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U.S. Securities and Exchange Commission

SECURITIES AND EXCHANGE COMMISSION

(Release No. 35-27790; 70-10168)

National Fuel Gas Company, et al.

Order Authorizing Acquisition of Nonutility Businesses; Payment of Dividends Out of Capital and Unearned Surplus; and Retirement and Reacquisition Certain Securities Issued to Associated Companies

December 30, 2003

National Fuel Gas Company ("National Fuel Gas"), a registered holding company under the Public Utility Holding Company Act of 1935, as amended ("Act"), and its nonutility subsidiaries ("Nonutility Subsidiaries") National Fuel Gas Supply Corporation ("Supply"), Empire State Pipeline ("Empire"), Upstate Energy Inc. ("Upstate"), all Buffalo, New York, National Fuel Resources, Inc. ("Resources"), Williamsville, New York, and Seneca Resources Corporation, Houston, Texas ("Seneca" and collectively, "Applicants"), have filed with the Securities and Exchange Commission ("Commission") an application-declaration ("Application") with the Commission under sections 6(a), 7, 9(a), 10, 12(c) and 12(f) of Act and rules 45, 46 and 54 under the Act. The Commission issued a notice of the Application on November 5, 2003 (Holding Co. Act Release No. 27747).

National Fuel Gas, through its direct and indirect subsidiaries, is engaged in all phases of the natural gas business: exploration, production, purchasing, gathering, processing, transportation, storage, retail distribution and wholesale and retail marketing. The company owns all of the issued and outstanding common stock of National Fuel Gas Distribution Corporation ("Distribution"), a gas-utility company that distributes natural gas at retail to approximately 733,000 residential, commercial and industrial customers (including transportation-only customers) in portions of western New York and northwestern Pennsylvania. For the twelve months ended June 30, 2003, National Fuel Gas had operating revenues of approximately $2 billion, of which $1.1 were attributable to regulated gas utility sales, $200 million to pipeline and storage operations, and $300 million to exploration and production activities. As of June 30, 2003, National Fuel Gas and its subsidiaries had total assets valued at approximately $3.8 billion, including $1.3 billion in net utility (i.e., distribution) plant, $786 million in net pipeline and storage plant, and $1.1 billion in next exploration and production property, plant and equipment.

Supply, an interstate pipeline company, transports and stores natural gas for Distribution and for other utilities, pipelines, marketers and large industrial customers in the northeastern United States. Supply owns and operates a 2,900-mile pipeline network that extends generally from southwestern Pennsylvania to the U.S.-Canadian border at Niagara Falls. It is regulated by the Federal Energy Regulatory Commission as a natural gas company under the Natural Gas Act of 1938.

Empire, an intrastate pipeline company, transports natural gas for Distribution and for other utilities, large industrial customers and power producers in New York State. The company owns a 157-mile pipeline that extends generally from the U.S.-Canadian border at the Chippawa Channel of the Niagara River near Buffalo, N.Y. to near Syracuse, N.Y, and is regulated by the New York Public Service Commission.

Seneca is engaged in the business of exploration and development of natural gas and oil producing reserves in California, in the Appalachian region of the United States, in Wyoming and in the Gulf Coast region of Texas and Louisiana. In addition, Seneca conducts exploration and production operations through subsidiaries in the provinces of Alberta, Saskatchewan and British Columbia in Canada.

Resources markets natural gas to approximately 22,000 industrial, commercial and residential customers under long-term agreements, and provides other related energy services to those end-use customers. Upstate Energy engages through subsidiaries in gas marketing and related activities, and is a "gas-related company" within the meaning of rule 58. Neither Resources nor Upstate Energy owns or operates facilities for the distribution of gas at retail or for the generation, transmission or distribution of electricity for sale.

By order dated December 16, 1999 (Holding Co. Act Release No. 27114, "December 1999 Order"), the Commission authorized National Fuel Gas, through Supply, Resources, Seneca and Upstate, to acquire the equity and debt securities of one or more companies that are engaged in or are formed to engage in certain categories of non-utility gas-related operations outside the United States ("Foreign Energy Affiliates"). Specifically, the Commission authorized National and the Nonutility Subsidiaries (except as described below) to invest up to $300 million through December 31, 2003 in the securities of Foreign Energy Affiliates, and authorized Resources and Upstate Energy to engage directly in marketing and brokering and related activities in Canada.1

By order dated December 27, 2000 (Holding Co. Act Release No. 27320, "December 2000 Order"), the Commission modified the December 1999 Order to authorize National Fuel Gas to invest up to an aggregate amount of $800 million (from $300 million) in Foreign Energy Affiliates.

Applicants now request authority for National Fuel Gas to acquire directly, or indirectly through the Nonutility Subsidiaries, one or more newly organized direct subsidiaries of National Fuel Gas or one or more subsidiaries of the Nonutility Subsidiaries ("Intermediate Subsidiaries"), the securities of or other interests in Foreign Energy Affiliates through December 31, 2006 ("Authorization Period"). The aggregate amount invested by National Fuel Gas and its subsidiaries in Foreign Energy Affiliates will not exceed $800 million. Applicants request that the Commission reserve jurisdiction over acquisitions of Foreign Energy Affiliates doing business outside Canada and Mexico.

