UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

NATIONAL FUEL GAS COMPANY

(Exact name of registrant as specified in its charter)

New Jersey		13-1086010
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
6363 Main Street
Williamsville, New York		14221
(Address of principal executive offices)		(Zip Code)

(716) 857-7000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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 Exchange Act). YES o NO þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Common stock, $1 par value, outstanding at April 30, 2007: 83,475,537 shares.

 

 

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 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
Regulatory Agencies
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
2006 Form 10-K		The Company’s Annual Report on Form 10-K for the year ended September 30, 2006
Bbl		Barrel (of oil)
Bcf		Billion cubic feet (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.
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.
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.

GLOSSARY OF TERMS (Cont.)
Exchange Act		Securities Exchange Act of 1934, as amended
Expenditures for long-lived assets		Includes capital expenditures, stock acquisitions and/or investments in partnerships.
FIN		FASB Interpretation Number
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.
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.
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)
Precedent Agreement		An agreement between a pipeline company and a potential customer to sign a service agreement after specified events (called “conditions precedent”) happen, usually within a specified time.
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.
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 a statutory or regulatory process. Restructuring of federally regulated natural gas pipelines has resulted in the separation (or “unbundling”) of gas commodity service from transportation service for wholesale and large-volume retail markets. State restructuring programs attempt to extend the same process to retail mass markets.
SAR		Stock-settled stock appreciation right
SFAS		Statement of Financial Accounting Standards
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 115		Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities

GLOSSARY OF TERMS (Concl.)
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 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
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.
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.

INDEX

		Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
a. Consolidated Statements of Income and Earnings Reinvested in the Business — Three and Six Months Ended March 31, 2007 and 2006			6 - 7
b. Consolidated Balance Sheets – March 31, 2007 and September 30, 2006			8 - 9
c. Consolidated Statement of Cash Flows – Six Months Ended March 31, 2007 and 2006			10
d. Consolidated Statements of Comprehensive Income — Three and Six Months Ended March 31, 2007 and 2006			11
e. Notes to Consolidated Financial Statements			12 - 21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22 - 41
Item 3. Quantitative and Qualitative Disclosures About Market Risk			41
Item 4. Controls and Procedures			41 - 42
Part II. Other Information
Item 1. Legal Proceedings			42 - 43
Item 1 A. Risk Factors			43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			43
Item 3. Defaults Upon Senior Securities			•
Item 4. Submission of Matters to a Vote of Security Holders			44
Item 5. Other Information			•
Item 6. Exhibits			45
Signatures			46
EX-10.1
EX-10.2
EX-12
EX-31.1
EX-31.2
EX-32
EX-99

•    The Company has nothing to report under this item.

     Reference to “the Company” in this report means the Registrant or the Registrant and its subsidiaries collectively, as appropriate in the context of the disclosure. All references to a certain year in this report are to the Company’s fiscal year ended September 30 of that year, unless otherwise noted.

     This Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements should be read with the cautionary statements and important factors included in this Form 10-Q at Item 2 — MD&A, under the heading “Safe Harbor for Forward-Looking Statements.” Forward-looking statements are all statements other than statements of historical fact, including, without limitation, those statements that are designated with an asterisk (“*”) following the statement, as well as those statements that are identified by the use of the words “anticipates,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” and similar expressions.

Part I. Financial Information

Item 1. Financial Statements

National Fuel Gas Company

Reinvested in the Business
(Unaudited)

		Three Months Ended
		March 31,
(Thousands of Dollars, Except Per Common Share Amounts)		2007				2006
INCOME
Operating Revenues		$	812,156			$	890,981
Operating Expenses
Purchased Gas			476,904				566,540
Operation and Maintenance			125,539				121,076
Property, Franchise and Other Taxes			20,233				20,120
Depreciation, Depletion and Amortization			42,061				44,278
			664,737				752,014
Operating Income			147,419				138,967
Other Income (Expense):
Income from Unconsolidated Subsidiaries			942				720
Interest Income			885				965
Other Income			2,526				248
Interest Expense on Long-Term Debt			(17,888	)			(18,149	)
Other Interest Expense			(1,516	)			(1,465	)
Income Before Income Taxes			132,368				121,286
Income Tax Expense			53,921				42,692
Net Income Available for Common Stock			78,447				78,594
EARNINGS REINVESTED IN THE BUSINESS
Balance at December 31			781,728				845,951
			860,175				924,545
Share Repurchases			333				22,619
Dividends on Common Stock (2007 - $0.30; 2006 - $0.29)			24,940				24,327
Balance at March 31		$	834,902			$	877,599
Earnings Per Common Share:
Basic:
Net Income Available for Common Stock		$	0.95			$	0.93
Diluted:
Net Income Available for Common Stock		$	0.92			$	0.91
Weighted Average Common Shares Outstanding:
Used in Basic Calculation			82,895,087				84,346,733
Used in Diluted Calculation			85,033,127				86,253,597

See Notes to Condensed Consolidated Financial Statements

Item 1. Financial Statements (Cont.)

