would be an “excess parachute payment” as defined in Section 280G of the Code and would thereby subject the Executive to the tax (the “Excise Tax”) imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the provisions of this Section 7(e) shall apply to determine the amounts payable to the Executive pursuant to this Agreement.
     (ii) Calculation of Benefits. Immediately following delivery of any Notice of Termination, the Company shall notify the Executive of the aggregate present value of all termination benefits to which he would be entitled under this Agreement and any other plan, program or arrangement as of the projected Date of Termination, together with the projected maximum payments, determined as of such projected Date of Termination that could be paid without the Executive being subject to the Excise Tax.
     (iii) Imposition of Payment Cap. If
     (x) the aggregate value of all compensation payments or benefits to be paid or provided to the Executive under this Agreement and any other plan, agreement or arrangement with the Company exceeds the amount which can be paid to the Executive without the Executive incurring an Excise Tax, and
     (y) the net-after tax amount (taking into account all applicable taxes payable by the Executive, including any Excise Tax) that the Executive would receive if the limitation contained in this Section 7(e)(iii) were not imposed does not exceed the net-after tax benefit the Executive would receive if such limitation were imposed by more than $25,000, then the amounts payable to the Executive under this Section 7 shall be reduced (but not below zero) to the maximum amount which may be paid hereunder without the Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the “Payment Cap”). In the event that the Executive receives reduced payments and benefits hereunder, the Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that he will receive in connection with the application of the Payment Cap.

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     (iv) Application of Section 280G. For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax,
     (A) such Covered Payments will be treated as “parachute payments” within the meaning of Section 280G of the Code, and all “parachute payments” in excess of the “base amount” (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company’s independent certified public accountants appointed prior to the Effective Date or tax counsel selected by such Accountants (the “Accountants”), the Company as a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute “parachute payments” or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the portion of the “base amount” allocable to such Covered Payments, or such “parachute payments” are otherwise not subject to such Excise Tax, and
     (B) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code.
     (v) Applicable Tax Rates. For purposes of determining whether the Executive would receive a greater net after-tax benefit were the amounts payable under this Agreement reduced in accordance with Paragraph 7(e)(iii), the Executive shall be deemed to pay:
(A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the first amounts are to be paid hereunder, and
(B) any applicable state and local income taxes at the highest applicable marginal rate of taxation for such calendar year, net of the maximum reduction in Federal incomes taxes which could be obtained from the deduction of such state or local taxes if paid in such year;
provided, however, that the Executive may request that such determination be made based on his individual tax circumstances, which shall govern such determination so long as the Executive provides to the Accountants such information and documents as the Accountants shall reasonably request to determine such individual circumstances.
     (vi) Adjustments in Respect of the Payment Cap. If the Executive receives reduced payments and benefits under this Section 7(e) (or this Section 7(e) is determined not to be applicable to the Executive because the Accountants conclude that the Executive is not subject to any Excise Tax) and it is established pursuant to a final determination

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of a court or an Internal Revenue Service proceeding (a “Final Determination”) that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Agreement, the aggregate “parachute payments” within the meaning of Section 280G of the Code paid to the Executive or for his benefit are in an amount that would result in the Executive being subject an Excise Tax, then the amount equal to such excess parachute payments shall be deemed for all purposes to be a loan to the Executive made on the date of receipt of such excess payments, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If this Section 7(e) is not applied to reduce the Executive’s entitlement under this Section 7 because the Accountants determine that the Executive would not receive a greater net-after tax benefit by applying this Section 7(e) and it is established pursuant to a Final Determination that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Agreement, the Executive would have received a greater net after tax benefit by subjecting his payments and benefits hereunder to the Payment Cap, then the aggregate “parachute payments” paid to the Executive or for his benefit in excess of the Payment Cap shall be deemed for all purposes a loan to the Executive made on the date of receipt of such excess payments, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If the Executive receives reduced payments and benefits by reason of this Section 7(e) and it is established pursuant to a Final Determination that the Executive could have received a greater amount without exceeding the Payment Cap, then the Company shall promptly thereafter pay the Executive the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company.
     (f) If Termination of Employment Occurs After the Executive Has Reached Age 62. Notwithstanding anything else to the contrary contained in this Section 7, if the Executive’s employment with the Company terminates at any time during the 3 year period ending on the first day of the month following the Executive’s sixty-fifth birthday (the “Normal Retirement Date”), and the Executive would be entitled to receive severance benefits under paragraphs 7(c), then (i) the multiplier in paragraph 7(c)(i)(B) shall not be 1.99, but shall be a number equal to 1.99 times (x/1095), where x equals the number of days remaining until the Executive’s Normal Retirement Date, and (ii) the End Date described in Section 7(c)(ii) shall not be the third anniversary of the Date of Termination, but shall be the Executive’s Normal Retirement Date.
     8. Non-exclusivity of Rights. Except as expressly provided herein, nothing in this Agreement shall prevent or limit the

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Executive’s continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other agreements with the Company or any of its affiliated companies, including employment agreements or stock option agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or program.
     9. No Offset. The Company’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise.
     10. Non-Competition and Non-Solicitation. (a) Noncompete. Unless the Executive otherwise elects by written notice to the Company prior to his Date of Termination (or in the case of a Company initiated termination, within 5 business days of receipt of a Notice of Termination, if such period extends beyond the Date of Termination) not to be bound by the provisions of this Section 10(a), during the one year period following the Executive’s Date of Termination for any reason (the “Restriction Period”), Executive shall not, directly or indirectly, engage in, become employed by, serve as an agent or consultant to, or become a partner, principal or stockholder (other than a holder of less than 1% of the outstanding voting shares of any publicly held company) of any business or entity that is engaged in any activity which is competitive with the business of the Company, National and their respective subsidiaries or affiliates in any geographic area in which the Company, National and/or any of their respective subsidiaries or affiliates is engaged in such competitive business.
     (b) Non-Solicitation of Employees. Regardless of whether the Executive has elected to be bound by Section 10(a), during the Restriction Period, the Executive shall not, directly or indirectly, for his own account or for the account of any other person or entity with which he is or shall become associated in any capacity, solicit for employment, employ or otherwise interfere with the relationship of Employer with any person who at any time during the six months preceding such solicitation, employment or interference is or was employed by or otherwise engaged to perform services for Employer other than any such solicitation or employment during the Executive’s employment with Employer on behalf of Employer.
     (c) Confidential Information. Regardless of whether the Executive has elected to be bound by Section 10(a), the Executive shall hold in a fiduciary capacity for the benefit of National and the

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Company all secret or confidential information, knowledge or data relating to National, the Company or any of their affiliated companies, and their respective businesses, (i) obtained by the Executive during his employment by the Company or any of its affiliated companies and (ii) not otherwise public knowledge (other than by reason of an unauthorized act by the Executive). After termination of the Executive’s employment with the Company, the Executive shall not, without the prior written consent of the Company, unless compelled pursuant to an order of a court or other body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it.
     (d) Non-disparagement. Regardless of whether the Executive has elected to be bound by Section 10(a), the Executive shall not publicly or privately disparage National or the Company, or any of their subsidiaries or affiliates, including any aspect of their respective business, products, employees, management or Board of Directors, in any manner which could adversely effect the business of National, the Company or such subsidiaries or affiliates. Furthermore, the Executive shall not, directly or indirectly, take any action or fail to take any action with the purpose of interfering with, damaging or disrupting the assets or business operations or affairs of National or the Company or any of their respective subsidiaries or affiliates.
     National and the Company shall not publicly or privately disparage the Executive, either personally or professionally. Nothing in this paragraph shall be construed to prevent any officer of National or the Company from discussing the Executive’s performance internally in the ordinary course of business.
     (e) Company Property. Except as expressly provided herein, promptly following the Executive’s termination of employment, the Executive shall return to the Company all property of National and the Company and all copies thereof in the Executive’s possession or under his control.
     (f) Additional Payment. Unless the Executive has elected not to be bound by Section 10(a), the Company shall make an additional lump sum payment to the Executive within 30 days following the Executive’s Date of Termination equal to one times the sum of (i) the Executive’s annual Base Salary and (ii) the Executive’s Average Bonus as compensation for the covenant contained in Section 10(a).
     11. Injunctive Relief and Other Remedies with Respect to Covenants. The Executive acknowledges and agrees that the covenants and obligations of the Executive set forth in Section 10 relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law. Therefore, the Executive agrees that the Company shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining the Executive from committing any violation of the covenants and obligations contained in

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Section 10 These remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. In no event shall an asserted violation of the provisions of Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement.
     12. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive’s legal representatives.
     (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place.
     (c) In the event the Executive ceases to be employed by the Company as a result of the transfer of the Executive’s employment to National or to another wholly owned subsidiary of National, for purposes of this Agreement, National or such other subsidiary, as the case may be, will automatically be deemed to be the Company from and after the date of such transfer and shall have the same rights, duties and obligations hereunder as the Company had immediately prior to such transfer.
     13. Miscellaneous. (a) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, applied without reference to principles of conflict of laws.
     (b) Arbitration. Except to the extent provided in Section 11, in the event that any dispute, controversy or claim arises between the Company or National and the Executive with respect to the subject matter of this Agreement and the enforcement of rights hereunder, such dispute, controversy or claim shall be resolved by binding arbitration before a panel of three arbitrators selected in accordance with the American Arbitration Association (the “AAA”). The arbitration shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association then in effect at the time of the arbitration (or such other rules as the parties may agree to in writing), and otherwise in accordance with principles which would be applied by a court of law or equity. The determination reached in such arbitration shall be final and binding on both parties without any right of appeal or further dispute. Execution of the determination by such arbitration panel may be sought in any court of competent jurisdiction. The arbitrators shall not be bound by judicial formalities and may abstain from following the strict rules of evidence

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and shall interpret this Agreement as an honorable engagement and not merely as a legal obligation. Unless otherwise agreed by the parties, any such arbitration shall take place in a location selected by the Company which is a convenient forum for such arbitration (taking into account the availability of a sufficient pool of experienced arbitrators) and not more than 100 miles from the Executive’s principal place of employment at the Effective Date (or at such other location as may be agreed upon by the parties), and shall be conducted in accordance with the Rules of the AAA. In the event of the occurrence of any proceeding (including the appeal of an arbitration decision) between the Company or National and the Executive with respect to the subject matter of this Agreement and the enforcement of rights hereunder, the Company or National shall reimburse the Executive for all reasonable costs and expenses relating to such proceeding, including reasonable attorneys’ fees and expenses, regardless of the final outcome, unless the arbitration panel determines that recovery by the Executive of all or a part of such fees, costs and expenses would be unjust. In no event shall the Executive reimburse the Company for any of the costs and expenses relating to such litigation or other proceeding.
     (c) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.
     (d) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters referred to herein, provided, however, that this Agreement is not intended to impair any rights of the Executive under any prior written agreement, any employee benefit plan of the Company or a Subsidiary or any written policy, program or procedure of the Company or a Subsidiary unless and to the extent specifically provided herein. No other agreement relating to the terms of the Executive’s employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, inducements or statements between the parties other than those that are expressly contained herein. The Executive acknowledges that he is entering into this Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences.
     (e) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
at the home address of the Executive noted
on the records of the Company
If to the Company:

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[Subsidiary Corporation]
6363 Main Street
Williamsville, NY 14221
Attention: Corporate Secretary
If to National:
National Fuel Gas Company
6363 Main Street
Williamsville, NY 14221
Attention: Corporate Secretary
or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.
     (f) Source of Payments. All payments to be made hereunder shall be paid in cash from the general funds of the Company; provided, however, that such payments shall be reduced by the amount of any payments made to the Executive or his dependents, beneficiaries or estate from any trust or special or separate fund established by the Company or National to assure such payments. To the extent that the Company does not pay any such amount when due, National shall, or shall cause the Company, to make such payment. The Company or National shall not be required to establish a special or separate fund or other segregation of assets to assure such payments, and, if the Company or National shall make any investments to aid it in meeting its obligations hereunder, the Executive shall have no right, title or interest whatever in or to any such investments except as may otherwise be expressly provided in a separate written instrument relating to such investments. Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship, between the Company or National and the Executive or any other person. To the extent that any person acquires a right to receive payments from the Company or National such right shall be no greater than the right of an unsecured creditor of the Company or National.
     (g) Tax Withholding;409A. The Company shall withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. To the extent that any payments hereunder are subject to the provisions of Section 409A of the Code, the Company intends that the amounts payable under this Agreement shall be administered in compliance with the requirements of that Section.
     (h) Severability; Reformation. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event that any of the provisions of any of Section 10 are not enforceable in accordance with its terms, the Executive and the Company agree that such Section shall be reformed to make such Section

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enforceable in a manner which provides the Company the maximum rights permitted at law.
     (i) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or the Executive’s rights hereunder on any occasion or series of occasions.
     (j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.
     (k) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect.
     IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written.
             
 
      [SUBSIDIARY CORPORATION]    
 
           
Attest: /s/
      By:    
 
           
Secretary
      Title:    
 
           
 
      NATIONAL FUEL GAS COMPANY    
 
           
Attest: /s/
      By:    
 
           
Secretary
      Title:    
 
           
 
      EXECUTIVE:    
 
           
 
           

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NATIONAL FUEL GAS COMPANY
EMPLOYMENT CONTINUATION
AND
NONCOMPETITION AGREEMENT
TABLE OF CONTENTS
         
    Page
1. Operation of Agreement
    2  
a. Effective Date
    2  
b. Termination of Employment Following a Potential Change in Control
    2  
 
       
2. Definitions
    2  
a. Change in Control
    2  
b. Potential Change in Control
    3  
 
       
3. Employment Period
    3  
 
       
4. Position and Duties
    3  
 
       
5. Compensation
    4  
a. Base Salary
    4  
b. Annual Bonus
    4  
c. Long-term Incentive Compensation Programs
    4  
d. Benefit Plans
    4  
e. Expenses
    5  
f. Vacation and Fringe Benefits
    5  
g. Indemnification
    5  
 
       
6. Termination
    5  
a. Death, Disability or Retirement
    5  
b. Voluntary Termination
    5  
c. Cause
    6  
d. Good Reason
    6  
e. Notice of Termination
    7  
f. Date of Termination
    7  
 
       
7. Obligations of the Company upon Termination
    7  
a. Death or Disability
    7  
b. Cause and Voluntary Termination
    7  
c. Termination by the Company other than for Cause and Termination by the Executive for Good Reason
    8  
i. Severance Benefits
    8  
ii. Continuation of Welfare Benefits
    8  
iii. Qualification for Early Retirement
    9  

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    Page
d. Discharge of the Company’s Obligations
    10  
e. Limit on Payments by the Company
    10  
i. Application of Section 7(e)
    10  
ii. Calculation of Benefits
    11  
iii. Imposition of Payment Cap
    11  
iv. Application of Section 280G
    11  
v. Applicable Tax Rates
    12  
vi. Adjustments in Respect of the Payment Cap
    12  
f. If Termination of Employment Occurs After the Executive Has Reached Age 62
    13  
 
       
8. Non-exclusivity of Rights
    13  
 
       
9. No Offset
    13  
 
       
10. Non-Competition and Non-Solicitation
    14  
a. Noncompete
    14  
b. Non-Solicitation of Employees
    14  
c. Confidential Information
    14  
d. Non-disparagement
    14  
e. Company Property
    15  
f. Additional Payment
    15  
 
       
11. Injunctive Relief and Other Remedies with Respect to Covenants
    15  
 
       
12. Successors
    15  
 
       
13. Miscellaneous
    16  
a. Applicable Law
    16  
b. Arbitration
    16  
c. Amendments
    16  
d. Entire Agreement
    16  
e. Notices
    17  
f. Source of Payments
    17  
g. Tax Withholding
    17  
h. Severability; Reformation
    18  
i. Waiver
    18  
j. Counterparts
    18  
k. Captions
    18  
 
       
Signature Page
    18  

21

 

Exhibit 10.2
AMENDED AND RESTATED
EMPLOYMENT CONTINUATION AND
NONCOMPETITION AGREEMENT
          THIS AGREEMENT among SENECA RESOURCES CORPORATION, a Pennsylvania corporation (the “Company”), NATIONAL FUEL GAS COMPANY, a New Jersey corporation (“National”), and Matthew D. Cabell (the “Executive”), dated as of the 11th day of December, 2006, and amended and restated as of the 20th day of September, 2007.
W I T N E S S E T H :
          WHEREAS, the Company and National wish to attract and retain well-qualified executive and key personnel and to assure continuity of management, which will be essential to its ability to evaluate and respond to any actual or threatened Change in Control (as defined below) in the best interests of shareholders;
          WHEREAS, the Executive is a valuable employee of the Company, an integral part of its management team and a key participant in the decision making process relative to short-term and long-term planning and policy for the Company;
          WHEREAS, the Company and National understand that any actual or threatened Change in Control will present significant concerns for the Executive with respect to his financial and job security;
          WHEREAS, the Company and National wish to encourage the Executive to continue his career and services with the Company for the period during and after an actual or threatened Change in Control and to assure to the Company the Executive’s services during the period in which such a Change in Control is threatened, and to provide the Executive certain financial assurances to enable the Executive to perform the responsibilities of his position without undue distraction and to exercise his judgment without bias due to his personal circumstances; and
          WHEREAS, the Board of Directors of National has determined that it would be in the best interests of National and its shareholders to assure continuity in the management of National in the event of a Change in Control by entering into an employment continuation and noncompete agreement with Executive;
          WHEREAS, to achieve these objectives, the Company, National and the Executive entered into an agreement providing the Company and the Executive with certain rights and obligations upon the occurrence of a Change in Control or Potential Change in Control (as defined in Section 2);

 


 

          WHEREAS, the parties have determined to amend and restate this Agreement to assure that its terms comply with the applicable requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”).
          NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is hereby agreed by and between the Company, National and the Executive as follows:
          1. Operation of Agreement. (a) Effective Date. The effective date of this Agreement shall be the date on which a Change in Control occurs (the “Effective Date”), provided that, except as provided in Section 1(b), if the Executive is not employed by the Company, National or any of their subsidiaries on the Effective Date, this Agreement shall be void and without effect.
          (b) Termination of Employment Following a Potential Change in Control. Notwithstanding Section 1(a), if (i) the Executive’s employment is terminated by the Company Without Cause (as defined in Section 6(c)) after the occurrence of a Potential Change in Control and prior to the occurrence of a Change in Control and (ii) a Change in Control occurs within two years of such termination, the Executive shall be deemed, solely for purposes of determining his rights under this Agreement, to have remained employed until the date such Change in Control occurs and to have been terminated by the Company Without Cause immediately after this Agreement becomes effective.
          2. Definitions. (a) Change in Control. For the purposes of this Agreement, a “Change in Control” shall be deemed to have occurred if any of the following have occurred:
(i) either (a) the Company or National shall receive a report on Schedule 13D, or an amendment to such a report, filed with the Securities and Exchange Commission pursuant to Section 13(d) of the Securities Exchange Act of 1934 (the “1934 Act”) disclosing that any person (as such term is used in Section 13(d) of the 1934 Act) (“Person”), is the beneficial owner, directly or indirectly, of twenty (20) percent or more of the outstanding stock of National or (b) the Company or National has actual knowledge of facts which would require any Person to file such a report on Schedule 13D, or to make an amendment to such a report, with the SEC (or would be required to file such a report or amendment upon the lapse of the applicable period of time specified in Section 13(d) of the 1934 Act) disclosing that such Person is the beneficial owner, directly or indirectly, of twenty (20) percent or more of the outstanding stock of National;
(ii) purchase by any Person, other than National or a wholly-owned subsidiary of National or an employee benefit plan sponsored or maintained by National or a wholly-owned subsidiary of National, of shares pursuant to a tender or exchange offer to acquire any stock of National (or securities convertible into stock) for cash, securities or any other consideration provided

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that, after consummation of the offer, such Person is the beneficial owner (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of twenty (20) percent or more of the outstanding stock of National (calculated as provided in paragraph (d) of Rule 13d-3 under the 1934 Act in the case of rights to acquire stock);
(iii) approval by the shareholders of National of (a) any consolidation or merger of National in which National is not the continuing or surviving corporation or pursuant to which shares of stock of National would be converted into cash, securities or other property, other than a consolidation or merger of National in which holders of its stock immediately prior to the consolidation or merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the consolidation or merger as immediately before, or (b) any consolidation or merger in which National is the continuing or surviving corporation but in which the common shareholders of National immediately prior to the consolidation or merger do not hold at least a majority of the outstanding common stock of the continuing or surviving corporation (except where such holders of common stock hold at least a majority of the common stock of the corporation which owns all of the common stock of National), or (c) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of National;
(iv) a change in the majority of the members of the Board of Directors of National (the “Board”) within a 24-month period unless the election or nomination for election by National’s shareholders of each new director was approved by the vote of at least two-thirds of the directors then still in office who were in office at the beginning of the 24-month period;
(v) National shall cease to own, directly or indirectly, through one or more subsidiaries, securities of the Company that provide it with more than 50% of the voting power of all outstanding classes of the Company’s securities entitled to vote in the election of directors, and more than 50% of the value of all classes of the Company’s outstanding equity securities.
            (b) Potential Change in Control. For the purposes of this Agreement, a Potential Change in Control shall be deemed to have occurred if:
(i) a Person commences a tender offer (with adequate financing) for securities representing at least twenty (20) percent of the outstanding stock of National (calculated as provided in paragraph (d) of Rule 13d-3 under the 1934 Act in the case of rights to acquire stock);
(ii) National enters into an agreement the consummation of which would constitute a Change in Control;