Generally, the operations of Foreign Energy Affiliates will be substantially similar to those that the Nonutility Subsidiaries are now directly engaged in within the United States. Foreign Energy Affiliates will engage three lines of business: natural gas and oil exploration and production operations; the construction and/or operation of pipeline and gas storage facilities ("Pipeline & Storage Activities");2 and brokering and marketing of natural gas and other energy commodities and incidental and related activities including, for example, the operation of natural gas or oil storage facilities, natural gas gathering and/or processing facilities, and pipeline spurs to serve industrial customers, power generators or utilities, and the operation of meters, regulators, and other similar non-utility equipment. Incidental and related activities would also include the performance of energy management services, risk management services and the design and installation of energy-saving systems. Brokering transactions would involve acting as a middle-man, usually for a fee, in structuring transactions in energy commodities between unrelated parties. Marketing transactions may take a variety of forms. For example, marketing transactions may consist of purchases from, and sales of gas and other energy commodities to, wholesale customers, end-use customers, and other marketers, where the performance of the parties in most instances would be by physical delivery of the underlying commodity. Marketing transactions may also include swaps or exchanges of energy commodities, or the sale or purchase of options, exchange traded futures contracts or other derivative products, which may or may not be settled by physical delivery. Resources and Upstate Energy may utilize, or cause subsidiaries to utilize, risk mitigation measures designed to minimize price and counterparty credit risk in all of these energy-related transactions and, in addition, certain risks associated with foreign currency fluctuations.3

Applicants state that: (1) they will not acquire any Foreign Energy Affiliates without a reasonable expectation (at the time of the acquisition) that the investment would be accretive to National Fuel Gas' earnings over a reasonable period of time; (2) they will not seek to recover any losses from or inadequate returns on investments in Foreign Energy Affiliates by increasing the rates of Distribution's customers; and (3) Distribution will not issue any security (including the assumption of any obligation or liability as guarantor, endorser, surety or otherwise), or pledge or otherwise encumber any part of its utility assets, for the purpose of financing, or otherwise in connection with, the acquisition, ownership or operation of any Foreign Energy Affiliates. Further, they state that Distribution will be insulated from any direct impact of the proposed transactions because Distribution will not acquire or hold a direct or indirect ownership (or other) interest in any Foreign Energy Affiliate.

Applicants request authority for Resources and Upstate to engage directly in marketing and brokering and related activities in Canada.

Applicants request authority during the Authorization Period for the Nonutility Subsidiaries, Intermediate Subsidiaries, and Foreign Energy Affiliates to: (1) pay dividends out of capital and unearned surplus; and (2) retire or reacquire any securities that have been issued to an associate company.

Applicants estimate that the fees, commissions and expenses to be incurred in connection with the Application will not exceed $15,000.

The transactions proposed are subject to rules 53 and 54. Applicants state that the conditions specified in rule 53(a) are satisfied and that none of the adverse conditions specified in rule 53(b) exist. As a result, the Commission will not consider the effect on the National Fuel Gas system of the capitalization or earnings of any National Fuel Gas subsidiary that is an exempt wholesale generator or foreign utility company, as those terms are defined in sections 32 and 33 of the Act, respectively, in determining whether to approve the proposed transactions.

Applicants state that, except as described below, no state commission and no federal commission, other than this Commission, has jurisdiction over the proposed transactions.4

Due notice of the filing of this Application has been given in the manner prescribed in rule 23 under the Act, and no hearing has been requested of or ordered by the Commission. Based on the facts in the record, it is found that the applicable standards of the Act are satisfied and that no adverse findings are necessary.

IT IS ORDERED, under the applicable provisions of the Act and rules under the Act, that the Application is granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act; provided, however, that National Fuel Gas submit the following information to the Commission in certificates filed under rule 24 under the Act, on a semi-annual basis, for the six-month periods ended March 31 and September 30 of each year (such reports to be submitted within 60 days after the end of the preceding semi-annual period, commencing with the first full semi-annual period following the issuance of the Commission's order in this file): (1) a brief narrative with respect to any transactions entered into or consummated during the preceding semi-annual period in which any Applicant acquired or agreed to acquire any Foreign Energy Affiliate; and (2) the amount of the aggregate investment in Foreign Energy Affiliates as of the end of the preceding semi-annual period.

IT IS FURTHER ORDERED, that jurisdiction is reserved over the proposed acquisitions of Foreign Energy Affiliates operating outside of Canada and Mexico, pending completion of the record.

For the Commission, by the Division of Investment Management, pursuant to delegated authority.


Jill M. Peterson
Assistant Secretary


Endnotes:


http://www.sec.gov/divisions/investment/opur/filing/35-27790.htm

Modified: 01/08/2004