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 and reports financial results for four 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 727,000 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 Pipeline, Inc. (Empire), a New York corporation. 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) 27 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 other interstate gas pipeline companies. Empire, an interstate pipeline company, transports natural gas for Distribution Corporation and for other utilities, large industrial customers and power producers in New York State. Empire owns the Empire Pipeline, 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, and the Empire Connector, which is a 76-mile pipeline extension from near Rochester, New York to an interconnection with the unaffiliated Millennium Pipeline near Corning, New York. The Millennium Pipeline serves the New York City area. The Empire Connector was placed into service on December 10, 2008.
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, and in the Gulf Coast region of Texas and Louisiana, including offshore areas in federal waters and some state waters. At September 30, 2009, the Company had U.S. proved developed and undeveloped reserves of 46,587 Mbbl of oil and 248,954 MMcf of natural gas.
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.
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, wholesale, commercial, public authority and residential customers primarily in western and central New York and northwestern Pennsylvania, offering competitively priced natural gas for its customers.
The Company’s other direct wholly owned subsidiaries are not included in any of the four reported business segments and include the following active companies:
Highland Forest Resources, Inc. (Highland), a New York corporation which, together with a division of Seneca known as its Northeast Division, markets timber from New York and Pennsylvania land holdings, owns two sawmills in northwestern Pennsylvania and processes timber consisting primarily of high quality hardwoods. At September 30, 2009, the Company owned 103,317 acres of timber property and managed an additional 3,424 acres of timber rights;
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. In July 2005, Horizon B.V. sold its entire 85.16% interest in United Energy, a.s., a district heating and electric generation business in the Czech Republic;
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;
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
National Fuel Gas Midstream Corporation (Midstream Corporation), a Pennsylvania corporation formed to build, own and operate natural gas processing and pipeline gathering facilities in the Appalachian region.
No single customer, or group of customers under common control, accounted for more than 10% of the Company’s consolidated revenues in 2009.
The Utility Segment
The Utility segment contributed approximately 58.3% of the Company’s 2009 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 47.0% of the Company’s 2009 net income available for common stock.
Supply Corporation has year-to-year or longer service agreements for all of its firm storage capacity, totaling 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 4,811 MDth or 7.1% of the total firm storage capacity. Nonaffiliated customers have contracted for the remaining 35,732 MDth or 52.2% of the total firm storage capacity. The majority of Supply Corporation’s storage and transportation services are 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 2010, 82.9% of Supply Corporation’s total firm storage capacity was committed under contracts that, subject to 2009 shipper or Supply Corporation notifications, could have been terminated effective in 2010. Supply Corporation did not issue or receive any such storage contract termination notifications in 2009. The strong demand for market-area storage enabled Supply Corporation to provide all of its year-to-year or longer storage services in 2009 at the maximum tariff rates.
Supply Corporation’s firm transportation capacity is not a fixed quantity, due to the diverse web-like nature of its pipeline system, and is subject to change as the market identifies different transportation paths and receipt/delivery point combinations. Supply Corporation currently has firm transportation service agreements for approximately 2,189 MDth per day (contracted transportation capacity). The Utility segment accounts for approximately 1,065 MDth per day or 48.7% of contracted transportation capacity, and the Energy Marketing and Exploration and Production segments represent another 112 MDth per day or 5.1% of contracted transportation capacity. The remaining 1,012 MDth or 46.2% of contracted transportation capacity is subject to firm contracts with nonaffiliated customers.
At the beginning of 2010, 52.7% of Supply Corporation’s contracted transportation capacity was committed under affiliate contracts that were scheduled to expire in 2010 or, subject to 2009 shipper or Supply Corporation notifications, could have been terminated effective in 2010. Based on contract expirations and termination notices received in 2009 for 2010 termination, and taking into account any known contract dditions, contracted transportation capacity with affiliates is expected to increase 3.0% in 2010. Similarly, 33.0% of contracted transportation capacity was committed under unaffiliated shipper contracts that were scheduled to expire in 2010 or, subject to 2009 shipper or Supply Corporation notifications, could have been terminated effective in 2010. Based on contract expirations and termination notices received in 2009 for 2010 termination, and taking into account any known contract additions, contracted transportation capacity with unaffiliated shippers is expected to increase 5.3% in 2010. This increase is due largely to the addition of compression at various facilities throughout the system as well as other projects designed to create incremental transportation capacity. 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.
For the 2009-2010 winter period, Empire has service agreements in place for firm transportation capacity totaling approximately 689 MDth per day (including capacity on the new Empire Connector facilities discussed below). Most of Empire’s firm contracted capacity (93.0%) has been contracted as long-term full-year deals. Two of those contracts are due to expire during 2010, representing just 0.1% of Empire’s firm contracted capacity. In addition, Empire has some seasonal (winter-only) contracts that extend for multiple years, representing 2.5% of Empire’s firm contracted capacity. One of those seasonal contracts is due to expire during 2010, representing just 0.1% of Empire’s firm contracted capacity. Arrangements for the remaining 4.5% of Empire’s firm contracted capacity are single-season or single-year contracts that expire during 2010 or early in 2011. Empire expects that all available capacity arising from expiring agreements will be re-contracted as seasonal or full-year agreements. The Utility segment accounts for 6.1% of Empire’s firm contracted capacity, and the Energy Marketing segment accounts for 1.2% of Empire’s firm contracted capacity, with the remaining 92.7% of Empire’s firm contracted capacity subject to contracts with nonaffiliated customers.
Empire’s new facilities (the Empire Connector project) were placed into service on December 10, 2008. Empire has a firm service agreement for 150.7 MDth per day of this expansion capacity. This long-term full-year agreement represents approximately 60% of the Empire Connector’s total capacity. None of this contracted capacity will expire during fiscal 2010.
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 incurred a net loss in 2009. The impact of this net loss in relation to the Company’s 2009 net income available for common stock was negative 10.2%. The net loss in the Exploration and Production segment was largely driven by an impairment charge of $182.8 million ($108.2 million after tax).
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 7.1% of the Company’s 2009 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.
All Other Category and Corporate Operations
The All Other category and Corporate operations incurred a net loss in 2009. The impact of this net loss in relation to the Company’s 2009 net income available for common stock was negative 2.2%.
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.
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 2009, the Utility segment purchased 76.8 Bcf of gas for delivery to its customers. All such purchases were made from non-affiliated companies. Gas purchased from producers and suppliers in the southwestern United States and Canada under firm contracts (seasonal and longer) accounted for 56% of these purchases. Purchases of gas under contracts for one month or less accounted for 44% of the Utility segment’s 2009 purchases. Purchases from Total Gas & Power North America Inc. (20%), Chevron Natural Gas (15%), BP Canada (14%) and ConocoPhillips Company (12%) accounted for 61% of the Utility’s 2009 gas purchases. No other producer or supplier provided the Utility segment with more than 10% of its gas requirements in 2009.
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 K — Business Segment Information and Note Q — Supplementary Information for Oil and Gas Producing Activities.
The Energy Marketing segment depends on an adequate supply of natural gas to deliver to its customers. In 2009, this segment purchased 62.5 Bcf of gas, including 60.9 Bcf for delivery to its customers. The remaining 1.6 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.