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(iii) proxies for the election of directors of National are solicited by anyone other than National; or
(iv) any other event occurs which is deemed to be a Potential Change in Control by the Board.
          3. Employment Period. Subject to Section 6 of this Agreement, the Company agrees to continue the Executive in its employ, and the Executive agrees to remain in the employ of the Company, for the period (the “Employment Period”) commencing on the Effective Date and ending on the earlier to occur of (i) the third anniversary of the Effective Date and (ii) the date on which the Executive attains age 65.
          4. Position and Duties. During the Employment Period, the Executive’s position (including titles), authority and responsibilities shall be at least commensurate with those held, exercised and assigned immediately prior to the Effective Date. It is understood that, for purposes of this Agreement, such position, authority and responsibilities shall not be regarded as not commensurate merely by virtue of the fact that a successor shall have acquired all or substantially all of the business and/or assets of the Company as contemplated by Section 12(b) of this Agreement. The Executive’s services shall be performed in the United States and within 30 miles of the location where the Executive was employed immediately preceding the Effective Date.
          5. Compensation. (a) Base Salary. During the Employment Period, the Executive shall receive a base salary at a monthly rate at least equal to the monthly salary paid to the Executive by the Company and any of its affiliated companies immediately prior to the Effective Date. The base salary shall be reviewed at least once each year after the Effective Date, and shall be increased annually at a rate at least equal to the greater of (i) the average percentage increase for the same period in the compensation of salaried employees of National and its subsidiaries who are not executives and (ii) the percentage increase in the national Consumer Price Index for the last completed calendar year. The Executive’s base salary, as it shall be increased from time to time, shall hereafter be referred to as “Base Salary”. Neither the Base Salary nor any increase in Base Salary after the Effective Date shall serve to limit or reduce any other obligation of the Company hereunder.
          (b) Annual Bonus. During the Employment Period, in addition to the Base Salary, for each fiscal year of the Company ending during the Employment Period, the Executive shall be afforded the opportunity to receive an annual bonus on terms and conditions no less favorable to the Executive (taking into account reasonable changes in the Company’s goals and objectives) than the annual bonus opportunity that had been made available to the Executive for the fiscal year ended immediately prior to the Effective Date (the “Annual Bonus Opportunity”). Any amount payable in respect of the Annual Bonus Opportunity shall be paid as soon as practicable following the year for which the amount (or

4


 

prorated portion) is earned or awarded, unless electively deferred by the Executive pursuant to any deferral programs or arrangements that the Company may make available to the Executive.
          (c) Long-term Incentive Compensation Programs. During the Employment Period, the Executive shall participate in all long-term incentive compensation programs for key executives at a level that is commensurate with the Executive’s participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter.
          (d) Benefit Plans. During the Employment Period, the Executive (and, to the extent applicable, his dependents) shall be entitled to participate in or be covered under all retirement, deferred compensation, savings, medical, dental, health, disability, group life, accidental death and travel accident insurance plans and programs of the Company and its affiliated companies at a level that is commensurate with the Executive’s participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter.
          (e) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies and procedures of the Company as in effect immediately prior to the Effective Date. Notwithstanding the foregoing, the Company may apply the policies and procedures in effect after the Effective Date to the Executive, if such policies and procedures are not less favorable to the Executive than those in effect immediately prior to the Effective Date.
          (f) Vacation and Fringe Benefits. During the Employment Period, the Executive shall be entitled to paid vacation and fringe benefits at a level that is commensurate with the paid vacation and fringe benefits available to the Executive immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available from time to time to the Executive or other similarly situated officers at any time thereafter.
          (g) Indemnification. During and after the Employment Period, National and the Company shall indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive’s performance as an officer, director or employee of National or the Company or any of their subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive serves at the request of National or the Company to the maximum extent permitted by applicable law and the Company’s Certificate of Incorporation and By-Laws (the “Governing Documents”), provided that in no event shall the protection afforded to the Executive hereunder be less than that afforded under the Governing Documents as in effect immediately prior to the Effective Date.

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          6. Termination. (a) Death, Disability or Retirement. Subject to the provisions of Section 1 hereof, this Agreement shall terminate automatically upon the Executive’s death, termination due to “Disability” (as defined below) or voluntary retirement under any of the Company’s retirement plans as in effect from time to time. For purposes of this Agreement, Disability shall mean the Executive’s inability to perform the duties of his position, as determined in accordance with the policies and procedures applicable with respect to the Company’s long-term disability plan, as in effect immediately prior to the Effective Date.
          (b) Voluntary Termination. Notwithstanding anything in this Agreement to the contrary, following a Change in Control the Executive may, upon not less than 30 days’ written notice to the Company, voluntarily terminate employment for any reason, provided that any termination by the Executive pursuant to Section 6(d) on account of Good Reason (as defined therein) shall not be treated as a voluntary termination under this Section 6(b).
          (c) Cause. The Company may terminate the Executive’s employment for Cause. For purposes of this Agreement, “Cause” means the Executive’s gross misconduct, fraud or dishonesty, which has resulted or is likely to result in material economic damage to the Company or National, as determined in good faith by a vote of at least two-thirds of the non-employee directors of National at a meeting of the Board at which the Executive is provided an opportunity to be heard (with representation by counsel of his choosing, should he so desire).
          (d) Good Reason. Following the occurrence of a Change in Control, the Executive may terminate his employment for Good Reason. For purposes of this Agreement, “Good Reason” means the occurrence of any of the following, without the express written consent of the Executive, after the occurrence of a Change in Control:
(i) a material diminution in (A) the Executive’s authority, duties, or responsibilities, (B) the Executive’s base compensation or (C) the budget over which the Executive retains authority;
(ii) a material diminution in the authority, duties, or responsibilities of the supervisor to whom the Executive is required to report, including a requirement that the Executive report to a corporate officer or employee instead of reporting directly to the board of directors of a corporation; or
(iii) the Company’s requiring the Executive to be based at any office or location outside of the United States and/or more than 30 miles from that location at which he performed his services specified under the provisions of Section 4 immediately prior to the Change in Control, except for travel reasonably required in the performance of the Executive’s responsibilities; or

6


 

(iv) any other action or inaction that constitutes a material breach by the Company of this Agreement;
provided, however, that to constitute Good Reason the Company shall have a period of 30 days to cure any acts which would otherwise give Executive the right to terminate his employment for Good Reason. Such 30-day period shall commence as of the date of receipt by the Company of the Notice of Termination.
In no event shall the mere occurrence of a Change in Control, absent any further impact on the Executive, be deemed to constitute Good Reason. In the event that the Executive shall in good faith give a Notice of Termination for Good Reason and it shall thereafter be determined that Good Reason did not exist, the Executive shall, unless the Company and the Executive shall otherwise mutually agree, return to employment with the Company within 5 business days of such decision, without any impairment or other limitation of his rights hereunder, except that he shall not be paid his base salary for any period he did not perform services and his annual bonus opportunity for such year may be reduced to reflect his period of absence.
          (e) Notice of Termination. Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by Notice of Termination given in accordance with Section 13(e). For purposes of this Agreement, a “Notice of Termination” means a written notice given, in the case of a termination for Cause, within 30 business days of the Company’s having actual knowledge of the events giving rise to such termination, and in the case of a termination for Good Reason, within 90 days of the Executive’s having actual knowledge of the events giving rise to such termination, and which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated, and (iii) specifies the date the Executive’s employment shall terminate (which date shall be not less than 30 nor more than 60 days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder.
          (f) Date of Termination. For the purpose of this Agreement, the term “Date of Termination” means (i) in the case of a termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, and (ii) in all other cases, the actual date on which the Executive’s employment terminates during the Employment Period.
          7. Obligations of the Company upon Termination. (a) Death or Disability. If the Executive’s employment is terminated during the Employment Period by reason of the Executive’s death or Disability, this Agreement shall terminate without further obligations to the

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Executive or the Executive’s legal representatives under this Agreement other than those obligations accrued hereunder at the Date of Termination, and the Company shall pay to the Executive (or his beneficiary or estate) (i) the Executive’s full Base Salary through the Date of Termination (the “Earned Salary”), (ii) any vested amounts or benefits owing to the Executive under the Company’s otherwise applicable employee benefit plans and programs, including any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Company and any amounts payable pursuant to any individual agreement with Executive (the “Accrued Obligations”), and (iii) any other benefits payable due to the Executive’s death or Disability under the Company’s plans, policies or programs (the “Additional Benefits”).
          Any Earned Salary shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 15 days (or at such earlier date required by law), following the Date of Termination. Accrued Obligations and Additional Benefits shall be paid in accordance with the terms of the applicable plan, program or arrangement.
          (b) Cause and Voluntary Termination. If, during the Employment Period, the Executive’s employment shall be terminated for Cause or voluntarily terminated by the Executive (other than on account of Good Reason following a Change in Control), the Company shall pay the Executive (i) the Earned Salary in cash in a single lump sum as soon as practicable, but in no event more than 10 days, following the Date of Termination, and (ii) the Accrued Obligations in accordance with the terms of the applicable plan, program or arrangement.
          (c) Termination by the Company other than for Cause and Termination by the Executive for Good Reason. Subject to Section 7(f) below, if, during the Employment Period, the Company terminates the Executive’s employment other than for Cause, or the Executive terminates his employment for Good Reason, the Company shall pay to the Executive the following amounts:
(i) Severance Benefits. The Executive shall be paid the following:
(A) the Executive’s Earned Salary;
(B) a cash amount (the “Severance Amount”) equal to
(1) 1.99; times
(2) the sum of
(i) the Executive’s annual Base Salary; and
(ii) the average of the annual at risk compensation incentive program bonuses or other bonuses (excluding sign-on bonuses) payable to the Executive (including, for the purposes of this calculation, any amount of such

8


 

bonuses paid in the form of restricted stock (in lieu of cash), to be valued at the date of grant) for the two fiscal years of the Company ending immediately prior to the Effective Date (the “Average Bonus”); and
(C) the Accrued Obligations.
Except as otherwise expressly provided in the next sentence, the Earned Salary and Severance Amount shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination; provided however that if the date payment would otherwise be due hereunder is after September 30, payment of the Severance Amount shall be paid on the first business day in the following January. Accrued Obligations shall be paid in accordance with the terms of the applicable plan, program or arrangement.
(ii) Continuation of Medical Benefits. The Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the earlier of (1) the eighteen month anniversary of the Date of Termination (the “Medical End Date”) and (2) the date the Executive becomes eligible for comparable benefits under a similar plan, policy or program of a subsequent employer, to continue participation in all of the Company’s medical, dental and health benefit plans (“Medical Plans”). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company’s general assets. The Executive’s participation in the Medical Plans will be on the same terms and conditions that would have applied had the Executive continued to be employed by the Company through the Medical End Date.
(iii) Continuation of Other Welfare Benefits. The Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the earlier of (1) the end of the second calendar year following the Date of Termination (the “Benefits End Date”) and (2) the date the Executive becomes eligible for comparable benefits under a similar plan, policy or program of a subsequent employer, to continue participation in all employee and executive welfare and fringe benefit plans, excluding the Medical Plans, any severance plans and further vacation pay (the “Benefit Plans”). To the extent any such benefit or perquisite cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company’s general assets. The Executive’s participation in the Benefit Plans will be on the same terms and conditions that would have applied had the Executive continued to be employed by the Company through the Benefits End Date.
     (iv) Vesting of Retirement Benefit Account. To the extent that, at the Date of Termination, the Executive is not fully vested in any amounts credited to his retirement accounts under the

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Company’s retirement plans (whether qualified or non-qualified) in which the Executive was participating immediately prior to the Change of Control, then in addition to any benefit otherwise payable to Executive under such plans, the Company shall make a single lump sum payment to the Executive, within 10 days of the Date of Termination, equal to the present value of the Executive’s unvested accrued benefit under such retirement plans. Such lump sum value shall be determined in accordance with the provisions of the applicable plans.
          (d) Discharge of the Company’s Obligations. Except as expressly provided in the last sentence of this Section 7(d), the amounts payable to the Executive pursuant to this Section 7 (whether or not reduced pursuant to Section 7(e)) following termination of his employment shall be in full and complete satisfaction of the Executive’s rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its subsidiaries. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and, upon the Executive’s receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive’s employment with the Company and its subsidiaries. Nothing in this Section 7(d) shall be construed to release the Company from its commitment to indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive’s performance as an officer, director or employee of the Company or any of its subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive served at the request of the Company to the maximum extent permitted by applicable law and the Governing Documents.
          (e) Limit on Payments by the Company.
(i) Application of Section 7(e). In the event that any amount or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any affiliated company (collectively, the “Covered Payments”), would be an “excess parachute payment” as defined in Section 280G of the Code and would thereby subject the Executive to the tax (the “Excise Tax”) imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the provisions of this Section 7(e) shall apply to determine the amounts payable to the Executive pursuant to this Agreement.
(ii) Calculation of Benefits. Immediately following delivery of any Notice of Termination, the Company shall notify the Executive of the aggregate present value of all termination benefits to which he would be entitled under this Agreement and any other plan, program or arrangement as of the projected Date of Termination, together with the projected maximum payments, determined as of such projected Date of Termination that could be paid without the Executive being subject to the Excise Tax.

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(iii) Imposition of Payment Cap. If
     (x) the aggregate value of all compensation payments or benefits to be paid or provided to the Executive under this Agreement and any other plan, agreement or arrangement with the Company exceeds the amount which can be paid to the Executive without the Executive incurring an Excise Tax, and
     (y) the net-after tax amount (taking into account all applicable taxes payable by the Executive, including any Excise Tax) that the Executive would receive if the limitation contained in this Section 7(e)(iii) were not imposed does not exceed the net-after tax benefit the Executive would receive if such limitation were imposed by more than $25,000, then the amounts payable to the Executive under this Section 7 shall be reduced (but not below zero) to the maximum amount which may be paid hereunder without the Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the “Payment Cap”). In the event that the Executive receives reduced payments and benefits hereunder, the Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that he will receive in connection with the application of the Payment Cap.
(iv) Application of Section 280G. For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax,
     (A) such Covered Payments will be treated as “parachute payments” within the meaning of Section 280G of the Code, and all “parachute payments” in excess of the “base amount” (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company’s independent certified public accountants appointed prior to the Effective Date or tax counsel selected by such Accountants (the “Accountants”), the Company as a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute “parachute payments” or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the portion of the “base amount” allocable to such Covered Payments, or such “parachute payments” are otherwise not subject to such Excise Tax, and
     (B) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Accountants

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in accordance with the principles of Section 280G of the Code.
(v) Applicable Tax Rates. For purposes of determining whether the Executive would receive a greater net after-tax benefit were the amounts payable under this Agreement reduced in accordance with Paragraph 7(e)(iii), the Executive shall be deemed to pay:
(A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the first amounts are to be paid hereunder, and
(B) any applicable state and local income taxes at the highest applicable marginal rate of taxation for such calendar year, net of the maximum reduction in Federal incomes taxes which could be obtained from the deduction of such state or local taxes if paid in such year;
provided, however, that the Executive may request that such determination be made based on his individual tax circumstances, which shall govern such determination so long as the Executive provides to the Accountants such information and documents as the Accountants shall reasonably request to determine such individual circumstances.
(vi) Adjustments in Respect of the Payment Cap. If the Executive receives reduced payments and benefits under this Section 7(e) (or this Section 7(e) is determined not to be applicable to the Executive because the Accountants conclude that the Executive is not subject to any Excise Tax) and it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding (a “Final Determination”) that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Agreement, the aggregate “parachute payments” within the meaning of Section 280G of the Code paid to the Executive or for his benefit are in an amount that would result in the Executive being subject an Excise Tax, then the amount equal to such excess parachute payments shall be deemed for all purposes to be a loan to the Executive made on the date of receipt of such excess payments, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If this Section 7(e) is not applied to reduce the Executive’s entitlement under this Section 7 because the Accountants determine that the Executive would not receive a greater net-after tax benefit by applying this Section 7(e) and it is established pursuant to a Final Determination that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Agreement, the Executive would have received a greater net after tax benefit by subjecting his payments and benefits hereunder to the Payment Cap, then the aggregate “parachute payments” paid to the Executive or for his

12


 

    benefit in excess of the Payment Cap shall be deemed for all purposes a loan to the Executive made on the date of receipt of such excess payments, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If the Executive receives reduced payments and benefits by reason of this Section 7(e) and it is established pursuant to a Final Determination that the Executive could have received a greater amount without exceeding the Payment Cap, then the Company shall promptly thereafter pay the Executive the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company.
               (f) If Termination of Employment Occurs After the Executive Has Reached Age 62. Notwithstanding anything else to the contrary contained in this Section 7, if the Executive’s employment with the Company terminates at any time during the 3 year period ending on the first day of the month following the Executive’s sixty-fifth birthday (the “Normal Retirement Date”), and the Executive would be entitled to receive severance benefits under paragraphs 7(c), then (i) the multiplier in paragraph 7(c)(i)(B) shall not be 1.99, but shall be a number equal to 1.99 times (x/1095), where x equals the number of days remaining until the Executive’s Normal Retirement Date, and (ii) if the Executive’s Normal Retirement Date shall occur earlier than either the Medical End Date or the Benefits End Date described in Section 7(c)(ii) and 7(c)(iii), respectively, then notwithstanding such Sections, such Medical End Date or Benefits End Date shall end on the Executive’s Normal Retirement Date.
          8. Non-exclusivity of Rights. Except as expressly provided herein, nothing in this Agreement shall prevent or limit the Executive’s continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other agreements with the Company or any of its affiliated companies, including employment agreements or stock option agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or program.
          9. No Offset. The Company’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others

13


 

whether by reason of the subsequent employment of the Executive or otherwise.
          10. Non-Competition and Non-Solicitation. (a) Noncompete. Unless the Executive otherwise elects by written notice to the Company prior to his Date of Termination (or in the case of a Company initiated termination, within 5 business days of receipt of a Notice of Termination, if such period extends beyond the Date of Termination) not to be bound by the provisions of this Section 10(a), during the one year period following the Executive’s Date of Termination for any reason (the “Restriction Period”), Executive shall not, directly or indirectly, engage in, become employed by, serve as an agent or consultant to, or become a partner, principal or stockholder (other than a holder of less than 1% of the outstanding voting shares of any publicly held company) of any business or entity that is engaged in any activity which is competitive with the business of the Company, National and their respective subsidiaries or affiliates in any geographic area in which the Company, National and/or any of their respective subsidiaries or affiliates is engaged in such competitive business.
          (b) Non-Solicitation of Employees. Regardless of whether the Executive has elected to be bound by Section 10(a), during the Restriction Period, the Executive shall not, directly or indirectly, for his own account or for the account of any other person or entity with which he is or shall become associated in any capacity, solicit for employment, employ or otherwise interfere with the relationship of Employer with any person who at any time during the six months preceding such solicitation, employment or interference is or was employed by or otherwise engaged to perform services for Employer other than any such solicitation or employment during the Executive’s employment with Employer on behalf of Employer.
          (c) Confidential Information. Regardless of whether the Executive has elected to be bound by Section 10(a), the Executive shall hold in a fiduciary capacity for the benefit of National and the Company all secret or confidential information, knowledge or data relating to National, the Company or any of their affiliated companies, and their respective businesses, (i) obtained by the Executive during his employment by the Company or any of its affiliated companies and (ii) not otherwise public knowledge (other than by reason of an unauthorized act by the Executive). After termination of the Executive’s employment with the Company, the Executive shall not, without the prior written consent of the Company, unless compelled pursuant to an order of a court or other body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it.
          (d) Non-disparagement. Regardless of whether the Executive has elected to be bound by Section 10(a), the Executive shall not publicly or privately disparage National or the Company, or any of their subsidiaries or affiliates, including any aspect of their respective business, products, employees, management or Board of

14


 

Directors, in any manner which could adversely effect the business of National, the Company or such subsidiaries or affiliates. Furthermore, the Executive shall not, directly or indirectly, take any action or fail to take any action with the purpose of interfering with, damaging or disrupting the assets or business operations or affairs of National or the Company or any of their respective subsidiaries or affiliates.
          National and the Company shall not publicly or privately disparage the Executive, either personally or professionally. Nothing in this paragraph shall be construed to prevent any officer of National or the Company from discussing the Executive’s performance internally in the ordinary course of business.
          (e) Company Property. Except as expressly provided herein, promptly following the Executive’s termination of employment, the Executive shall return to the Company all property of National and the Company and all copies thereof in the Executive’s possession or under his control.
          (f) Additional Payment. Unless the Executive has elected not to be bound by Section 10(a), the Company shall make an additional lump sum payment to the Executive within 30 days following the Executive’s Date of Termination equal to one times the sum of (i) the Executive’s annual Base Salary and (ii) the Executive’s Average Bonus as compensation for the covenant contained in Section 10(a).
          11. Injunctive Relief and Other Remedies with Respect to Covenants. The Executive acknowledges and agrees that the covenants and obligations of the Executive set forth in Section 10 relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law. Therefore, the Executive agrees that the Company shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining the Executive from committing any violation of the covenants and obligations contained in Section 10 These remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. In no event shall an asserted violation of the provisions of Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement.
          12. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive’s legal representatives.
          (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in

15


 

form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place.
          (c) In the event the Executive ceases to be employed by the Company as a result of the transfer of the Executive’s employment to National or to another wholly owned subsidiary of National, for purposes of this Agreement, National or such other subsidiary, as the case may be, will automatically be deemed to be the Company from and after the date of such transfer and shall have the same rights, duties and obligations hereunder as the Company had immediately prior to such transfer; provided that (i) such provision shall not apply without the Executive’s consent if such transfer of employment occurs in connection with or in anticipation of a transaction involving the Company that would constitute a Change of Control under this Agreement, and (ii) the definition of a Change of Control hereunder shall be modified to exclude from said definition any transaction pertaining to the Company (and not National) unless National shall have otherwise agreed in writing that such definition shall not be so amended.
          13. Miscellaneous. (a) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, applied without reference to principles of conflict of laws.
          (b) Arbitration. Except to the extent provided in Section 11, in the event that any dispute, controversy or claim arises between the Company or National and the Executive with respect to the subject matter of this Agreement and the enforcement of rights hereunder, such dispute, controversy or claim shall be resolved by binding arbitration before a panel of three arbitrators selected in accordance with the American Arbitration Association (the “AAA”). The arbitration shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association then in effect at the time of the arbitration (or such other rules as the parties may agree to in writing), and otherwise in accordance with principles which would be applied by a court of law or equity. The determination reached in such arbitration shall be final and binding on both parties without any right of appeal or further dispute. Execution of the determination by such arbitration panel may be sought in any court of competent jurisdiction. The arbitrators shall not be bound by judicial formalities and may abstain from following the strict rules of evidence and shall interpret this Agreement as an honorable engagement and not merely as a legal obligation. Unless otherwise agreed by the parties, any such arbitration shall take place in a location selected by the Company which is a convenient forum for such arbitration (taking into account the availability of a sufficient pool of experienced arbitrators) and not more than 100 miles from the Executive’s principal place of employment at the Effective Date (or at such other location as may be agreed upon by the parties), and shall be conducted in accordance with the Rules of the AAA. In the event of the occurrence of any proceeding (including the appeal of an arbitration decision)

16


 

between the Company or National and the Executive with respect to the subject matter of this Agreement and the enforcement of rights hereunder, the Company or National shall reimburse the Executive for all reasonable costs and expenses relating to such proceeding, including reasonable attorneys’ fees and expenses, regardless of the final outcome, unless the arbitration panel determines that recovery by the Executive of all or a part of such fees, costs and expenses would be unjust. In no event shall the Executive reimburse the Company for any of the costs and expenses relating to such litigation or other proceeding.
          (c) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.
          (d) Entire Agreement. This Agreement, as amended and restated, constitutes the entire agreement between the parties hereto with respect to the matters referred to herein; provided, however, that this Agreement is not intended to impair any rights of the Executive under any prior written agreement, any employee benefit plan of the Company or a Subsidiary or any written policy, program or procedure of the Company or a Subsidiary unless and to the extent specifically provided herein. No other agreement relating to the terms of the Executive’s employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, inducements or statements between the parties other than those that are expressly contained herein. The Executive acknowledges that he is entering into this Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences.
          (e) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
          If to the Executive:
at the home address of the Executive noted
on the records of the Company
          If to the Company:
Seneca Resources Corporation
6363 Main Street
Williamsville, New York 14221
Attention: Corporate Secretary
          If to National:
National Fuel Gas Company
6363 Main Street
Williamsville, New York 14221
Attention: Corporate Secretary

17


 

or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.
          (f) Source of Payments. All payments to be made hereunder shall be paid in cash from the general funds of the Company; provided, however, that such payments shall be reduced by the amount of any payments made to the Executive or his dependents, beneficiaries or estate from any trust or special or separate fund established by the Company or National to assure such payments. To the extent that the Company does not pay any such amount when due, National shall, or shall cause the Company, to make such payment. The Company or National shall not be required to establish a special or separate fund or other segregation of assets to assure such payments, and, if the Company or National shall make any investments to aid it in meeting its obligations hereunder, the Executive shall have no right, title or interest whatever in or to any such investments except as may otherwise be expressly provided in a separate written instrument relating to such investments. Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship, between the Company or National and the Executive or any other person. To the extent that any person acquires a right to receive payments from the Company or National such right shall be no greater than the right of an unsecured creditor of the Company or National.
          (g) Tax Withholding; Section 409A. The Company shall withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. To the extent that any payments hereunder are subject to the provisions of Section 409A of the Code, the Company intends that the amounts payable under this Agreement shall be administered in compliance with the requirements of that Section.
          (h) Severability; Reformation. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event that any of the provisions of any of Section 10 are not enforceable in accordance with its terms, the Executive and the Company agree that such Section shall be reformed to make such Section enforceable in a manner which provides the Company the maximum rights permitted at law.
          (i) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto

18


 

to assert its or the Executive’s rights hereunder on any occasion or series of occasions.
          (j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.
          (k) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect.
          IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused this amended and restated Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year indicated above.
                 
        SENECA RESOURCES CORPORATION    
 
               
Attest:
      By:   /s/ B. McMahan
 
   
 
               
/s/ Linda Harris
      Name: Barry McMahan    
 
               
 
               
 
      Title: Senior Vice President    
 
               
        NATIONAL FUEL GAS COMPANY    
 
               
Attest:
      By:   /s/ David F. Smith    
 
               
 
               
/s/ Sarah J. Mugel
      Name: D. F. Smith    
 
               
 
               
 
      Title: President    
 
               
        EXECUTIVE:    
 
               
        /s/ M. D. Cabell    
             

19


 

EMPLOYMENT CONTINUATION
AND
NONCOMPETITION AGREEMENT
TABLE OF CONTENTS
                 
            Page
 
               
1.   Operation of Agreement     2  
 
  a.   Effective Date     2  
 
  b.   Termination of Employment Following a Potential Change in Control     2  
 
               
2.   Definitions     2  
 
  a.   Change in Control     2  
 
  b.   Potential Change in Control     3  
 
               
3.   Employment Period     4  
 
               
4.   Position and Duties     4  
 
               
5.   Compensation     4  
 
  a.   Base Salary     4  
 
  b.   Annual Bonus     4  
 
  c.   Long-term Incentive Compensation Programs     5  
 
  d.   Benefit Plans     5  
 
  e.   Expenses     5  
 
  f.   Vacation and Fringe Benefits     5  
 
  g.   Indemnification     5  
 
               
6.   Termination     6  
 
  a.   Death, Disability or Retirement     6  
 
  b.   Voluntary Termination     6  
 
  c.   Cause     6  
 
  d.   Good Reason     6  
 
  e.   Notice of Termination     7  
 
  f.   Date of Termination     7  
 
               
7.   Obligations of the Company upon Termination     7  
 
  a.   Death or Disability     7  
 
  b.   Cause and Voluntary Termination     8  
 
  c.   Termination by the Company other than for Cause and Termination by the Executive for Good Reason     8  
 
      i. Severance Benefits     8  
 
      ii. Continuation of Medical Benefits     9  
 
      iii. Continuation of Other Welfare Benefits     9  
 
      iv. Vesting of Retirement Benefit Account     9  
 
  d.   Discharge of the Company’s Obligations     10  

20


 

             
            Page
 
 
  e.   Limit on Payments by the Company   10
 
      i. Application of Section 7(e)   10
 
      ii. Calculation of Benefits   10
 
      iii. Imposition of Payment Cap   11
 
      iv. Application of Section 280G   11
 
      v. Applicable Tax Rates   12
 
      vi. Adjustments in Respect of the Payment Cap   12
 
  f.   If Termination of Employment Occurs After the    
 
      Executive Has Reached Age 62   13
 
           
8.   Non-exclusivity of Rights   13
 
           
9.   No Offset   13
 
           
10.   Non-Competition and Non-Solicitation   14
 
  a.   Noncompete   14
 
  b.   Non-Solicitation of Employees   14
 
  c.   Confidential Information   14
 
  d.   Non-disparagement   14
 
  e.   Company Property   15
 
  f.   Additional Payment   15
 
           
11.   Injunctive Relief and Other Remedies with Respect to Covenants   15
 
           
12.   Successors   15
 
           
13.   Miscellaneous   16
 
  a.   Applicable Law   16
 
  b.   Arbitration   16
 
  c.   Amendments   17
 
  d.   Entire Agreement   17
 
  e.   Notices   17
 
  f.   Source of Payments   18
 
  g.   Tax Withholding; Section 409A   18
 
  h.   Severability; Reformation   18
 
  i.   Waiver   18
 
  j.   Counterparts   19
 
  k.   Captions   19
 
           
Signature Page       19

21

 

Exhibit 10.3
NATIONAL FUEL GAS COMPANY
TOPHAT PLAN
Adopted March 20, 1997
Amended September 20, 2007
Current as of September 20, 2007

 


 

TABLE OF CONTENTS
         
    Page
Preamble
    1  
 
       
ARTICLE 1 Definitions
    1  
 
       
1.1 “AARCIP
    1  
1.2 “Base Salary
    1  
1.3 “Beneficiary
    2  
1.4 “Code
    2  
1.5 “Committee
    2  
1.6 “Company
    2  
1.7 “Continuing Service Participant
    2  
1.8 “DCP
    2  
1.9 “Employer
    2  
1.10 “ERP
    2  
1.11 “409A Election Date
    2  
1.12 “409A Service Recipients
    3  
1.13 “Legal Limits
    3  
1.14 “Maximum Matching Contribution Percentage
    3  
1.15 “Participant
    3  
1.16 “Plan
    3  
1.17 “Plan Year
    4  
1.18 “Policies
    4  
1.19 “Retirement
    4  
1.20 “Retirement Plan
    4  
1.21 “Retirement Plan-Related Tophat Benefit
    4  
1.22 “TDSP
    4  
1.23 “TDSP-Related Matching Benefit
    4  
1.24 “TDSP-Related Retirement Savings Account Benefit
    4  
1.25 “TDSP-Related Tophat Benefit
    4  
1.26 “Termination of Employment
    4  
1.27 “409A Transition Rules
    5  
 
       
ARTICLE 2 Benefits Provided
    5  
 
       
2.1 Coordination With Other Benefits
    5  
2.2 TDSP-Related Tophat Benefit
    5  
2.3 Retirement Plan-Related Tophat Benefit
    6  
2.4 Distribution of TDSP-Related Tophat Benefit
    8  
 
       
ARTICLE 3 Participants’ Termination of Employment
    8  
 
       
3.1 TDSP-Related Tophat Benefits
    8  


 

TABLE OF CONTENTS
(continued)
         
    Page
3.2 Retirement Plan-Related Tophat Benefits
    9  
3.3 Lump Sum Cash-Out of De Minimis Tophat Benefits
    13  
 
       
ARTICLE 4 Beneficiary Designation
    13  
 
       
4.1 Beneficiary Designation
    13  
4.2 Change of Beneficiary Designation
    13  
4.3 No Beneficiary Designation
    14  
4.4 Effect of Payment
    14  
 
       
ARTICLE 5 Termination and Modification
    14  
 
       
5.1 Termination and Amendment
    14  
5.2 Limited Power of President to Amend Plan
    14  
 
       
ARTICLE 6 Administration
    14  
 
       
6.1 Committee Duties
    14  
6.2 Agents
    15  
6.3 Binding Effect of Decisions
    15  
6.4 Indemnity of Committee
    15  
6.5 Section 409A of the Code
    15  
 
       
ARTICLE 7 Miscellaneous
    15  
 
       
7.1 Unsecured General Creditor
    15  
7.2 Nonassignability
    15  
7.3 Not a Contract of Employment
    16  
7.4 Health Information
    16  
7.5 Governing Law
    16  
7.6 Withholding
    16  
7.7 Binding Effect
    16  
7.8 Borrowing
    16  
7.9 Validity
    16  
7.10 Incapacity of Person Entitled To Payment
    16  
7.11 Captions
    17  
7.12 Construction
    17  

ii 


 

NATIONAL FUEL GAS COMPANY
TOPHAT PLAN
Preamble
     National Fuel Gas Company has adopted the National Fuel Gas Company Tophat Plan (“ Plan ”) to help attract and retain high caliber employees in high-level management positions, to provide such employees with a tax-favored vehicle to accumulate assets and to enhance retirement benefits, to restore benefits lost to employees under the TDSP as a result of the effect of Legal Limits upon their receipt of Company matching contributions in the TDSP, and to restore benefits lost to employees under the Retirement Plan as a result of their participation in the DCP (with respect to persons not eligible for the ERP). Notwithstanding the above, the only employees eligible to receive benefits under this Plan are highly-compensated employees as defined by the Code and its corresponding regulations, as the same may be amended from time to time.
     The tophat benefits provided by this Plan were previously contained within the DCP. These tophat benefits have now been segregated into this separate Plan document, in part because federal legislation enacted in 1996 (which limits the ability of states to impose a source tax on retirement benefits earned within such states) may penalize employees unless the provisions authorizing tophat benefits are reflected in a separate plan, and in part to more fully and accurately describe the tophat benefits.
     This Plan has been amended to comply with the requirements of Section 409A of the Code.
ARTICLE 1
Definitions
     For purposes hereof, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings:
     1.1 “ AARCIP ” shall mean the National Fuel Gas Company Annual At Risk Compensation Incentive Program, as amended from time to time or any successor thereto.
     1.2 “ Base Salary ” shall mean gross cash compensation per regular payroll period, including salary continuation payments made by an Employer on account of sickness or accident, which are paid to a Participant for employment services rendered to an Employer, before reduction for compensation deferred pursuant to the DCP or pursuant to the TDSP, and shall also include ( i ) payments made to a Participant pursuant to the AARCIP or a successor plan thereto, ( ii ) awards of restricted stock that are made to

 


 

a Participant for service in the Company’s fiscal year 1996 or later to supplement an AARCIP award for that fiscal year, which was approximately equal to the maximum AARCIP award then permissible consistent with the shareholder approval applicable to that AARCIP award, valued at the average of the high and low market value on the grant date, and ( iii ) any performance-related lump sum compensation (i.e., lump sum payments other than expense or tuition reimbursements, moving expense reimbursements, lump sum payments for eligible unused vacation, worker’s compensation payments, award payments for suggestions, severance payments or any other non-performance related payments) made on or after August 1, 1997, but shall exclude all other fees, commissions, special, extra or nonperiodic compensation in any form. Notwithstanding the above, amounts described in clause (iii) shall only be included in Base Salary for officers of any Employer; provided that, for officers of Seneca Resources Corporation, such amounts shall be included in Base Salary solely for purposes of determining such officers’ TDSP-Related Retirement Savings Account Benefit.
     1.3 “ Beneficiary ” shall mean the person, persons, or entity designated by the Participant to receive any benefits payable under this Plan upon the death of a Participant.
     1.4 “ Code ” shall mean the Internal Revenue Code of 1986, as amended.
     1.5 “ Committee ” shall mean the committee appointed to manage and administer the Plan in accordance with its provisions of Article 6.
     1.6 “ Company ” shall mean National Fuel Gas Company and all successor companies thereto.
     1.7 “Continuing Service Participant” means a Participant who ceases to be an employee of, but continues to provide services to, any of the 409A Service Recipients following his Retirement or Termination of Employment, or is reasonably expected (at the time of such Retirement or Termination of Employment) to provide services to any of the 409A Service Recipients within 12 months of such termination of employment.
     1.8 “ DCP ” shall mean the National Fuel Gas Company Deferred Compensation Plan, as amended from time to time or any successor thereto.
     1.9 “ Employer ” shall mean the Company and each of its subsidiaries which has one or more eligible employees who have been selected to participate in the Plan.
     1.10 “ ERP ” shall mean the National Fuel Gas Company and Participating Subsidiaries Executive Retirement Plan, as amended from time to time or any successor thereto.
     1.11 “409A Election Date ” means December 31, 2007 or such other date as the Company shall determine to be the latest date that benefits payable under the Plan may

2


 

commence to be paid based on the Participant’s election as to the form and timing of payment in respect of his or her benefits payable under the Retirement Plan without violating the election requirements applicable under Section 409A of the Code and any regulations, proposed regulations or other guidance promulgated thereunder.
     1.12 “ 409A Service Recipients ” means the Company and each other entity which is in the same controlled group of affiliated employers as the Company, as determined in accordance with the rules under Section 414(b) and (c) of the Code.
     1.13 “ Legal Limits ” shall mean ( i ) the provisions of the Retirement Plan and applicable section(s) of the Code that prevent the Retirement Plan from including in calculating “Final Average Pay” compensation deferred pursuant to the DCP, ( ii ) the maximum amount of annual compensation of an employee that may be taken into account under the Retirement Plan in accordance with Section 401(a)(17) of the Code, as amended and supplemented, and the implementing provisions of the Retirement Plan, but only with respect to Participants who are not members under the ERP, ( iii ) the nondiscrimination rules under Section 401(a)(4) and the annual limits imposed by Sections 401(k)(3), 401(m)(2), 401(a)(17), 402(g) or 415 of the Code, or a successor to any such sections, and/or ( iv ) the corresponding requirements of the Employment Retirement Income Security Act of 1974, as amended (“ ERISA ”), respecting the Retirement Plan and respecting deferrals under and employer matching contributions to the TDSP.
     1.14 “ Maximum Matching Contribution Percentage ” shall mean with respect to a Participant the maximum employer matching contribution percentage applicable to the Participant under the TDSP based on such Participant’s actual contributions under the TDSP.
     1.15 “ Participant ” shall mean any person currently or formerly in the regular full-time employment of an Employer,
     (a) ( i )  who has lost benefits under the TDSP as a result of Legal Limits; and ( ii ) whose Accounts have not been completely distributed to him or her; or
     (b) ( i ) who has vested in his or her benefits under the Retirement Plan; ( ii ) who has lost benefits under the Retirement Plan as a result of Legal Limits; ( iii ) whose Retirement Plan benefits have not been completely distributed to him or her; and ( iv ) who is not a member under the ERP.
     1.16 “ Plan ” shall mean the National Fuel Gas Company Tophat Plan, as amended from time to time or any successor thereto.

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     1.17 “ Plan Year ” shall mean the 12 consecutive month period commencing on August 1 and ending on the next following July 31.
     1.18 “ Policies ” shall mean the policies described in Section 7.1.
     1.19 “ Retirement ” and “ Retire ” shall mean severance from employment with the Employer at or after the attainment of age fifty-five (55), or prior thereto pursuant to the disability retirement provisions of the Retirement Plan; provided, however, that in the case of any Continuing Service Participant, the terms Retirement or Retire (and any similar terms used in this Plan) shall be deemed to refer to the date at which such Participant incurs a “separation from service,” within the meaning of Section 409A of the Code and the regulations promulgated thereunder, from the 409A Service Recipients. This means that rather than being entitled to commence to receive a distribution hereunder upon, or at a specified time following, Retirement, a Continuing Service Participant shall only be entitled to receive such distribution upon, or at a specified time following, such a separation from service.
     1.20 “ Retirement Plan ” shall mean the National Fuel Gas Company Retirement Plan, as amended from time to time or any successor thereto.
     1.21 “ Retirement Plan-Related Tophat Benefit ” shall mean the tophat benefit described in Section 2.3.
     1.22 “ TDSP ” shall mean the National Fuel Gas Company Tax-Deferred Savings Plan for Non-Union Employees, as amended from time to time or any successor thereto.
     1.23 “ TDSP-Related Matching Benefit ” shall have the meaning ascribed thereto in subclause (i) of Section 2.2.
     1.24 “ TDSP-Related Retirement Savings Account Benefit ” shall have the meaning ascribed thereto in subclause (ii) of Section 2.2.
     1.25 “ TDSP-Related Tophat Benefit ” shall mean the TDSP-Related Matching Benefit and the TDSP-Related Retirement Savings Account Benefit.
     1.26 “ Termination of Employment ” shall mean the cessation of a Participant’s employment with the 409A Service Recipients for any reason other than Retirement; provided, however, that in the case of any Continuing Service Participant, the term Termination of Employment (and any similar terms used in this Plan) shall be deemed to refer to the date at which such Participant incurs a “separation from service,” within the meaning of Section 409A of the Code and the regulations promulgated thereunder, from the 409A Service Recipients. This means that rather than being entitled to receive a distribution hereunder upon, or at a specified time following, a Termination of

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Employment, a Continuing Service Participant shall only be entitled to receive such distribution upon, or at a specified time following, such a separation from service.
     1.27 “ 409A Transition Rules ” shall mean the rules described in Section 2.3.
ARTICLE 2
Benefits Provided
     2.1 Coordination With Other Benefits . The benefits provided for a Participant under the Plan are in addition to any other benefits to which the Participant may be entitled under any other plan or program of the Employer. This Plan shall supplement and shall not supersede, modify, amend, enhance or diminish any other such plan or program except as may otherwise be expressly provided.
     2.2 TDSP-Related Tophat Benefit . Each Participant who is eligible to participate in the TDSP shall be credited with a TDSP-Related Tophat Benefit equal to the sum of ( i ) the employer matching contributions that the Participant would have received under the TDSP based on such Participant’s elective deferrals thereunder (“TDSP-Related Matching Benefit”) and ( ii ) in the case of any Participant who is a Post-2003 Qualified Participant under the TSDP, the additional employer contributions that the Participant would have received under the TSDP had such Participant’s monthly Company Contribution Compensation (as defined in the TSDP) been equal to his Base Salary as defined for purposes of this Plan (“TDSP-Related Retirement Savings Plan Account”), in each case ( x ) assuming that the Participant’s deferrals and entitlements to employer contributions were not limited by the Legal Limits and ( y ) reduced by the actual corresponding contribution made for his benefit under the TSDP.
     (a)  Example . This example shall illustrate how the TDSP-Related Matching Benefit provisions of this Section 2.2 are to be applied. Assume that a particular Participant’s TDSP deferral percentage (salary contribution percentage) is 6%, and that his or her Maximum Matching Contribution Percentage under the TDSP is 6%. Also assume that his or her Base Salary as defined in the Plan for that calendar year is $399,000 ( i . e ., $285,000 base annual pay plus $114,000 paid under the AARCIP), that his or her base salary as defined in the TDSP for the same period is $285,000, that the Code §401(a)(17) limit for that year is $225,000, that the Code §402(g) limit is $15,500 for that year, and that the Code §401(k)(3) and §415 limits do not adversely affect the Participant in this example.
     Under the TDSP, the Participant would be entitled to a Maximum Matching Contribution of $13,500 (6% x $225,000 Code §401(a)(17) limit). Under Section 2.2, the Participant would receive a TDSP-Related Matching Benefit of $10,440 (i.e., 6% x [$399,000 minus $225,000 base salary taken into account under the TDSP]). Therefore, the total aggregate “employer matching contribution” received by the Participant would

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be $23,940 ($13,500 in the TDSP and $10,440 by virtue of the TDSP-Related Matching Benefit).
     (b)  Example . This example shall illustrate how the TDSP-Related Retirement Savings Plan Account provisions of this Section 2.2 are to be applied. Assume that a particular Participant is a Post-2003 Qualified Participant under the TSDP with less than eight years of service. Also assume that his Base Salary as defined in the Plan for that calendar year is $420,000 ( i . e ., $300,000 base annual pay plus $120,000 paid under the AARCIP), that his or her base salary as defined in the TDSP for the same period is $300,000 and his monthly Company Contribution Compensation for the same period is $25,000 ($300,000 divided by 12), that the Code §401(a)(17) limit for that year is $225,000, and that the Code §415 limits do not adversely affect the Participant in this example.
     Under the TDSP, the Participant would be entitled to an allocation to his Retirement Savings Account of $4,500 (2% x $225,000 Code §401(a)(17) limit). Under Section 2.2, the Participant would receive a total tophat of $3,900 (i.e., 2% x [$420,000 minus $225,000 base salary taken into account under the TDSP]). Therefore, the total aggregate “retirement savings contribution” received by the Participant would be $8,400 ($4,500 in the TDSP and $3,900 by virtue of TDSP-Related Retirement Savings Account Benefit).
     As can be seen by these illustrations, the tophats are intended to make up for and not under- or overcompensate for Participants’ losses caused by the various Legal Limits applying to, and the base salary definition of, the TDSP.
     2.3 Retirement Plan-Related Tophat Benefit .
     (a)  Tophat . Any loss of benefits to a Participant under the Retirement Plan, which results from deferrals made under the DCP by the Participant, or otherwise are due to the Legal Limits, shall be restored by the Company, provided that such Participant is not also a member of the ERP. Example . An example of the Retirement Plan-Related Tophat Benefit is as follows: Assume that a Participant eligible for this tophat retired in the year 2000, at age 60. Assume that his or her “Final Average Pay” under the Retirement Plan would have been $100,000, had he or she not participated in the DCP. Assume further that, as a result of his or her participation in the DCP, his or her “Final Average Pay” is reduced to $80,000. Assume further that his or her Retirement Plan annuity (expressed as a single life annuity) consequently is reduced from $3,750/month to $3,000/month. This Participant will then receive $750 per month for life under this tophat or the actuarial equivalent thereof, determined using the actuarial assumptions under the Retirement Plan in accordance with the form of payment elected (or, absent such an election, the four-year period certain annuity described in Section 3.2(b)(i)).

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     (b)  Distribution Elections . The following rules shall apply with respect to distribution elections made in respect of the Retirement Plan-Related Tophat Benefit under this Section 2.3:
     (i) Pursuant to the transitional rules contained in the Internal Revenue Service guidance and treasury regulations under Section 409A of the Code (the “ 409A Transition Rules ”), a Participant who commences receiving payment of his or her tophat on or prior to the 409A Election Date by reason of Retirement shall receive such payments in the same form as the annuity he or she receives under the Retirement Plan.
     (ii) In accordance with the 409A Transition Rules, a Participant who is entitled to a tophat with respect to any period ending on or prior to the 409A Election Date, and who does not commence receiving a distribution thereof on or prior to the 409A Election Date, may make an election on or prior to, and effective as of, the 409A Election Date, regarding the distribution of such tophat upon Retirement; provided that ( x ) any such election shall also be applicable with respect to any tophat accrued by the Participant under this Section 2.3 after the 409A Election Date and ( y ) Section 3.2(a), if applicable, shall supersede any such election.
     (iii) A Participant who commences participation in the Plan after the 409A Election Date may make an election regarding the distribution of the tophat accrued under this Section 2.3 at such times (but no later than 30 days after the date that participation in the Plan shall commence) and in such manner as shall be prescribed by the Committee.
     (iv) A Participant may only change an election previously filed pursuant to this Section 2.3(b) in accordance with the conditions specified in this subclause (iv). Except as otherwise expressly provided below, any such change in such an election, whether as to when payment of Retirement Plan-Related Tophat Benefit is to commence or the form of distribution of such Retirement Plan-Related Tophat Benefit, must ( 1 ) be made in writing, ( 2 ) be delivered at least 12 months prior to date as of which the Participant’s Retirement Plan-Related Tophat Benefit would otherwise commence to be paid hereunder, and ( 3 ) delay commencement of payment of such Retirement Plan-Related Tophat Benefit for at least five years from the date payment of such Retirement Plan-Related Tophat Benefit would otherwise have commenced. Notwithstanding the foregoing, a Participant who has elected under Section 3.2(b) to receive a distribution in the form of a life annuity, a ten-year period certain and life annuity or either joint and survivor annuity form may elect to change from that form to any other annuity form at any time prior to the commencement of the receipt of Retirement Plan-Related Tophat Benefit hereunder. For example, a Participant who has elected to receive his Retirement Plan-Related Tophat Benefit in the form of an annuity just

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for his life may change that election to a joint and survivor annuity without the 12 months advance notice and five year delay in commencement of payments described in this subclause (iv).
     2.4 Distribution of TDSP-Related Tophat Benefit .
     (a)  Benefits Accrued Prior to August 1, 2005 . The following rules shall apply with respect to the TDSP-Related Tophat Benefits accrued prior to August 1, 2005:
     (i) The TDSP-Related Tophat Benefit accrued by a Participant who previously elected to receive such benefit upon Termination of Employment or Retirement shall be distributed to such Participant as soon as practicable after July 31, 2005 during the calendar year 2005; and
     (ii) The TDSP-Related Tophat Benefit accrued by a Participant who previously elected to receive such benefit on an annual basis shall be distributed to such Participant, to the extent not previously distributed, in August 2005.
     (b)  Benefits Accrued After July 31, 2005 . The TDSP-Related Tophat Benefit accrued by a Participant in any calendar year with respect to services after July 31, 2005 shall be distributed in a lump sum payment no later than March 15 of the calendar year following the calendar year in which such benefit is accrued.
ARTICLE 3
Participants’ Termination of Employment
     3.1 TDSP-Related Tophat Benefits .
     (a)  Termination . If the Participant Retires or incurs a Termination of Employment by means other than death, such Participant shall receive a lump sum payment equal to the value, as of the date of such Termination of Employment or Retirement, of the Participant’s TDSP-Related Tophat Benefit with respect to the year of Termination of Employment or Retirement. Such TDSP-Related Tophat Benefit shall be distributed 30 days after such Termination of Employment or Retirement.
     (b)  Death . If the Participant incurs a Termination of Employment by reason of death, his or her Beneficiary shall receive a lump sum payment equal to the value, as of the date of such Termination of Employment, of the Participant’s TDSP-Related Tophat Benefit with respect to the year of such Termination of Employment. Such benefit shall be paid 60 days after the Participant’s date of death.

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     3.2 Retirement Plan-Related Tophat Benefits .
     (a)  Termination .
     (i) If the Participant incurs a Termination of Employment by means other than death, and the Participant is not vested in his or her benefits under the Retirement Plan, such Participant shall receive no benefit under this Plan.
     (ii) If the Participant incurs a Termination of Employment after January 1, 2005 other than due to death, is then less than 55 years old and is vested in his or her benefits under the Retirement Plan, such Participant shall receive a lump sum payment on the six month anniversary of the Participant’s Termination of Employment in an amount equal to the present value of such Retirement Plan-Related Tophat Benefit as of the date of such six month anniversary. Such lump sum payment shall be determined using a discount rate equal to the then-current yield to maturity on 30-year Treasury securities, or in such other manner as the Committee reasonably determines
     (iii) Special Transitional Rules . Notwithstanding Section 3.2(a)(ii), pursuant to the Transitional Rules the lump sum payment payable to a Participant under Section 3.2(a)(ii) or 3.2(b) who ( x ) had a Termination of Employment in 2005 shall be made 30 days following such Termination of Employment, on the basis that the Participant shall have terminated participation in the Plan, and shall be valued as of the date of such Termination of Employment, or ( y ) had a Termination of Employment prior to 2004 but did not receive a lump sum payment prior to 2005, shall be paid on January 31, 2006, on the basis that the Participant shall have terminated participation in the Plan as of January 1, 2006, and shall be valued as of January 1, 2006.
     (b)  Retirement . When a Participant Retires after January 1, 2005, he or she shall receive his or her Retirement Plan-Related Tophat Benefit in whichever of the available forms of distribution (and with any actuarial reduction, as appropriate) shall be required under Section 3.2(a) or elected by such Participant in accordance with Section 2.3; provided that a Participant who Retires and commences distribution of his Retirement Plan-Related Tophat Benefit after the 409A Election Date, but fails to make a distribution election in accordance with Section 2.3 with respect to a payment commencing after the 409A Election Date shall be paid the present value of his or her Retirement Plan-Related Tophat Benefit in the form of the four-year period certain annuity referenced in subclause (i) below.
     (i) Four-Year Certain Annuity . The Retirement Plan-Related Tophat Benefit may be paid in a four-year period certain annuity that is actuarially equivalent to the lump-sum present value (calculated using the most recently published mortality table that is generally accepted by American actuaries and

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reasonably applicable to the Plan, and a 6 percent annual interest rate or discount rate) of the Participant’s Retirement Plan-Related Tophat Benefit. Except to the extent commencement of such benefits is delayed in accordance with Section 2.3(b)(iv), the first payment will paid on the six-month anniversary of the date of the Participant’s Retirement; provided that, at the time the Participant makes an election pursuant to Section 2.3(b), a Participant who is not subject to the delay in commencement applicable under Section 2.3(b)(iv) may elect to have the first payment be payable on the later of ( i ) the six-month anniversary of the Participant’s Termination of Employment with the Company and its Subsidiaries and ( ii ) the first business day of the calendar year following the Participant’s Retirement. Each installment after the first installment shall be paid on each of the first three anniversaries of the date on which the first installment is due to be paid.
     (ii) Single Life Annuity . The Retirement Plan-Related Tophat Benefit may be paid in the form of a single life annuity for the Participant’s lifetime payable in equal monthly installments.
     (iii) Ten-Year Period Certain and Life . The Retirement Plan-Related Tophat Benefit may be paid in the form of an annuity in monthly installments for ten years from the Participant’s Retirement and for life thereafter if the Participant survives such ten-year period. If the Participant’s death occurs within such ten-year period, annuity payments shall continue for the remainder of the ten-year period to the Participant’s Beneficiary. To provide for the possibility that benefit payments will continue after the Participant’s lifetime, the benefit payable to the Participant during his or her lifetime under this Section 3.2(b)(iii) shall be reduced from the benefit that would have been payable as a single life annuity under Section 3.2(b)(ii), based on the same factors that would apply were such benefit payable under the Retirement Plan, including the Participant’s age. No adjustment shall be made to the amount payable to the Participant in the event that no survivor benefit should become payable because the Participant lives longer than 10 years following the date the Retirement Plan-Related Tophat Benefit commence to be paid.
     (iv) Joint and Survivor Annuity . The Retirement Plan-Related Tophat Benefit may be paid in the form of a joint and survivor annuity so that the Participant receives a monthly installment for the duration of the Participant’s life and the Participant’s Beneficiary receives a monthly installment for the duration of his or her life in an amount that is either 50% or 100% of the Participant’s monthly installment, as so elected by the Participant. To provide for the possibility that benefit payments will continue after the Participant’s lifetime, the benefit payable to the Participant during his or her lifetime under this Section 3.2(b)(iv) shall be reduced from the benefit that would have been payable as a

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single life annuity under Section 3.2(b)(ii), based on the same factors that would apply were such benefit payable under the Retirement Plan, including the Participant’s age and that of his or her Beneficiary. No adjustment shall be made to the amount payable to the Participant in the event that no survivor benefit should become payable because the Beneficiary that the Participant selects shall not survive the Participant. Notwithstanding the previous sentence, if the Beneficiary selected hereunder is the Participant’s spouse and if said spousal Beneficiary dies prior to the fifth anniversary of the Participant’s retirement date, the Participant’s benefit shall be adjusted to be that which would have been payable as a single life annuity under Section 3.2(b)(ii), as of the first of the month coinciding with or next following the spouse’s date of death. There will be no actuarial adjustment made in calculating the benefit under this Section 3.2(b)(iv) as a result of the availability of this pop-up benefit other than as provided to reflect commencement of benefits prior to the Normal Retirement Date.
     (v) Annuities . Unless the Participant shall have elected a later commencement date pursuant to Section 2.3(b), including but not limited to Section 2.3(b)(iv), payment of the first monthly installment of any annuity (other than the four-year period certain annuity) shall commence on the six month anniversary of the Participant’s Retirement. The first payment to be made hereunder in respect of any annuity shall be equal to the sum of ( i ) the monthly payments that would have been made to such Participant from the date of his Retirement (but for the six month delay required to comply with Section 409A of the Code), and ( ii ) an amount of interest on each monthly payment referenced in subclause (i), at the short-term applicable federal rate (within the meaning of Section 1274(d) of the Code), compounded semi-annually, in effect for January in the calendar year in which the Participant Retires (or at such other rate as the Committee shall specify from time to time), from the date such payment would have been made to the six month anniversary of such Retirement. Each subsequent payment of any monthly annuity payment will be in the amount, and paid at the time, it is otherwise payable without regard to the six month delay in payment required hereunder. Notwithstanding the preceding sentence, with respect to a Retirement that occurred in 2005, amounts that would have been payable for the lesser of ( i ) the six months following such Retirement or ( ii ) through December 31, 2005, may be paid in accordance with the 409A Transition Rules at any time during 2005, on the basis that such payment is a partial cancellation of such Participant’s participation in the Plan.
     (vi) Survivor Benefits . If the Participant’s Retirement Plan-Related Tophat Benefit is payable to the Participant in the form of the four-year certain annuity, and the Participant dies after Retirement but prior to the date the last installment of such benefit is paid, any installments remaining to be paid at the

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date of the Participant’s death will be paid to the Participant’s Beneficiary at the same time and in the same amounts as they would have been paid to the Participant. If the Participant has Retired and selected an optional form of distribution (other than the four-year period certain annuity) under which a portion of such Retirement Plan-Related Tophat Benefit is eligible to be paid to his Beneficiary after the Participant’s death, such benefits shall be paid in accordance with the terms of the form of distribution elected by the Participant; that is ( i ) with respect to any remaining payments related to the minimum 120 payments payable under the Ten-Year Certain and Life Option, such remaining monthly payments shall continue to be paid to the Participant’s Beneficiary at the same time and in the same amounts as they would have been payable to the Participant, until a total of 120 monthly payments have been made to the Participant and the Participant’s Beneficiary (at which time payment to the Beneficiary will cease) and ( ii ) with respect to either joint and survivor annuity options, in the form of an annuity for the lifetime of the Participant’s Beneficiary (if living at the time of the Participant’s death) in a monthly amount that is equal to the percentage (50% or 100%) of the monthly benefit payable to the Participant immediately prior to his or her death that was elected by the Participant pursuant to Section 3.2(b)(iv). In the event that a Participant dies within the six month period following Retirement and has elected to receive his or her Retirement Plan-Related Tophat Benefit in a form of an annuity (other than the four-year period certain annuity) that provides for survivor benefits to be paid following his death, any survivor benefit payable to the Participant’s Beneficiary in respect of the Retirement Plan-Related Tophat Benefit shall commence on the first day of the month following the Participant’s death and the Participant’s Beneficiary shall immediately receive any benefits that would have been payable to the Participant assuming payment to the Participant had commenced without delay following his Retirement, including, where applicable, interest at the rate specified in Section 3.2(b)(v) for the period of any such delay in payment.
     (vii) Right to Adjust . The Committee shall have the right to adjust Retirement Plan-Related Tophat Benefit payable under this Plan to correct errors, and/or to provide uniform treatment of Participants, retired Participants or Beneficiaries.
     (c)  Death .
     (i) If the Participant incurs a Termination of Employment by reason of death, and the Participant has no surviving spouse, no benefits shall be paid with respect to the Participant under this Plan.
     (ii) If the Participant incurs a Termination of Employment by reason of death, and the Participant has a surviving spouse, such surviving spouse shall receive a Retirement Plan-Related Tophat under this Plan if and to the extent he

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or she ( A ) receives a spouse’s pre-retirement death benefit under the Retirement Plan and ( B ) such pre-retirement death benefit is less than the pre-retirement death benefit that would have been payable but for the operation of Legal Limits. The benefit payable under this Section 3.2(c)(ii) shall equal the excess of ( A ) the pre-retirement death benefit that would have been payable under the Retirement Plan disregarding the Legal Limits over ( B ) the pre-retirement death benefit actually payable under the Retirement Plan, and shall be paid in the form of an annuity over the life of the surviving spouse. Such annuity shall commence within 60 days after the Participant’s date of death. The annuity payable to the surviving spouse shall be based on the actuarial assumptions contained in the Retirement Plan.
     (iii) If a Participant incurs a Termination of Employment or Retires other than due to death and is to receive payment of the Retirement Plan-Related Tophat in a lump sum under Section 3.2(a) or in an annuity without a survivor benefit, and dies prior to payment of such lump sum or commencement of such annuity due to the six-month delay in payment required under either such Section, such lump sum or the amount that would have been payable to such Participant as an annuity (with interest determined as provided above in Section 3.2(b)(v)) shall be paid to such Participant’s Beneficiary on the six month anniversary of the Participant’s Termination of Employment or Retirement, as the case may be.
     3.3 Lump Sum Cash-Out of De Minimis Tophat Benefits . Notwithstanding any other provision herein to the contrary, a Participant who Retires or incurs a Termination of Employment and the sum of whose TDSP-Related Tophat Benefit and Retirement Plan-Related Tophat Benefit do not together exceed the amount limitation applicable to accelerated cash-out of de minimis payments permitted under Section 409A of the Code and the IRS guidance thereunder, shall be paid the value of his or her tophat benefits hereunder in a lump sum on or before the later of ( i ) December 31 of the calendar year in which the Termination of Employment or Retirement occurs or ( ii ) the date that is 2 1 / 2 months after the date of the Termination of Employment or Retirement.
ARTICLE 4
Beneficiary Designation
     4.1 Beneficiary Designation . Except with respect to benefits hereunder that are payable solely to a surviving spouse, each Participant shall have the right, at any time, to designate any person, persons or entity as his or her primary and secondary Beneficiary or Beneficiaries to receive amounts payable under the Plan.
     4.2 Change of Beneficiary Designation . Any Beneficiary designation may be changed by a Participant at any time by executing and filing a form prescribed by the Committee. The filing of a new Beneficiary designation form will cancel all Beneficiary designations previously filed. The Committee shall be entitled to rely on the last

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designation filed by the Participant prior to his or her death. In addition, the Committee may provide that the Beneficiary designation made under the DCP and/or Retirement Plan shall apply to the respective tophats that may be provided under this Plan.
     4.3 No Beneficiary Designation . If a Participant fails to designate a Beneficiary in accordance with Section 4.1, or if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the benefits (if any) payable under the Plan upon the Participant’s death, then the Participant’s designated Beneficiary shall be deemed to be the Participant’s surviving spouse. If the Participant has no surviving spouse, any benefits payable under the Plan upon the Participant’s death shall be paid to the personal representative, executor or administrator of the Participant’s estate.
     4.4 Effect of Payment . The payment of benefits under the Plan to the named Beneficiary shall completely discharge the Employer’s obligations under this Plan.
ARTICLE 5
Termination and Modification
     5.1 Termination and Amendment . The Company reserves the right to terminate or amend the Plan in whole or in part at any time. Such termination or amendment shall have a binding effect on Participants and their Beneficiaries. Upon termination of the Plan, the Participants’ accounts shall be paid out in accordance with the distribution provisions contained in the Plan immediately prior to such termination.
     5.2 Limited Power of President to Amend Plan . The President is empowered to amend, restate or otherwise change the Plan ( i ) as counsel may advise to be necessary or appropriate in order to ensure that the Plan continues to operate as a plan of deferred compensation for tax purposes, remains exempt from many of the provisions of ERISA and otherwise continues to fulfill the purposes for which the Plan was adopted and intended, ( ii ) as he or she may deem necessary in order to make technical or clarifying changes not inconsistent with or in order to fulfill the purposes of the Plan, ( iii ) as counsel may advise to be necessary to reflect new or revised Legal Limits, and ( iv ) in other respects except as will materially increase the cost of the Plan to the Company or its subsidiaries or the benefits of the Plan to Participants.
ARTICLE 6
Administration
     6.1 Committee Duties . This Plan shall be administered by a Committee, the members of which shall be appointed by the Board of Directors of the Company. The Committee shall have the authority to make, amend, interpret, and enforce all appropriate rules, regulations, and procedures for the administration of this Plan, and to decide or resolve any and all questions including interpretations of this Plan, as may arise in connection with the Plan. Members of the Committee who are eligible to participate in

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the Plan may participate to the same extent as other Participants but shall not take part in any determination directly relating only to their own participation or benefits.
     6.2 Agents . In the administration of this Plan, the Committee may, from time to time, employ agents, including employees of the Company and Participants, and may delegate to them such administrative duties as it sees fit, and may from time to time consult with counsel who may be counsel to the Employer.
     6.3 Binding Effect of Decisions . The decision or action of the Committee with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final, conclusive and binding upon all persons having any interest in the Plan.
     6.4 Indemnity of Committee . The Company and Employer shall indemnify and hold harmless the members of the Committee and their agents and delegates against any and all claims, losses, damage, expense (including counsel fees) or liability arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Committee or any of its members or agents.
     6.5 Section 409A of the Code . Notwithstanding anything herein to the contrary, neither the Committee nor any delegate thereof shall take any action under the Plan, including without limitation pursuant to this Section 6, which would result in the imposition of an additional tax under section 409A of the Code on a Participant.
ARTICLE 7
Miscellaneous
     7.1 Unsecured General Creditor . Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interest or claims in any property or assets of any Employer, nor shall they be Beneficiaries of, or have any rights, claims or interests in any life insurance policies, annuity contracts or the proceeds therefrom owned or which may be acquired by the Employer (“ Policies ”). Such Policies or other assets of the Employer shall not be held under any trust for the benefit of Participants, their Beneficiaries, heirs, successors or assigns, or held in any way as collateral security for the fulfilling of the obligations of the Employer under this Plan. Any and all of the Employer’s assets and Policies shall be, and remain, the general assets of the Employer. The Employer’s obligation under the Plan shall merely constitute an unfunded and unsecured promise of the Employer to pay money in the future.
     7.2 Nonassignability . Neither a Participant nor any other person shall have any right to sell, assign, transfer, pledge, mortgage or otherwise encumber, hypothecate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof or interest therein. No part of the amounts payable shall, prior to actual

15


 

payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant’s or any other person’s bankruptcy or insolvency.
     7.3 Not a Contract of Employment . The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between the Employer and the Participant, and the Participant (or his or her Beneficiary) shall have no rights against the Employer except as may otherwise be specifically provided herein. Moreover, nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of the Employer or to deny to the Employer the right to discipline a Participant (including reducing his or her salary) or discharge him or her at any time.
     7.4 Health Information . The Participant shall provide to the Company, if so requested and as a precondition for Plan participation, all health information and other information as the Company may require in order to purchase Policies.
     7.5 Governing Law . The provisions of the Plan shall be construed and interpreted according to the laws of the State of New York.
     7.6 Withholding . All payments that are to be made by an Employer to a Participant shall be subject to withholding for any and all taxes as the Employer in its discretion deems appropriate.
     7.7 Binding Effect . The provisions of this Plan shall bind the Participant and his or her Beneficiaries, and shall bind and inure to the benefit of the Employer and its successors and assigns.
     7.8 Borrowing . No portions of any accounts may be borrowed by a Participant or his or her Beneficiaries under this Plan.
     7.9 Validity . In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal and invalid provision had never been inserted herein.
     7.10 Incapacity of Person Entitled To Payment . If the Committee shall reasonably determine, upon evidence satisfactory to it, that it is not desirable, because of the incapacity of the person who shall be entitled to receive any payment in accordance with the provisions of the Plan, to make such payment directly to such person, the Committee may apply such payment for the benefit of such person in any way that the Committee shall deem advisable, or the Committee may make such payment to any third person who, in the judgment of the Committee, will apply such payment for the benefit of the person entitled thereto. Such payment for the benefit of the person entitled thereto, or

16


 

to a third person for his or her benefit, shall be a complete discharge of all liability with respect to such payment. The Committee may retain any amount that would otherwise be payable in accordance with the provisions of the Plan to a person who may be under legal disability until a representative of such person competent to receive such payment on his or her behalf shall have been appointed pursuant to law.
     7.11 Captions . The captions of the articles, sections and paragraphs of the Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions.
     7.12 Construction . Whenever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply.

17

 

Exhibit 10.4
NATIONAL FUEL GAS COMPANY
AND PARTICIPATING SUBSIDIARIES
EXECUTIVE RETIREMENT PLAN
Amended and Restated as of September 20, 2007

 


 

TABLE OF CONTENTS
         
ARTICLE   PAGE NO.
 
   
ARTICLE 1 Purpose
    1  
 
       
ARTICLE 2 Definitions
    1  
 
       
ARTICLE 3 Determination of Retirement Benefits
    7  
 
       
ARTICLE 4 Vesting; Forfeiture
    11  
 
       
ARTICLE 5 Form of Payment of Benefits
    12  
 
       
ARTICLE 6 Source of Payment
    17  
 
       
ARTICLE 7 Administration of the Plan
    17  
 
       
ARTICLE 8 Amendment and Termination
    19  
 
       
ARTICLE 9 General Provisions
    20  
 i 

 


 

ARTICLE 1
PURPOSE
     1.1 National Fuel Gas Company established this National Fuel Gas Company and Participating Subsidiaries Executive Retirement Plan effective as of February 19, 1987 for the purpose of attracting and retaining executives, and for these additional purposes: ( 1 ) to provide retirement benefits to eligible employees in addition to basic retirement benefits provided them under the National Fuel Gas Company Retirement Plan as it may be amended and restated; ( 2 ) to provide retirement benefits to such employees to make up for benefit reductions, if any, under the National Fuel Gas Company Retirement Plan caused by participation in the National Fuel Gas Company Deferred Compensation Plan, as it may be amended and restated; ( 3 ) to provide retirement benefits to such employees without regard to the $200,000 limit on qualified plans’ covered compensation that became effective respecting the National Fuel Gas Company Retirement Plan effective July 1, 1989 (and as that limit may change from time to time); and ( 4 ) to provide to such employees benefits which would have been payable from the tax-exempt trust under the National Fuel Gas Company Retirement Plan but for the limitations placed by Section 415 of the Code on benefits payable and contributions made with respect to such employees under such plans.
     1.2 The National Fuel Gas Company and Participating Subsidiaries Executive Retirement Plan is intended to constitute an unfunded deferred compensation plan under Section 201(2) of the Act and the Company’s obligation to pay benefits hereunder, if any, is unfunded and unsecured.
     1.3 The National Fuel Gas Company and Participating Subsidiaries Executive Retirement Plan has been amended to comply with the requirements of Section 409A of the Code.
ARTICLE 2
DEFINITIONS
     When used herein, the following terms shall have the following meanings:
     2.1 Act means the Employee Retirement Income Security Act of 1974, as amended from time to time.
     2.2 Annual Cash Compensation with respect to any Member shall include the following:

 


 

     (i) The Member’s base salary, whether or not the receipt of a portion thereof has been deferred;
     (ii) The Member’s compensation (whether or not the receipt of all or a portion thereof has been deferred) under National Fuel Gas Company’s short-term annual incentive program, known as the Annual At Risk Compensation Incentive Program (“ AARCIP ”) or any successor program thereto; and
     (iii) The Member’s other performance-related lump sum compensation (i.e. lump sum payments other than expense or tuition reimbursements, moving expense reimbursements, lump sum payments for eligible unused vacation, worker’s compensation payments, award payments for suggestions, severance payments or any other non-performance related lump sum payments) made on or after August 1, 1997.
The Member’s Annual Cash Compensation shall also exclude all commissions, stock, option or SAR awards, restricted stock awards, special allowances, supplemental compensation, any payment under the National Fuel Gas Company Performance Incentive Program and any other extra compensation or incentives or bonuses not expressly included in Annual Cash Compensation pursuant to the foregoing provisions of this Section 2.2.
     2.3 Basic Pension Plan means the National Fuel Gas Company Retirement Plan, as amended and restated from time to time.
     2.4 Basic Pension Plan Benefit means the benefit, stated as a monthly annuity for the Member’s life, commencing at the Member’s Normal Retirement Date, under which the annual payments shall equal the Benefit Base as determined under the Basic Pension Plan, taking into account the effect, if any, of the Benefit Limitations and the fact that deferrals under the National Fuel Gas Company Deferred Compensation Plan are excluded from the definition of Final Average Pay under the Basic Pension Plan.
     2.5 Beneficiary means the person or persons entitled to receive the amount, if any, payable under the Plan upon the death of a Member or retired Member in the Plan in accordance with the form of benefit distribution selected by the Member pursuant to Sections 5.2 and 5.3.
     2.6 Benefit Limitations means ( i ) the maximum “annual benefit” payable under the Basic Pension Plan in accordance with Section 415 of the Code and the implementing provisions of the Basic Pension Plan (as they operate in conjunction with the relevant provisions of other Company employee benefit plans), and ( ii ) the maximum amount of annual compensation of an employee that may be taken into account under the Basic Pension Plan in accordance with Section 401(a)(17) of the Code, as amended and supplemented, and the implementing provisions of the Basic Pension Plan.

2


 

     2.7 Board of Directors means the Board of Directors of National Fuel Gas Company.
     2.8 Code means the Internal Revenue Code of 1986, as amended from time to time.
     2.9 Committee means the committee appointed from time to time by the Board of Directors to administer the Plan.
     2.10 Company means National Fuel Gas Company and each of the following subsidiaries, which participate in the Plan: National Fuel Gas Distribution Corporation, National Fuel Gas Supply Corporation, Seneca Resources Corporation, National Fuel Resources Inc., Penn-York Energy Corporation, Empire Exploration, Inc. and Horizon Energy Development, Inc., each of which has adopted or has indicated that it will adopt the Plan.
     2.11 Early Retirement Date shall be the Retirement Date selected by the Member that is no earlier than the first day of the calendar month immediately following or coinciding with the Member’s 55th birthday, or any first of a month thereafter, but prior to the Member’s Normal Retirement Date, provided the Member is Vested in either or both the Top-Hat Benefit or the Supplemental Benefit.
     2.12 Employment Year is the consecutive 12-month period commencing on the date on which the Member commenced employment with a Company, and each subsequent 12-month period commencing on each anniversary thereof.
     2.13 Final Average Pay means an amount equal to the average of the Annual Cash Compensation payable by the Company to a Member for the 60 consecutive month period during the 120 consecutive month period immediately preceding the date the Member retires which results in the Member receiving the highest average. If an AARCIP or other annual performance bonus is granted following the Member’s retirement date, unless such payment is expressly excluded from consideration in the computation of the Member’s benefits, that award shall be used in determining the Member’s Final Average Pay, if it is payable in connection with employment periods included in the 60-month period referred to above. In this event, the Member’s Retirement Benefits shall be increased, once the effect of such award is determined, and the increase shall be made retroactive to the Member’s Retirement Date, without interest (provided that no such retroactive application shall have the effect of accelerating the date at which Retirement Benefits shall commence to be paid in accordance with Section 5.2).
     Notwithstanding the preceding paragraph of this Section 2.13, if any such post retirement AARCIP award included in the definition of Annual Cash Compensation is used in determining Final Average Pay hereunder, AARCIP awards relating to no more

3


 

than five of National Fuel Gas Company’s fiscal years may be used in determining Final Average Pay. An example of the effect of this provision is as follows. Assume that a Member retires on October 1, 2006, and that his salary and AARCIP awards were as follows for the following calendar year:
                 
            AARCIP Award (relating to
            fiscal year ending September
    Salary   30 but paid in December)
2001
  $ 480,000     $ 120,000  
2002
  $ 540,000     $ 150,000  
2003
  $ 600,000     $ 180,000  
2004
  $ 660,000     $ 210,000  
2005
  $ 780,000     $ 240,000  
2006
  $ 840,000     $ 270,000  
     This Member’s Final Average Pay would be $876,000 computed as follows:
[9/12 ($840,000) + 12/12 ($780,000) + 12/12 ($660,000) + 12/12 ($600,000) + 12/12 ($540,000) + 3/12 ($480,000) + $270,000 + $240,000 + $210,000 + $180,000 + $150,000] ÷ 5.
     2.14 409A Election Date means December 31, 2007 or such other date as the Company shall determine to be the latest date that benefits payable under the Plan may commence to be paid based on the Member’s election as to the form and timing of payment in respect of his or her benefits payable under the Basic Pension Plan without violating the election requirements applicable under Section 409A of the Code and any regulations, proposed regulations or other guidance promulgated thereunder.
     2.15 Member means any person employed by a Company who is designated as a Member by the Chief Executive Officer of National Fuel Gas Company.
     2.16 Normal Retirement Date is the first day of the month coinciding with or immediately following the Member’s 65th birthday.
     2.17 Plan means the National Fuel Gas Company and Participating Subsidiaries Executive Retirement Plan as set forth herein and as amended and restated from time to time.
     2.18 Retirement Benefits means the benefits payable under this Plan.
     2.19 Retirement Date is the date with respect to which payment of Retirement Benefits under the Plan commence (which for this purpose shall be determined without regard to any six-month delay pursuant to Section 5.1 hereof).

4


 

     2.20 Social Security Benefit means the annual amount estimated by the Committee to be payable to a Member under the Social Security Act of 1935, as amended, at the Member’s Retirement Date, calculated on the assumption that the Member will not receive any future wages that would be treated as such for purposes of that act. If a Member’s Retirement Date precedes his attainment of age 62, the amount estimated to be payable to the Member at age 62 (without assuming any cost of living increases) shall be reduced as follows. The percentage early retirement factor applicable at age 62 (e.g., 80%) shall be further reduced by .75% per month for the first 24 months, and by         .5% per month for the remaining months, if any, by which the Member’s Retirement Date precedes his attainment of age 62. The Social Security Benefit, once calculated, will be frozen as of the Member’s Retirement Date. For example, assume that the Member retired on his 59th birthday, and that his estimated Social Security benefit beginning at age 65 (Primary Insurance Amount) was $15,912 per annum. Using current Social Security tables, his age 62 early retirement factor (80%) would be further reduced to 56%. This Member’s Social Security Benefit would therefore equal $8,910.72.
     2.21 Social Security Offset means, in respect of a Member’s Supplemental Benefit, the product of ( i ) .0125 times the Member’s Years of Service times ( ii ) the Member’s Social Security Benefit.
     2.22 Supplemental Benefit means a benefit which is stated as a monthly annuity for the Member’s lifetime, commencing at the Member’s Normal Retirement Date, under which the annual payments shall equal the remainder of (1) minus (2) below, where (1) and (2) are:
  (1)   the Member’s Total Benefit Base;
 
  (2)   the sum of
  (i)   the Member’s Social Security Offset and
 
  (ii)   the Member’s Basic Pension Plan Benefit.
If the remainder of (1) minus (2) is negative, the Member’s Supplemental Benefit shall be zero.
     2.23 Termination of Employment means the termination of a Member’s employment with the Company and each other entity which is in the same controlled group of affiliated employers as the Company, as determined in accordance with the rules under Section 414(b) and (c) of the Code (the “ 409A Service Recipients ”); provided, however, that in the case of any Member who ceases to be an employee but continues to provide services to any of the 409A Service Recipients following his termination of employment, or is reasonably expected (at the time of such termination of employment) to provide services to any of the 409A Service Recipients within 12 months of such

5


 

termination of employment (a “ Continuing Service Member ”), the term Termination of Employment (and any similar terms used in this Plan) shall be deemed to refer to the date at which such Member incurs a “separation from service,” within the meaning of Section 409A of the Code and the regulations promulgated thereunder, from the 409A Service Recipients. This means that rather than being entitled to receive a distribution hereunder upon, or at a specified time following, a Termination of Employment, a Continuing Service Member shall only be entitled to receive such distribution upon, or at a specified time following, such a separation from service.
     2.24 Top-Hat Benefit means a benefit which is stated as a monthly annuity for the Member’s life, commencing at the Member’s Normal Retirement Date, under which the annual payments shall equal the remainder of (1) minus (2) below, where (1) and (2) are:
  (1)   the Member’s Benefit Base as determined under the Basic Pension Plan, but without reduction on account of Benefit Limitations and adjusted as if deferrals under the National Fuel Gas Company Deferred Compensation Plan were not excluded from the definition of Final Average Pay under the Basic Pension Plan and
 
  (2)   the Member’s Basic Pension Plan Benefit.
     2.25 Total Benefit Base means, with respect to a Vested Member, a monthly annuity for the Member’s life, commencing at his Normal Retirement Date, under which the annual payments shall equal an amount calculated by multiplying the sum of (1) and (2) by (3), where (1), (2) and (3) are:
  (1)   .0197 times the Member’s Years of Service not in excess of 30;
 
  (2)   .0132 times the Member’s Years of Service, if any, in excess of 30 (but not to exceed 10);
 
  (3)   the Member’s Final Average Pay.
     2.26 Vesting
     (a) A Member’s Top-Hat Benefit shall vest in the same manner and subject to the same service requirements and/or other conditions that apply to become vested in the retirement benefits provided under the Basic Pension Plan.
     (b) A Member’s Supplemental Benefit shall vest on the later of ( i ) the first of the month coinciding with or immediately following his 55th birthday or ( ii ) the date on which the Member has completed five Years of Service with a Company.
     A “Vested” Member is a Member with respect to whom “Vesting” has occurred.

6


 

     2.27 Years of Service equals the number of Employment Years completed by a Member. With respect to an Employment Year in which a Member completed 1,000 or more hours, but less than a full year of service, the Member shall be credited with a fractional Year of Service equal to the quotient of (i) the number of full months of the Member’s service during such Employment Year and (ii) 12. Years of Service shall not exceed 40. Notwithstanding the foregoing sentence, if a Member retires prior to having completed 1,000 hours in his final Employment Year, the Member shall be credited with a fractional Year of Service as calculated above. No more than one Year of Service shall be credited in any Employment Year.
     2.28 In construing the Plan, masculine pronouns shall refer to both males and females, as appropriate.
ARTICLE 3
DETERMINATION OF RETIREMENT BENEFITS
     3.1 Introduction . The Plan provides a Member with a two-part benefit: the Top-Hat Benefit and the Supplemental Benefit. The Top-Hat Benefit makes a Member whole for any reduction in the regular pension he receives under the Basic Pension Plan resulting from Internal Revenue Code limitations and/or his participation in the National Fuel Gas Company Deferred Compensation Plan. The Supplemental Benefit provides an additional retirement benefit to the Basic Pension Plan.
     A Member who does not satisfy the requirements to Vest in a Top-Hat Benefit prior to the date his service for the Company terminates shall receive no benefit under the Plan. A Member who Vests in the Top-Hat Benefit, but does not Vest in the Supplemental Benefit, shall receive only a Top-Hat Benefit. A Member who is Vested in both the Top-Hat Benefit and the Supplemental Benefit and who terminates service with the Company after having attained an Early Retirement Date shall receive the Top-Hat Benefit and a portion of the Supplemental Benefit, as described in Section 3.3.
     3.2 Benefit for Member Retiring at Normal Retirement Date . A Member who retires on or after the Member’s Normal Retirement Date shall receive only the Supplemental Benefit if he shall have Vested in such Supplement Benefit. A Member who retires on or after his Normal Retirement Date, but has not Vested in the Supplement Benefit, shall receive the Top-Hat Benefit.
     3.3 Benefit for Members Terminating Service After Qualifying for Early Retirement .
     (a) The benefit payable under the Plan to a Vested Member whose Termination of Employment occurs after the Member has satisfied the conditions to retire

7


 

at an Early Retirement Date shall equal the sum of (1) plus [(2) minus (3)], where (1), (2) and (3) are:
  (1)   the product of (i) and (ii), where (i) and (ii) are
  ( i )   the Member’s Top-Hat Benefit,
 
  ( ii )   the early retirement percentage that would be applicable to the Member were the Top-Hat Benefit actually payable from the Basic Pension Plan commencing on the date on which payment of the Top-Hat Benefit is to commence hereunder (regardless of when payment of the Basic Pension Plan Benefit actually commences);
  (2)   the product of (i) and (ii ), where (i) and (ii) are
  ( i )   the remainder of (x) minus [the sum of (y) and (z)], where (x), (y) and (z) are:
  ( x )   the Member’s Total Benefit Base;
 
  ( y )   the amount determined under Section 3.3(a)(1);
 
  ( z )   (A) the Member’s Basic Pension Plan Benefit times (B) the early retirement percentage that would be applicable to the Member were the Basic Pension Plan to commence on the date on which payment of the Top-Hat Benefit is to commence hereunder (regardless of when payment of the Basic Pension Plan Benefit actually commences);
  ( ii )   the Member’s Early Retirement Percentage as determined in Section 3.3(b) below; and
  (3)   the Member’s Social Security Offset.
Notwithstanding the foregoing, if the remainder of subclause (2) minus subclause (3) above is less than zero, then the Member shall receive (instead of the benefit calculated pursuant to the foregoing formula) the benefit described in subclause (1) above.

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     (b) The Early Retirement Percentage applicable under the Plan to the Member’s Supplemental Benefit is determined in accordance with the following scale:
         
Retirement Age   Early Retirement Percentage
65
    100  
64
    94  
63
    88  
62
    82  
61
    70  
60
    58  
59
    46  
58
    34  
57
    22  
56
    10  
55 years and 2 months
    0  
     The Early Retirement Percentage determined in accordance with the above scale respecting ages 62, 63 and 64, shall be increased by 1/2 of 1% for each whole calendar month by which a Member’s Early Retirement Date follows the first of the month coinciding with or immediately following his 62nd, 63rd, or 64th birthday, as the case may be. The Early Retirement Percentage determined in accordance with the above scale respecting ages 55 years and 2 months, 56, 57, 58, 59, 60, and 61, shall be increased by 1% for each whole calendar month by which his Early Retirement Date follows the first of the month coinciding with or immediately following his 55 year and 2 month, 56th, 57th, 58th, 59th, 60th and 61st birthdays, as the case may be. Furthermore, the Early Retirement Percentage shall be increased by .125% for each whole calendar month by which a Member’s Years of Service exceed 30; provided, however, that this shall never result in an Early Retirement Percentage in excess of 100%. (In the event a Member desires to retire on the earliest possible Early Retirement Date, i.e., on the first of the month coinciding with or immediately following his 55th birthday, the increase in percentage as a result of Years of Service in excess of 30 shall be made from a base percentage of -2%, in computing Early Retirement Percentage.)
     (c) The provisions of this Section 3.3 are illustrated by the following example. Assume that (i) a Member has 30 Years of Service under this Plan (29 under the Basic Pension Plan) and a Final Average Pay of $300,000; (ii) he desires to retire in 2006 at age 58 (10% reduction under the Basic Pension Plan); (iii) the maximum amount of the Member’s Final Average Pay allowed to be taken into account under the Basic Pension Plan applicable limits under Section 401(a)(17) of the Code is limited to $220,000; and (iv) his Social Security Benefit was $15,000:

9


 

         
Step 1. Calculate the Top-Hat Benefit
       
 
       
[(.015 x $300,000) x 29] — the Member’s Basic Pension Plan Benefit
       
 
       
The Member’s Base Pension Plan Benefit is
       
[(.015 x $220,000) x 29]
       
($3,300) x 29 = $95,700
       
so the Top-Hat Benefit is
       
[(.015 x $300,000) x 29] -$95,700
       
[$4,500 x 29] — $95,700
       
$130,500 - 95,700=
  $ 34,800  
 
       
Step 2. Adjust the Top-Hat Benefit for Early Retirement
       
 
       
$34,800 x .9 =
  $ 31,320  
 
       
Step 3. Determine the Total Benefit Base
       
 
       
[(.0197 x $300,000) x 30]
$5,910 x 30 =
  $ 177,300  
 
       
Step 4. Reduce the Total Benefit Base by the Top-Hat Benefit and the
       
Basic Pension Plan Benefit, each as Adjusted for Early Retirement
       
 
       
$177,300 - [Adjusted Top-Hat Benefit + Adjusted Basic Pension
       
Plan Benefit]
       
 
       
$177,300 - [$31,320 + (95,700 x .9)]
       
$177,300 - [$31,320 + 86,130]
       
$177,300 - $117,450 =
  $ 59,850  
 
       
Step 5. Adjust Reduced Total Benefit Base for the Early
       
Retirement Percentage
       
 
       
$59,850 x .34 =
  $ 20,349  
 
       
Step 6. Calculate the Social Security Offset
       
 
       
[(.0125 x 30) x $15,000]
       
(0.3750) x $15,000 =
  $ 5,625  

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Step 7. Determine the ERP Benefit Payable
Add the Adjusted Top-Hat Benefit (shown in Step 2) and the Adjusted Total Benefit Base, (shown in Step 5), then subtract the Social Security Offset (shown in Step 6)
         
($31,320 + 20,349) — $5,625
    $51,669- $5,625 =
  $ 46,044  
     3.4 Benefit for Members Terminating Service Before Qualifying for Early Retirement . The benefit payable under the Plan to a Member whose Termination of Employment occurs before the Member has attained an Early Retirement Date, but after the Member has Vested in his Top-Hat Benefit, and who has elected to commence receipt of his Top-Hat Benefit at an Early Retirement Date shall equal the Member’s Top-Hat Benefit adjusted to reflect the actuarial reduction therein for early commencement of the benefit that would be applicable to the Member were the Top-Hat Benefit actually payable from the Basic Pension Plan commencing on the date on which payment of the Top-Hat Benefit is to commence hereunder (regardless of when payment of the Basic Pension Plan Benefit actually commences).
     3.5 Late Retirement . A Member’s Years of Service shall be credited if they extend beyond his Normal Retirement Date (but shall not exceed 40 in total), and the Final Average Pay determination shall reflect such Years of Service. However, there shall be no actuarial adjustment to his Additional Benefit Base on account of a Member’s retirement after Normal Retirement Date; for such purpose the Additional Benefit Base hereunder shall be computed as if his late retirement date were his Normal Retirement Date.
ARTICLE 4
VESTING; FORFEITURE
     4.1 Time of Vesting . No Retirement Benefits will be payable to or in respect of any Member unless that Member remains employed by the Company until he is Vested in at least the Top-Hat Benefit under this Plan.
     4.2 Misconduct . Notwithstanding Section 4.1 hereof, no Retirement Benefits will be payable to or in respect of a Member whose employment is terminated by the Company for serious, willful misconduct in respect of his obligations to the Company, including but not limited to the commission of a felony or a perpetration of a common law fraud which has damaged, or is likely to result in damage to, the Company (provided that, the same result shall obtain if, in the case of Member who terminates service before the Company is aware or has a reasonable opportunity to act on such conduct, the

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Committee determines that the Member could have been terminated by the Company due to such conduct in accordance with this Section 4.2.)
     4.3 Competition . If and so long as a Member or retired Member shall be employed by any corporation, entity or individual which is then engaged in a business competitive with the Company, or shall be engaged in any such business, or shall aid, advise or assist or attempt to aid, advise or assist any corporation, individual or entity in engaging in any such business, or shall endeavor, directly or indirectly, to interfere with the relations between the Company and any customer or engage in any activity that would be deemed by the Committee in its sole discretion to be detrimental to the Company’s best interests, the rights of such Member or retired Member to Retirement Benefits, including the rights of any Beneficiary, shall be forfeited with the same full force and effect as though the Retirement Benefits had not been granted under any of the provisions of the Plan, unless the Committee determines that such activity is not detrimental to the best interests of the Company; provided that from and after 60 days following cessation by the Member or retired Member of such activity and written notice by him to the Committee, his right to receive Retirement Benefits hereunder shall be restored, unless the Committee, in its sole discretion, determines that the prior activity has caused substantial damage to the Company. Notwithstanding anything else contained in this Section 4.3 to the contrary, this Section shall not apply following the occurrence of a Change in Control.
ARTICLE 5
FORM OF PAYMENT OF BENEFITS
     5.1 Time of Distribution of Retirement Benefits . Retirement Benefits shall be payable as soon as practicable after the Member’s Normal Retirement Date or Early Retirement Date; provided that after the 409A Election Date, no payment of benefits under this Plan shall commence prior to the six-month anniversary of the date of the Member’s Termination of Employment; and provided further , that , to the extent that the immediately preceding proviso delays payment of the Member’s Retirement Benefit, the Member shall be paid a lump sum, as soon as practicable (but not later than 30 days) after such six-month anniversary of the Member’s Termination of Employment, equal to the sum of ( i ) the Retirement Benefits that would have been payable prior to the six month anniversary of such Termination of Employment but for such mandatory delay in payment and ( ii ) an amount of interest on the Retirement Benefits referenced in subclause (i), at the short-term applicable federal rate (within the meaning of Section 1274(d) of the Code), compounded semi-annually, in effect for January in the calendar year in which the Member’s Retirement Benefits would have commenced but for such six month delay (or at such other rate as the Committee shall specify from time to time), from the date such Retirement Benefits would otherwise have been paid to the Member until the six month anniversary of the Member’s Termination of Employment.

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     5.2 Elections with Respect to Distribution of Retirement Benefits . Retirement Benefits shall be payable to or in respect of a Member eligible therefor in accordance with distribution elections made by the Member. Such election must specify the date at which any benefits payable to such Member under the Plan shall be payable, as well as the form in which such benefits are to be provided from among the options available under, and described in, Section 5.3. A Member who does not elect the date on which any benefits payable under the Plan shall commence to be paid shall commence receipt of such benefits on the later of ( i ) the earliest date on which the Member’s benefits hereunder could commence or ( ii ) the six-month anniversary of the date of the Member’s Termination of Employment. The following rules shall apply with respect to the distribution elections made in respect of the receipt of Retirement Benefits:
     (a) A Member who commences receipt of payment of his or her Retirement Benefit on or before the 409A Election Date and, on the 409A Election Date, was receiving Retirement Benefits in the same form of annuity as is applicable to the benefits payable to such Member under the Basic Pension Plan shall continue to receive such benefit in the same manner and form as the benefit received by such Member under the Basic Pension Plan.
     (b) A Member who is entitled to a Retirement Benefit with respect to any Years of Service completed on or prior to the 409A Election Date, and who has not commenced receipt of a distribution thereof prior to the 409A Election Date, shall make an election in accordance with Section 5.3, on or prior to the 409A Election Date, regarding the form of distribution of such Retirement Benefits, provided that such election shall also be applicable with respect to any Retirement Benefits accrued by the Member under this Plan after the 409A Election Date. A Member described in this Section 5.2(b) must also elect whether, if the Member terminates employment prior to his Normal Retirement Date, distribution of his or her Retirement Benefits shall commence as of an Early Retirement Date and, if so, when such benefits shall commence.
     (c) A Member who commences participation in the Plan after the 409A Election Date shall, on the first date that such Member is eligible to commence participation in the Plan, make an election in accordance with Section 5.3 regarding the distribution of his or her Retirement Benefit accrued under this Plan and an election as to the date (which shall be at least six months) following the Member’s Termination of Employment (or, if later, at the earliest date as of which such Member’s benefits hereunder could otherwise commence) that such Member’s Vested Retirement Benefit, if any, payable under the Plan is to commence to be paid.
     5.3 Forms of Payment . Unless a Member shall elect an alternative form of payment in the manner described in Section 5.2, the Member’s Retirement Benefits shall be paid in the form specified in Section 5.3(a). A Member may elect to receive benefits, by making an election within the time period established under Section 5.2, in any of the

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alternative forms described in Sections 5.3(b) through 5.3(d). Each form of benefit is intended to be of actuarial equivalent value.
     (a)  Normal Form of Payment . The normal benefit form for Retirement Benefits is a four-year period certain annuity that is actuarially equivalent to the lump-sum present value (calculated using the most recently published mortality table that is generally accepted by American actuaries and reasonably applicable to the Plan, and a 6 percent annual interest rate or discount rate) of (i) the Member’s Supplemental Benefit, if the Member is Vested therein or (ii) otherwise, the Member’s Top-Hat Benefit. The first payment will paid on the six-month anniversary of the date of the Member’s Retirement or Early Retirement; provided that, at the time the Member makes an election pursuant to Section 5.2, the Member may elect to have the first payment be payable on the later of ( i ) the six-month anniversary of the Member’s Termination of Employment with the Company and its Subsidiaries and ( ii ) the first business day of the calendar year following the Member’s Retirement or Early Retirement. Subsequent installments shall be paid on each of the first three anniversaries of the date on which the first installment is due to be paid. The Retirement Benefits of a Member who fails to make a timely distribution election under Section 5.2 shall be paid in accordance with the normal benefit form provided for in this Section 5.3(a).
     (b)  Single Life Annuity . Retirement Benefits may be paid in the form of a single life annuity for the Member’s lifetime payable in equal monthly installments which shall commence not earlier than the six-month anniversary of the Retirement or Early Retirement of the Member, as elected by such Member. The date on which such benefits commence to be paid shall be established pursuant to the Member’s election or, in the absence of a timely election, pursuant to the default provided under Section 5.2.
     (c)  Ten-Year Period Certain and Life . Retirement Benefits may be paid in the form of an annuity in monthly installments for ten years from the Member’s Retirement or Early Retirement, as elected by such Member, and for life thereafter if the Member survives such ten-year period. Such payments shall commence not earlier than the six-month anniversary of the Member’s Retirement or Early Retirement, as elected by such Member. If the Member’s death occurs within such ten-year period, annuity payments shall continue for the remainder of the ten-year period to the Member’s Beneficiary. To provide for the possibility that benefit payments will continue after the Member’s lifetime, the benefit payable to the Member during his or her lifetime under this Section 5.3(c) shall be reduced from the benefit that would have been payable as a single life annuity under Section 5.3(b), based on the same factors that would apply were such benefit payable under the Basic Pension Plan, including the Member’s age. No adjustment shall be made to the amount payable to the Member in the event that no survivor benefit should become payable because the Member lives longer than 10 years following the date the Retirement Benefits commence to be paid. The date on which such benefits commence to be paid shall be established pursuant to the Member’s

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election or, in the absence of a timely election, pursuant to the default election provided under Section 5.2.
     (d)  Joint and Survivor Annuity . Retirement Benefits may be paid in the form of a joint and survivor annuity so that the Member receives a monthly installment for the duration of the Member’s life and the Member’s Beneficiary receives a monthly installment for the duration of his or her life in an amount that is either 50% or 100% of the Member’s monthly installment, as so elected by the Member. To provide for the possibility that benefit payments will continue after the Member’s lifetime, the benefit payable to the Member during his or her lifetime under this Section 5.3(d) shall be reduced from the benefit that would have been payable as a single life annuity under Section 5.3(b), based on the same factors that would apply were such benefit payable under the Basic Pension Plan, including the Member’s age and that of his or her Beneficiary. The date on which such benefits commence to be paid shall be established pursuant to the Member’s election or, in the absence of a timely election, pursuant to the default election provided under Section 5.2. No adjustment shall be made to the amount payable to the Member in the event that no survivor benefit should become payable because the Beneficiary that the Member selects shall not survive the Member. Notwithstanding the previous sentence, if the Beneficiary selected hereunder is the Member’s spouse and if said spousal Beneficiary dies prior to the fifth anniversary of the Member’s retirement date, the Member’s benefit shall be adjusted to be that which would have been payable as a single life annuity under Section 5.3(b), as of the first of the month coinciding with or next following the spouse’s date of death. There will be no actuarial adjustment made in calculating the benefit under this Section 5.3(d) as a result of the availability of this pop-up benefit other than as provided to reflect commencement of benefits prior to the Normal Retirement Date.
     5.4 Distribution of Benefits to Spouses/Beneficiaries . If the Member’s Retirement Benefits are payable to the Member in the normal form, and the Member dies prior to the date the last installment of such benefit is paid, any installments remaining to be paid at the date of the Member’s death will be paid to the Member’s Beneficiary at the same time and in the same amounts as they would have been paid to the Member. If the Member selects an optional form of distribution of his or her Retirement Benefits such that a portion of such Retirement Benefits is eligible to be paid to his Beneficiary after the Member’s death, such benefits shall be paid in accordance with the terms of the form of distribution elected by the Member; that is ( i ) with respect to any remaining payments related to the minimum 120 payments payable under the ten-year certain and life option, such remaining monthly payments shall continue to be paid to the Member’s Beneficiary at the same time and in the same amounts as they would have been payable to the Member, until a total of 120 monthly payments have been made to the Member and the Member’s Beneficiary (at which time payment to the Beneficiary will cease) and ( ii ) with respect to either joint and survivor annuity options, in the form of an annuity for the lifetime of the Member’s Beneficiary (if living at the time of the Member’s death) in a

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monthly amount that is equal to the percentage (50% or 100%) of the monthly benefit payable to the Member immediately prior to his or her death that was elected by the Member pursuant to Section 5.3(d). To the extent that payment of Retirement Benefits to a Member has been delayed from his Termination of Employment pursuant to Section 5.1 and the Member dies prior to the time such delayed payments shall have been made to the Member, the Member’s Beneficiary shall be paid a lump sum, as soon as practicable (but not later than 60 days) after the Member’s death, equal to the sum of ( i ) the Retirement Benefits that would have been payable to the Member prior to his death but for such mandatory delay in payment and ( ii ) an amount of interest on the Retirement Benefits referenced in subclause (i), at the short-term applicable federal rate (within the meaning of Section 1274(d) of the Code), compounded semi-annually, in effect for January in the calendar year in which the Member’s Retirement Benefits would have commenced but for such mandatory delay (or at such other rate as the Committee shall specify from time to time), from the date such Retirement Benefits would otherwise have been paid to the date of the Member’s death.
     5.5 Changes in Distributions Elections . A Member may only change an election previously filed pursuant to Section 5.2 in accordance with the conditions specified in this Section 5.5. Except as otherwise expressly provided below, any such change in such an election, whether as to when payment of Retirement Benefits is to commence or the form of distribution of such Retirement Benefits, must ( 1 ) be made in writing, ( 2 ) be delivered at least 12 months prior to date as of which the Member’s Retirement Benefits would otherwise commence to be paid hereunder, and ( 3 ) delay commencement of payment of such Retirement Benefits for at least five years from the date payment of such Retirement Benefits would otherwise have commenced. Notwithstanding the foregoing, a Member who has elected to receive a distribution in the form of a life annuity under Section 5.3(b), a ten-year period certain and life annuity under Section 5.3(c) or either joint and survivor annuity form under Section 5.3(d) may elect to change from that form to any other annuity form at any time prior to the commencement of the receipt of Retirement Benefits hereunder. For example, a Member who has elected to receive his Retirement Benefits in the form of an annuity just for his life may change that election to a joint and survivor annuity without the 12 months advance notice and five year delay in commencement of payments described in the second sentence of this Section 5.5.
     5.6 Right to Adjust . The Committee shall have the right to adjust Retirement Benefits payable under this Plan to correct errors, and/or to provide uniform treatment of Members, retired Members or Beneficiaries.
     5.7 Spouse’s Benefit . In the event of a Vested Member’s death prior to the commencement of the receipt of Retirement Benefits hereunder, his spouse, if she shall survive him, shall receive Retirement Benefits hereunder for her lifetime commencing as

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of the first day of the month following the Member’s death equal to the greater of (i) or (ii):
     (i) .50 times the Member’s Supplemental Benefit, except that if the Member’s surviving spouse is more than five years younger than the Member, the .50 multiplier described in this clause shall be reduced by .00125 for each month in excess of 60 that the surviving spouse’s age is less than that of the Member. Thus, for example, the multiplier declines to .30 if the surviving spouse is 220 months younger than the Member.
     (ii) 50% of the Retirement Benefit which the Member would have received had payment thereof commenced on the day before the date of his death in the form of the Automatic Joint and Survivor Annuity (as defined and described in the Basic Pension Plan), determined without regard to whether the Member could have commenced such benefit on such date.
ARTICLE 6
SOURCE OF PAYMENT
     6.1 All payments provided for under the Plan shall be paid in cash from the general funds of the Company; provided, however, that such payments shall be reduced by the amount of any payments made to or in respect of a Member from any trust or special or separate fund established by the Company to assure such payments. The Company shall not be required to establish a special or separate fund or other segregation of assets to assure such payments, and, if the Company shall make any investments to aid it in meeting its obligations hereunder, the Member and his Beneficiary shall have no right, title, or interest whatever in or to any such investments except as may otherwise be expressly provided in a separate written instrument relating to such investments. Nothing contained in this Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind between the Company and any Member or Beneficiary. To the extent that any Member or Beneficiary acquires a right to receive payments from the Company hereunder, such right shall be no greater than the right of an unsecured creditor of the Company.
ARTICLE 7
ADMINISTRATION OF THE PLAN
     7.1 Committee to Administer . The Plan shall be administered by the Committee which shall have full power and authority to interpret, construe and administer the Plan, and review claims for benefits under the Plan, and the Committee’s

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interpretations and constructions of the Plan and actions thereunder shall be binding and conclusive on all persons and for all purposes.
     7.2 Agents . For purposes of the Act, the members of the Committee shall be the named fiduciaries of the Plan for administration of the Plan (including but not limited to complying with reporting and disclosure requirements and establishing and maintaining Plan records), and shall engage such certified public accountants, who may be accountants for the Company, as it shall require or may deem advisable for purposes of the Plan. The Committee may arrange for the engagement of such legal counsel, who may be counsel for the Company, and make use of such agents and clerical or other personnel as they each shall require or may deem advisable for purposes of the Plan. The Committee may rely upon the written opinion of such counsel and the accountants engaged by the Committee and may delegate to any agent, who may be a Company employee, or to any sub-committee or member of the Committee, its authority to perform any act hereunder, including without limitation those matters involving the exercise of discretion, provided that such delegation shall be subject to revocation at any time at the discretion of the Committee.
     7.3 Liability; Indemnity . To the maximum extent permitted by the Act, no member of the Committee, nor any of their agents, including Company officers or employees, shall be personally liable by reason of any contract or other instrument executed by any of them in their capacity as members of the Committee or otherwise, nor for any mistake of judgment made in good faith, and the Company shall indemnify and hold harmless, directly from its own assets, each member of the Committee and each other officer, employee, or director of the Company to whom any duty or power relating to the administration or interpretation of the Plan or to the management or control of the assets of the Plan may be delegated or allocated, against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission to act in connection with the Plan unless arising out of such person’s own fraud or bad faith. Said persons shall be entitled to rely conclusively upon, and shall be fully protected in any action taken by them or any of them in good faith in reliance upon, any table, valuation, certificate, opinion or report which shall be furnished to them or any of them by an actuary, accountant, counsel or other expert who shall be employed or engaged by them.
     7.4 Binding Effect of Decisions . The decision or action of this Committee with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final, conclusive and binding upon all persons having any interest in the Plan.
     7.5 Effect of Restatement . Notwithstanding anything else contained herein to the contrary, in no event shall the restatement of this Plan as of September 20, 2007 reduce the amount of Retirement Benefits payable to any Member hereunder, or

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otherwise reduce the amount of such Member’s Final Average Pay, in either case below the amount that would have applied under the terms of this Plan as in effect immediately prior to such restatement.
     7.6 Section 409A of the Code . Notwithstanding anything herein to the contrary, the Committee and any of its delegates shall use their commercially reasonable best efforts to administer the plan in a manner that will cause the Plan and any payments to be made hereunder, to comply with the requirements of Section 409A, with the intent of avoiding the imposition of an additional tax under Section 409A of the Code on any Member.
ARTICLE 8
AMENDMENT AND TERMINATION
     8.1 General Power to Amend . Subject to the application of Article 4 in the situations therein enumerated, the Plan may be amended, suspended or terminated, in whole or in part, by the Board of Directors, and Members may be adversely affected thereby provided that such actions may not deprive Vested Members of Retirement Benefits accrued until the date of such actions. In addition, the rights of Vested Members may be affected if ( i ) failing to make changes would be administratively burdensome; ( ii ) the Member voluntarily consents to such change in writing; or ( iii ) if changes are required by law.
     8.2 Limited Power of the President . Notwithstanding Section 8.1, the President of National Fuel Gas Company is empowered to amend, restate or otherwise change the Plan ( i ) as counsel may advise to be necessary or appropriate in order to ensure that the Plan continues to operate as a plan of deferred compensation for tax purposes in compliance with requirements of Section 409A, remain exempt from many of the provisions of the Act and otherwise continues to fulfill the purposes for which the Plan was adopted and intended; ( ii ) as he or she may deem necessary in order to make technical or clarifying changes not inconsistent with or in order to fulfill the purposes of the Plan; ( iii ) as counsel may advise to be necessary to reflect the impact of Benefit Limitations, as they may change from time to time; and ( iv ) in other respects except as will materially increase the cost of the Plan to the Companies or the benefits of the Plan to Members or as will otherwise reduce the accrued benefits of any Member without his or her consent.

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ARTICLE 9
GENERAL PROVISIONS
     9.1 Effect of Corporate Reorganization . This Plan shall be binding upon and inure to the benefit of the Company and its successors and assigns and the Member, and his designees, Beneficiaries, legal representatives and estate. Nothing in this Plan shall preclude the Company from consolidating or merging into or with, or transferring all or substantially all of its assets to, another corporation which assumes this Plan and all obligations of the Company hereunder. Upon such a consolidation, merger or transfer of assets, and assumption of the Plan, the term “Company” shall refer to such other corporation and this Plan shall continue in full force and effect.
     9.2 Right to Discharge Member . Neither the Plan nor any action taken hereunder shall be construed as giving to a Member the right to be retained in the employ of the Company or as affecting the right of the Company to discharge any Member, at any time without regard to the effect such discharge would have upon his eligibility for or receipt of benefits under the Plan.
     9.3 Withholding . The Company may withhold from any benefits payable under this Plan all federal, state, city or other taxes as shall be required (as determined by the Company) pursuant to any law or governmental regulation or ruling.
     9.4 Assignability . No right to any amount payable at any time under the Plan may be assigned, transferred, pledged, or encumbered, either voluntarily or by operation of law, except as provided expressly herein as to payments to a Beneficiary or as may otherwise be required by law. If, by reason of any attempted assignment, transfer, pledge, or encumbrance, or any bankruptcy or other event happening at any time, any amount payable under the Plan would be made subject to the debts or liabilities of the Member or his Beneficiary or would otherwise not be enjoyed by him, then the Committee, if it so elects, may terminate such person’s interest in any such payment and direct that the same be held and applied to or for the benefit of the Member, his Beneficiary, or any other person deemed to be the natural objects of his bounty, taking into account the expressed wishes of the Member (or, in the event of his death, his Beneficiary).
     9.5 Inability to Utilize Benefits . If the Committee shall find that any person to whom any amount is or was payable hereunder is unable to care for his affairs because of illness or accident or other reasons, or has died, then the Committee, if it so elects, may direct that any payment or any part thereof due such person shall be paid to his estate (unless a prior claim therefor has been made by a duly appointed legal representative) or be paid or applied for the benefit of such person or to or for the benefit of his spouse, children or other dependents, an institution maintaining or having custody of such person, any other person deemed by the Committee to be a proper recipient on behalf of such

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person otherwise entitled to payment, or any of them, in such manner and proportion as the Committee may deem proper. Any such payment shall be in complete discharge of the liability therefor of the Company, the Plan or the Committee or any member, officer or employee thereof. The Committee may withhold the payment of any amount that shall be payable in accordance with the provisions of the Plan to a person under legal disability until a representative of such person competent to receive such payment on his behalf shall have been properly appointed.
     9.6 Actuarial Equivalents . Except as otherwise provided herein, whenever it is necessary to determine under this Plan whether one benefit is less than, equal to, or larger than another, or whether one benefit is the actuarial equivalent of another whether or not such benefits are provided under this Plan, such determination shall be made using mortality, interest and any other assumptions used at the time in determining actuarial equivalents under the Basic Pension Plan.
     9.7 Health Information . The Member shall provide to the Company, if so requested and as a precondition for remaining a Member, all health information and other information as the Company may require should it decide to purchase life insurance policies or annuity contracts.
     9.8 Additional Benefit . The benefits payable under this Plan shall be in addition to all other benefits provided for Employees of the Company, except as otherwise provided in this Plan.
     9.9 Headings . The captions preceding the sections and articles hereof have been inserted solely as a matter of convenience and in no way define or limit the scope or intent of any provisions of the Plan.
     9.10 Governing Law . Except to the extent that such laws are pre-empted by the Employee Retirement Income Security Act of 1974, as amended, this Plan shall be governed by the laws of the State of New York as from time to time in effect.

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Exhibit 10.5
AMENDED AND RESTATED
RETIREMENT BENEFIT AGREEMENT
FOR
DAVID F. SMITH
      This AGREEMENT , dated as of September 22, 2003, amended as of September 8, 2005 and further amended and restated as of September 20, 2007, is between National Fuel Gas Company , a New Jersey corporation, (“National”) National Fuel Gas Supply Corporation , a New York corporation, (“Supply”; Supply, National, and each of National’s wholly owned subsidiaries are hereafter collectively referred to as the “Company”), and David F. Smith (the “Executive”).
RECITALS :
  A.   The Executive currently is employed as the President of Supply, a wholly owned subsidiary of National.
 
  B.   Supply, National and the Executive desire to set forth the Executive’s additional retirement benefits if the Executive’s employment with the Company is terminated by the Company without Cause or if the Executive terminates employment with the Company with Good Reason prior to March 1, 2011.
     NOW, THEREFORE, in consideration of the premises and of the covenants contained in this Agreement, Supply, National and the Executive agree as follows:
1. Definitions .
                 (a) “Board of Directors” or “Board” means the Board of Directors of National.
                 (b) “Cause” means (i) the willful and continued failure by the Executive to substantially perform his duties with the Company after written

 


 

warnings specifically identifying the lack of substantial performance are delivered to him by the Company, or (ii) the willful engaging by the Executive in illegal conduct, gross misconduct, fraud or dishonesty, which is materially and demonstrably injurious to the Supply, National, or the Company, as determined in good faith by a vote of at least 2/3 of the non-employee directors of National at a meeting of the Board at which the Executive is provided an opportunity to be heard (with representation by counsel of his choosing, should he so desire).
                 (c) “Good Reason” means
       (i) a significant reduction in the nature and scope of the Executive’s duties and direct reporting responsibilities from the nature and scope of those duties and direct reporting responsibilities at the effective date of this Agreement (by way of illustration but not of limitation, if Executive is serving as President of Supply, National, or National Fuel Gas Distribution Corporation, a significant reduction in duties will not have occurred),
       (ii) a significant reduction in the Executive’s total potential compensation from that total potential compensation at the effective date of this Agreement, or
       (iii) a requirement that the Executive relocate more than 100 miles away from National’s headquarters, as it may be located from time to time.
The Executive will have a period of six-months from the happening of an event that gives rise to Good Reason to terminate his employment on account of Good Reason.
2. Supplemental Retirement .
                 (a) Modification of Rights and Coordination of Benefits. Notwithstanding any provision in the National Fuel Gas Company and

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Participating Subsidiaries Executive Retirement Plan, as adopted July 10, 1987, and as subsequently amended, (the “ERP Plan”), the provisions of this Section are in addition to any benefits payable under the terms of the ERP Plan, the National Fuel Gas Company Retirement Plan (the “Retirement Plan”), or any other plan or arrangement sponsored or maintained by Supply, National or the Company, if there is a termination of the Executive’s employment with the Company prior to Executive attaining age 57 1 / 2 (i) by the Company without Cause or (ii) by the Executive with Good Reason.
                 (b)  Benefit for Termination Prior to Age 57 1 / 2 . The intent of this Agreement is to provide, in certain situations described below, additional benefits to the Executive such that he will receive benefits that are, in total, equivalent to what he would have received under the terms of the ERP Plan and Retirement Plan if he had attained age 57 1 / 2 at the time of his termination of employment. If the Executive’s employment with the Company is terminated prior to his attaining age 57 1 / 2 (i) by the Company without Cause or (ii) by the Executive with Good Reason, the Executive will be entitled to receive under this Agreement an additional retirement benefit calculated and payable as follows:
                      (i)  Definitions :
     (A) The Contractual Benefit Base will be an amount equal to the sum of (I) the Retirement Plan Benefit, (II) the ERP Tophat Benefit and (III) the ERP Supplemental Benefit, all calculated as if the Executive had attained age 57 1 / 2 at the time of his termination.
     (B) The Retirement Plan Benefit is the amount payable as the Benefit Base, determined, based on Executive’s service and compensation at time of termination, under the terms of the National Fuel Gas Company Retirement Plan (expressed as a single life annuity for the Executive).

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     (C) The ERP Tophat Benefit is the amount payable determined, based on Executive’s service and compensation at time of termination, under Section 3.4(a) of the ERP Plan as the Adjusted Basic Pension Plan Benefit Base minus the Basic Pension Plan Benefit (expressed as a single life annuity for the Executive).
     (D) The ERP Supplemental Benefit is the amount payable determined, based on Executive’s service and compensation at time of termination, under Section 3.4(c) of the ERP Plan (expressed as a single life annuity for the Executive) .
     (E) Wife means the individual to whom Executive is married at the time benefits first become payable under Section 2(b)(ii)(B) below.
     (ii) Payment of Additional Retirement Benefit . If the Executive has not attained age 55 at the time of termination of employment, the additional benefit under this Agreement will be payable (1) under Section 2(b)(ii)(A) through August 1, 2008, and (2) under Section 2(b)(ii)(B) commencing on September 1, 2008. If the Executive has attained age 55 at the time of termination of employment, the additional benefit under this Agreement will be payable solely under Section 2(b)(ii)(B) commencing on the later of the first day of the first month following the six month anniversary of such termination and September 1, 2008:
     (A) Payments Prior to Age 55 . An amount equal to 1/12 of the Contractual Benefit

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Base will be paid to the Executive on the first day of each month commencing on or after the six month anniversary of his termination of employment and ending on (and including) August 1, 2008. In addition, any amounts that would have otherwise been payable to the Executive under this Section 2(b)(ii)(A) had the payments hereunder commenced on the first day of the first month following the Executive’s termination of employment shall be paid to the Executive in a single lump sum on the first day of the first month commencing on or after the six month anniversary of the Executive’s termination of employment (without regard to whether such date falls after August 1, 2008). If the Executive dies before receiving all of the payments provided for under the preceding two sentences, and his Wife survives him, then without regard to whether his death falls prior to the six month anniversary of his termination of employment, his Wife shall receive ( x ) commencing on the first day of the first month following the Executive’s death, any remaining monthly payments and ( y ) on the date that is 60 days following the Executive’s death, any lump sum payment described in the preceding sentence; provided that the Executive’s Wife shall only be entitled to receive a pro-rata portion of such lump sum amount, if any, based on the number of total number of days that had elapsed between the Executive’s termination of employment and the date of his death.

5


 

     (B) Payments After Age 55 . The monthly benefit amount will be equal to 1/12 of the Contractual Benefit Base less the sum of (I) the Retirement Plan Benefit, (II) the ERP Tophat Benefit and (III) the ERP Supplemental Benefit (all expressed as a single life annuity for the Executive (the “Monthly Benefit”)) beginning on the later of the first day of the first month following the six month anniversary of the Executive’s termination of employment and September 1, 2008, and will be payable as follows:
(i) If the Executive is not married to his Wife on the date benefit payments begin under this Section 2(b)(ii)(B), an amount equal to the Monthly Benefit will be paid to the Executive commencing on the later of the first day of the first month following the six month anniversary of the Executive’s termination of employment and September 1, 2008, and continuing each month through the month that contains his date of death.
(ii) If the Executive is married to his Wife on the date benefits begin under this Section 2(b)(ii)(B), the Monthly Benefit will be paid in the form of a joint and 50% survivor annuity, with the 50% survivor benefit payable to his Wife, if she survives him. The amount to be paid each month will be such that it is actuarially equivalent, using the actuarial equivalence factors then used under the Retirement Plan, to the benefit that would be payable to the Executive if he was unmarried. For the avoidance of doubt, if the Executive dies after termination of

6


 

employment but prior to the date that benefits first become payable under this Section 2(b)(II)(B)(ii), and Executive was married to his Wife at the time of his death, the Executive’s Wife shall be entitled to receive on the later of the date of the Executive’s death and September 1, 2008 ( x ) the 50% survivor benefit described above and ( y ) a pro-rata portion of the lump sum amount that the Executive would have become entitled to receive pursuant to Section 2(b)(II)(B)(iii) below, if any, based on the total number of days that had elapsed between the Executive’s termination of employment and the date of his death.
(iii) In addition to any other amounts payable to the Executive under Section 2(b)(ii)(B) hereof, any amounts that would have otherwise been payable to the Executive under Section 2(b)(ii)(B) had the payments hereunder commenced on the later of September 1, 2008 or the first day of the month following Executive’s termination of employment shall be paid to the Executive in a single lump sum on the day that the first Monthly Benefit is actually payable to him under Section 2(b)(ii)(B).
     (C) For the avoidance of doubt, no payments will be made under this Agreement after the death of the later to die of the Executive and his Wife.
      3. Termination . This Agreement will terminate on (a) March 1, 2011, if benefits have not been payable pursuant to its terms, or (b) the first date that both the Executive and his Wife are deceased. Notwithstanding the preceding sentence, this Agreement will terminate earlier on the occurrence of the Executive’s termination of

7


 

employment prior to March 1, 2011 for any reason (including, termination on account of death or due to disability) other than a termination (i) by the Company without Cause or (ii) by the Executive with Good Reason.
      4.  Withholding for Taxes . The Company will deduct or withhold from payments made under this Agreement, and from other payments made to the Executive, all amounts that may be required to be deducted or withheld under any applicable Social Security contribution, income tax withholding or other similar law now in effect or that may become effective during the term of this Agreement.
      5.  Non-exclusivity of Rights . Except as otherwise specifically provided in Section 2, nothing in this Agreement may prevent or limit the Executive’s continued or future participation in any benefit, incentive, or other plan, practice, or program provided by the Company and for which the Executive may qualify.
      6.  No Obligation to Seek Other Employment . The Executive is not obligated to seek employment with any entity that is not the Company or to take other action to mitigate any amount payable to him under this Agreement.
      7.  Confidentiality . Neither the Executive nor the Company will disclose any of the terms of this Agreement or any information regarding the Executive’s employment with the Company to any other person (other than the Executive’s disclosure to his spouse, attorney and accountant) without the prior written consent of the other, except as may be necessary or appropriate in the ordinary course of the Company’s operations, and except as may be required by law.
      8.  Successors .
          (a) This Agreement is personal to the Executive and is not assignable by the Executive or his Wife. This Agreement will inure to the benefit of and be enforceable by the Executive’s and his Wife’s legal representatives.
          (b) This Agreement will inure to the benefit of and be binding on Supply, National and its successors and assigns.

8


 

          (c) In the event the Executive ceases to be employed by Supply as a result of the transfer of the Executive’s employment to National or to another wholly owned subsidiary of National, for purposes of this Agreement, National or such other subsidiary, as the case may be, will automatically be deemed to be Supply from and after the date of such transfer and shall have the same rights, duties and obligations hereunder as Supply had immediately prior to such transfer.
          (d) Supply and National will require any successor (whether direct or indirect, by acquisition of assets, merger, consolidation or otherwise) to all or substantially all of the operations or assets of Supply or National or any other successor and without regard to the form of transaction used to acquire the operations or assets of Supply or National with whom Executive continues to be employed by after the time of such transaction, to assume and agree to perform this Agreement in the same manner and to the same extent that Supply or National would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” means the Company and any successor to its operations or assets as set forth in this Section that is required by this clause to assume and agree to perform this Agreement or that otherwise assumes and agrees to perform this Agreement.
      9. Dispute Resolution . Supply, National and the Executive will attempt to resolve between them any dispute that arises under this Agreement. If they do not agree within 10 days after either party submits a demand for arbitration to the other, the issue will be submitted to arbitration with each party having the right to appoint one arbitrator and those two arbitrators mutually selecting a third arbitrator. The rules of the American Arbitration Association under its national rules for the Resolution of Employment Disputes will apply, and the decision of two of the three arbitrators will be final. The arbitrators must reach a decision within 60 days after the selection of the third arbitrator. The arbitration will take place in Erie County, New York. The arbitration will apply New York law. Each party will pay his or its own attorney fees and costs of arbitration, the fee of the arbitrator he or it selects, one-half the fee of the third arbitrator, and one-half of the fees and expenses of the American Arbitration Association.

9


 

           10. Notice . All communications to parties required under this Agreement must be in writing and (a) delivered in person, (b) mailed by registered or certified mail, return receipt requested, (any mailed notice to be effective four days after the date it is mailed) or (c) sent by facsimile transmission, with confirmation sent by way of one of the above methods, to the party at the address given below for that party (or to such other address as such party designates in a writing complying with this Section, delivered to the other party):
     If to the Supply:
National Fuel Gas Supply Corporation
6363 Main Street
Williamsville, NY 14221
Attention: General Counsel
Telephone: (716) 857-7548
Telecopier: (716) 857-7614
     If to National:
National Fuel Gas Company
6363 Main Street
Williamsville, NY 14221
Attention: Corporate Secretary
Telephone: (716) 857-7858
Telecopier: (716) 857-7856
     If to the Executive:
David F. Smith
6363 Main Street
Williamsville, NY 14221
Telephone: (716) 857-7977
Telecopier: (716) 857-7856

10


 

     with a copy to:
Lucy A. Smith
9295 Hunt Club Lane
Clarence, New York 14031
Telephone: (716) 741-1744
           11. Source of Payments . All payments to be made hereunder shall be paid in cash from the general funds of Supply, provided, however, that such payments shall be reduced by the amount of any payments made to the Executive or his dependents, beneficiaries or estate from any trust or special or separate fund established by Supply or National to assure such payments. To the extent that Supply does not pay any such amount when due, National shall, or shall cause Supply, to make such payment. Neither Supply nor National shall be required to establish a special or separate fund or other segregation of assets to assure such payments, and, if Supply or National shall make any investments to aid it in meeting its obligations hereunder, the Executive shall have no right, title or interest whatever in or to any such investments except as may otherwise be expressly provided in a separate written instrument relating to such investments. Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship, between Supply or National and the Executive or any other person. To the extent that any person acquires a right to receive payments from Supply or National such right shall be no greater than the right of an unsecured creditor of Supply or National.
           12. Miscellaneous . No course of action or failure to act by the Company or the Executive may constitute a waiver by that party of any right or remedy under this Agreement, and no waiver by either party of any right or remedy under this Agreement will be effective unless made in writing. Whenever possible, each provision of this Agreement will be interpreted in such a manner as to be enforceable under applicable law. However, if any provision of this Agreement is deemed unenforceable under applicable law by a court having jurisdiction, that provision will be unenforceable only to the extent necessary to make it enforceable without invalidating the remainder of

11


 

it or any of the remaining provisions of this Agreement. This Agreement (a) may not be amended, modified or terminated orally or by any course of conduct pursued by the Company or the Executive, but may be amended, modified or terminated only by a written agreement duly executed by Supply, National and the Executive, (b) constitutes the entire agreement between Supply, National and the Executive with respect to the additional retirement benefits payable under this Agreement, and supersedes all oral and written proposals, representations, understandings and agreements previously made or existing with respect to such subject matter, and (c) will be governed by, and interpreted and construed in accordance with, the laws of the State of New York, without regard to principles of conflicts of law. For the avoidance of doubt, all amounts payable hereunder are intended to comply with Section 409A of the Code and no party hereto shall take any action under this Agreement which would result in the imposition of an additional tax under Section 409A of the Code on the Executive.
           IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written.
             
    NATIONAL FUEL GAS SUPPLY CORPORATION    
 
           
 
  By:   /s/ James R. Peterson    
 
           
 
  Name:   James R. Peterson    
 
  Title:   Secretary    
 
           
    NATIONAL FUEL GAS COMPANY    
 
           
 
  By:   /s/ Philip C. Ackerman    
 
           
 
  Name:   Philip C. Ackerman    
 
  Title:   Chairman/CEO    
 
           
    EXECUTIVE:    
 
           
         /s/ David F. Smith    
         
    DAVID F. SMITH    

12


 

     
STATE OF NEW YORK
 
 
  ): ss.
COUNTY OF ERIE
 
     On the 22 nd day of October, in the year 2007, before me, the undersigned, personally appeared James R. Peterson, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her capacity as the Secretary of National Fuel Gas Supply Corporation, the corporation described in and which executed the foregoing instrument, and that by his/her signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument.
     
/s/ Sarah J. Mugel
  [Notary Stamp Omitted]
 
   
Notary Public
   
 
   
STATE OF NEW YORK
 
 
  ): ss.
COUNTY OF ERIE
 
     On the 23 rd day of October, in the year 2007, before me, the undersigned, personally appeared Philip C. Ackerman, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her capacity as the Chairman/CEO of National Fuel Gas Company, the corporation described in and which executed the foregoing instrument, and that by his/her signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument.
     
/s/ Sarah J. Mugel
  [Notary Stamp Omitted]
 
   
Notary Public
   
 
   
STATE OF NEW YORK
 
 
  :ss.
COUNTY OF ERIE
 
     On the 22 nd day of October, in the year 2007, before me, the undersigned personally appeared David F. Smith, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity, and that by his signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument.
     
/s/ Sarah J. Mugel
 
  [Notary Stamp Omitted] 
Notary Public
   

13

 

EXHIBIT 12
NATIONAL FUEL GAS COMPANY
COMPUTATION OF RATIO OF
EARNINGS TO FIXED CHARGES
UNAUDITED
                                         
    Fiscal Year Ended September 30,
    2007   2006   2005   2004   2003
     
EARNINGS:
                                       
 
                                       
Income from Continuing Operations
  $ 201,675     $ 184,614     $ 138,437     $ 141,920     $ 256,076  
Plus Income Tax Expense
    131,813       108,245       85,621       89,820       116,795  
Less Investment Tax Credit (1)
    (697 )     (697 )     (697 )     (697 )     (693 )
(Less Income) Plus Loss from Unconsolidated Subsidiaries (3)
    (4,979 )     (3,583 )     796       (805 )     (535 )
Plus Distributions from Unconsolidated Subsidiaries
    1,613       4,651       1,990       785       1,238  
Plus Interest Expense on Long-Term Debt
    68,446       72,629       73,244       82,989       91,381  
Plus Other Interest Expense
    6,029       5,952       9,069       6,354       11,010  
Less Amortization of Loss on Reacquired Debt
    (1,119 )     (1,118 )     (1,066 )     (1,350 )     (2,078 )
Plus (Less) Allowance for Borrowed Funds Used in Construction
    374       296       201       298       (102 )
Plus Rentals (2)
    2,685       2,810       3,554       4,286       4,573  
     
 
                                       
 
  $ 405,840     $ 373,799     $ 311,149     $ 323,600     $ 477,665  
     
 
                                       
FIXED CHARGES:
                                       
 
                                       
Interest & Amortization of Premium and Discount of Funded Debt
  $ 68,446     $ 72,629     $ 73,244     $ 82,989     $ 91,381  
Plus Other Interest Expense
    6,029       5,952       9,069       6,354       11,010  
Less Amortization of Loss on Reacquired Debt
    (1,119 )     (1,118 )     (1,066 )     (1,350 )     (2,078 )
Plus (Less) Allowance for Borrowed Funds Used in Construction
    374       296       201       298       (102 )
Plus Rentals (2)
    2,685       2,810       3,554       4,286       4,573  
     
 
                                       
 
  $ 76,415     $ 80,569     $ 85,002     $ 92,577     $ 104,784  
     
 
                                       
RATIO OF EARNINGS TO FIXED CHARGES
    5.31       4.64       3.66       3.50       4.56  
 
(1)   Investment Tax Credit is included in Other Income
 
(2)   Rentals shown above represent the portion of all rentals (other than delay rentals) deemed representative of the interest factor.
 
(3)   Fiscal 2005 includes the Impairment of Investment in Partnership of $4,158.

 

 

Exhibit 21
Subsidiares of Registrant
As of September 30, 2007
     
Legal Name   Domicile
National Fuel Gas Company:
  USA, New Jersey
Leidy Hub, Inc.
  USA, New York
National Fuel Gas Distribution Corporation
  USA, New York
National Fuel Gas Supply Corporation
  USA, Pennsylvania
Seneca Resources Corporation
  USA, Pennsylvania
Highland Forest Resources, Inc.
  USA, New York
Empire Pipeline Company, LLC
  USA, New York
St. Clair Pipeline Company, LLC
  USA, New York
Empire State Pipeline
  USA, New York
Empire Pipeline, Inc.
  USA, New York
Horizon Energy Development, Inc.
  USA, New York
Horizon Energy Holdings, Inc.
  USA, New York
Horizon Energy Development B.V.
  The Netherlands
Horizon LFG, Inc.
  USA, New York
Toro Partners, LP
  USA, Texas
Data-Track Account Services, Inc.
  USA, New York
Horizon Power, Inc.
  USA, New York
Seneca Energy II, LLC
  USA, New York
Model City Energy, LLC
  USA, New York
Energy Systems Northeast, LLC
  USA, Delaware
National Fuel Resources, Inc.
  USA, New York

 

 

Exhibit 23.1
NETHERLAND, SEWELL
& ASSOCIATES, INC.
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We hereby consent to the reproduction of and reference to our audit report for Seneca Resources Corporation dated October 17, 2007, appearing in this National Fuel Gas Company Annual Report on Form 10-K.
We also consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-123654, 333-85711, and 333-102200) and Form S-8 (Nos. 2-94539, 33-49693, 333-03055, 333-51595, 333-55124, 333-102211, 333-102220, 333-117131, 333-117132 and 333-143701) of National Fuel Gas Company of our audit report dated October 17, 2007, appearing in this National Fuel Gas Company Annual Report on Form 10-K.
         
  NETHERLAND, SEWELL & ASSOCIATES, INC.
 
 
  By:   /s/ Danny D. Simmons, P. E.    
    Danny D. Simmons, P. E.   
    Executive Vice President   
 
Houston, Texas
November 29, 2007

 

Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-123654, 333-85711, and 333-102200) and Form S-8 (Nos. 2-94539, 33-49693, 333-03055, 333-51595, 333-55124, 333-102211, 333-102220, 333-117131, 333-117132 and 333-143701) of National Fuel Gas Company of our report dated November 29, 2007 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Buffalo, New York
November 29, 2007

 

Exhibit 31.1
CERTIFICATION
     I, P. C. Ackerman, certify that:
     1. I have reviewed this annual report on Form 10-K of National Fuel Gas Company;
     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 29, 2007
/s/ P. C. Ackerman               
P. C. Ackerman
Chairman of the Board and
Chief Executive Officer

 

Exhibit 31.2
CERTIFICATION
     I, R. J. Tanski, certify that:
     1. I have reviewed this annual report on Form 10-K of National Fuel Gas Company;
     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 29, 2007
/s/ R. J. Tanski               
R. J. Tanski
Treasurer and Principal Financial Officer

 

Exhibit 32
NATIONAL FUEL GAS COMPANY
Certification Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
     Each of the undersigned, P. C. ACKERMAN, the Chairman of the Board and Chief Executive Officer, and R. J. TANSKI, the Treasurer and Principal Financial Officer, of NATIONAL FUEL GAS COMPANY (the “Company”), DOES HEREBY CERTIFY that:
  1.   The Company’s Annual Report on Form 10-K for the year ended September 30, 2007 (the “Annual Report”) fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, as amended; and
 
  2.   Information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
     IN WITNESS WHEREOF, each of the undersigned has executed this statement this 29th day of November, 2007.
     
 
  /s/ P. C. Ackerman
 
   
 
  Chairman of the Board and
Chief Executive Officer
 
   
 
  /s/ R. J. Tanski
 
   
 
  Treasurer and Principal Financial Officer

 

Exhibit 99.1
NETHERLAND, SEWELL & ASSOCIATES, INC.
WORLDWIDE PETROLEUM CONSULTANTS
October 17, 2007
Mr. Matthew D. Cabell
Seneca Resources Corporation
1201 Louisiana Street, Suite 400
Houston, Texas 77002
Dear Mr. Cabell:
In accordance with your request, we have audited the estimates prepared by Seneca Resources Corporation (Seneca), as of September 30, 2007, of the proved reserves and future revenue to the Seneca interest in certain oil and gas properties located in the United States and the Gulf of Mexico. These estimates are based on constant prices and costs, as discussed in subsequent paragraphs of this letter. We have examined the estimates with respect to reserves quantities, reserves categorization, future producing rates, future net revenue, and the present value of such future net revenue, using the definitions set forth in U.S. Securities and Exchange Commission (SEC) Regulation S-X Rule 4-10(a) and subsequent staff interpretations and guidance. The estimates of reserves and future revenue have been prepared in accordance with the definitions and guidelines of the SEC and, with the exception of the exclusion of future income taxes, conform to the Statement of Financial Accounting Standards No. 69.
The following table sets forth Seneca’s estimates of the net reserves and future net revenue, as of September 30, 2007, for the audited properties:
                                 
All Properties  
    Net Reserves     Future Net Revenue (M$)  
    Oil     Gas             Present Worth  
Category   (MBBL)     (MMCF)     Total     at 10%  
 
                               
Proved Developed
    38,426.7       187,826.8       3,173,748       1,381,687  
Proved Undeveloped
    9,159.6       17,561.8       603,224       209,375  
 
                       
 
                               
Total Proved
    47,586.3       205,388.6       3,776,972       1,591,062  
For the purposes of this audit, the properties were divided into sections for the East Coast, Gulf Coast, and West Coast Divisions. The following tables set forth Seneca’s estimates of the net reserves and future net revenue by division, as of September 30, 2007, for the audited properties:
                                 
East Coast Division  
    Net Reserves     Future Net Revenue (M$)  
    Oil     Gas             Present Worth  
Category   (MBBL)     (MMCF)     Total     at 10%  
 
                               
Proved Developed
    483.3       96,673.5       551,327       246,600  
Proved Undeveloped
    24.2       10,404.1       49,476       12,385  
 
                       
 
                               
Total Proved
    507.5       107,077.6       600,803       258,985  

 


 

NETHERLAND, SEWELL & ASSOCIATES, INC.
                                 
Gulf Coast Division  
    Net Reserves     Future Net Revenue (M$)  
    Oil     Gas             Present Worth  
Category   (MBBL)     (MMCF)     Total     at 10%  
 
                               
Proved Developed
    1,434.8       25,136.1       177,811       156,879  
                                 
West Coast Division  
    Net Reserves     Future Net Revenue (M$)  
    Oil     Gas             Present Worth  
Category   (MBBL)     (MMCF)     Total     at 10%  
 
                               
Proved Developed
    36,508.6       66,017.2       2,444,610       978,208  
Proved Undeveloped
    9,135.4       7,157.7       553,748       196,990  
 
                       
 
                               
Total Proved
    45,644.0       73,174.9       2,998,358       1,175,198  
The oil reserves shown include crude oil and condensate. Oil volumes are expressed in thousands of barrels (MBBL); a barrel is equivalent to 42 United States gallons. Gas volumes are expressed in millions of cubic feet (MMCF) at standard temperature and pressure bases.
When compared on a field-by-field basis, some of the estimates of Seneca are greater and some are less than the estimates of Netherland, Sewell & Associates, Inc. However, in our opinion the estimates of Seneca’s proved reserves and future revenue shown herein are, in the aggregate, reasonable and have been prepared in accordance with generally accepted petroleum engineering and evaluation principles. These principles are set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. We are satisfied with the methods and procedures used by Seneca in preparing the September 30, 2007, estimates of reserves and future revenue, and we saw nothing of an unusual nature that would cause us to take exception with the estimates, in the aggregate, as prepared by Seneca.
The estimates shown herein are for proved developed and proved undeveloped reserves. Proved developed reserves include proved developed producing and proved developed non-producing reserves. Seneca’s estimates do not include probable or possible reserves that may exist for these properties, nor do they include any consideration of undeveloped acreage beyond those tracts for which undeveloped reserves have been estimated. Reserves categorization conveys the relative degree of certainty; reserves subcategorization is based on development and production status. The estimates of reserves and future revenue included herein have not been adjusted for risk.
Oil prices used by Seneca are based on regional posted prices in effect on September 30, 2007, and are adjusted by lease for quality, transportation fees, and infield price differentials. Gas prices used by Seneca are based on regional spot market prices in effect on September 30, 2007, and are adjusted by lease for energy content, transportation fees, and infield price differentials. As a reference, the September 30, 2007, Plains Marketing, L.P. West Texas Intermediate posted price was $78.25 per barrel and the September 30, 2007, Platts Henry Hub spot market price was $6.380 per MMBTU. All prices are held constant in accordance with SEC guidelines.
Lease and well operating costs used by Seneca are based on historical operating expense records. These costs include the per-well overhead expenses allowed under joint operating agreements along with estimates of costs to be incurred at and below the district and field levels. No headquarters general and administrative overhead expenses of Seneca are included. Lease and well operating costs are held constant in accordance with SEC guidelines. Seneca’s estimates of capital costs are included as required for workovers, new development wells, production equipment, and abandonment.

 


 

NETHERLAND, SEWELL & ASSOCIATES, INC.
It should be understood that our audit does not constitute a complete reserves study of the oil and gas properties of Seneca. Our audit consisted primarily of substantive testing, wherein we conducted a detailed review of major properties making up approximately 99 percent of the company’s total proved reserves and accounting for approximately 99 percent of the present worth for those reserves. In the conduct of our audit, we have not independently verified the accuracy and completeness of information and data furnished by Seneca with respect to ownership interests, oil and gas production, well test data, historical costs of operation and development, product prices, or any agreements relating to current and future operations of the properties and sales of production. However, if in the course of our examination something came to our attention that brought into question the validity or sufficiency of any such information or data, we did not rely on such information or data until we had satisfactorily resolved our questions relating thereto or had independently verified such information or data. Our audit did not include a review of Seneca’s overall reserves management processes and practices.
In evaluating the information at our disposal concerning this audit, we have excluded from our consideration all matters as to which the controlling interpretation may be legal or accounting, rather than engineering and geologic. As in all aspects of oil and gas evaluation, there are uncertainties inherent in the interpretation of engineering and geologic data; therefore, our conclusions necessarily represent only informed professional judgment.
Supporting data documenting this audit, along with data provided by Seneca, are on file in our office. We are independent petroleum engineers, geologists, geophysicists, and petrophysicists with respect to Seneca Resources Corporation as provided in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. We do not own an interest in these properties and are not employed on a contingent basis.
             
        Sincerely,
 
           
        NETHERLAND, SEWELL & ASSOCIATES, INC.
 
           
 
      By:   /s/ Frederic D. Sewell, P.E.
 
           
 
          Frederic D. Sewell, P.E.
Chairman and Chief Executive Officer
 
           
By:
  /s/ Danny D. Simmons, P.E.   By:   /s/ Mike K. Norton, P.G.
 
           
 
  Danny D. Simmons, P.E.
Executive Vice President
      Mike K. Norton, P.G.
Senior Vice President
 
           
Date Signed: October 17, 2007   Date Signed: October 17, 2007
RBT:JJH

 

 

EXHIBIT 99.2
Exploration and Production
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Pipeline and Storage
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Timber
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Utility
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Energy Marketing
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