National Fuel Gas Company
Consolidated Statements of Income and Earnings
Reinvested in the Business
(Unaudited)

		Six Months Ended
		March 31,
(Thousands of Dollars, Except Per Common Share Amounts)		2007				2006
INCOME
Operating Revenues		$	1,316,396			$	1,601,737
Operating Expenses
Purchased Gas			719,843				1,003,317
Operation and Maintenance			224,913				224,704
Property, Franchise and Other Taxes			37,345				37,302
Depreciation, Depletion and Amortization			84,886				87,324
			1,066,987				1,352,647
Operating Income			249,409				249,090
Other Income (Expense):
Income from Unconsolidated Subsidiaries			2,173				1,985
Interest Income			2,248				2,098
Other Income			3,241				989
Interest Expense on Long-Term Debt			(33,931	)			(36,367	)
Other Interest Expense			(3,366	)			(3,240	)
Income Before Income Taxes			219,774				214,555
Income Tax Expense			86,807				78,542
Net Income Available for Common Stock			132,967				136,013
EARNINGS REINVESTED IN THE BUSINESS
Balance at October 1			786,013				813,020
			918,980				949,033
Share Repurchases			34,351				22,619
Dividends on Common Stock (2007 - $0.60; 2006 - $0.58)			49,727				48,815
Balance at March 31		$	834,902			$	877,599
Earnings Per Common Share:
Basic:
Net Income Available for Common Stock		$	1.61			$	1.61
Diluted:
Net Income Available for Common Stock		$	1.57			$	1.58
Weighted Average Common Shares Outstanding:
Used in Basic Calculation			82,786,027				84,385,140
Used in Diluted Calculation			84,891,742				86,256,515

See Notes to Condensed Consolidated Financial Statements

Item 1. Financial Statements (Cont.)

National Fuel Gas Company

		March 31,				September 30,
		2007				2006
(Thousands of Dollars)
ASSETS
Property, Plant and Equipment		$	4,820,700			$	4,703,040
Less — Accumulated Depreciation, Depletion and Amortization			1,893,449				1,825,314
			2,927,251				2,877,726
Current Assets
Cash and Temporary Cash Investments			121,809				69,611
Hedging Collateral Deposits			2,034				19,676
Receivables — Net of Allowance for Uncollectible Accounts of $44,471 and $31,427, Respectively			335,666				144,254
Unbilled Utility Revenue			58,850				25,538
Gas Stored Underground			17,021				59,461
Materials and Supplies — at average cost			31,853				36,693
Unrecovered Purchased Gas Costs			13,962				12,970
Prepaid Pension and Post-Retirement Benefit Costs			68,483				64,125
Other Current Assets			30,700				63,723
Deferred Income Taxes			23,951				23,402
			704,329				519,453
Other Assets
Recoverable Future Taxes			79,177				79,511
Unamortized Debt Expense			14,482				15,492
Other Regulatory Assets			85,427				76,917
Deferred Charges			5,234				3,558
Other Investments			80,866				88,414
Investments in Unconsolidated Subsidiaries			15,850				11,590
Goodwill			5,476				5,476
Intangible Assets			30,423				31,498
Fair Value of Derivative Financial Instruments			1,866				11,305
Deferred Income Taxes			4,627				9,003
Other			6,010				4,388
			329,438				337,152
Total Assets		$	3,961,018			$	3,734,331

See Notes to Condensed Consolidated Financial Statements

Item 1. Financial Statements (Cont.)

National Fuel Gas Company

		March 31,				September 30,
		2007				2006
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
Capitalization:
Comprehensive Shareholders’ Equity
Common Stock, $1 Par Value Authorized — 200,000,000 Shares; Issued And Outstanding — 83,132,149 Shares and 83,402,670 Shares, Respectively		$	83,132			$	83,403
Paid in Capital			565,809				543,730
Earnings Reinvested in the Business			834,902				786,013
Total Common Shareholder Equity Before Items of Other Comprehensive Income			1,483,843				1,413,146
Accumulated Other Comprehensive Income			21,733				30,416
Total Comprehensive Shareholders’ Equity			1,505,576				1,443,562
Long-Term Debt, Net of Current Portion			999,000				1,095,675
Total Capitalization			2,504,576				2,539,237
Current and Accrued Liabilities
Notes Payable to Banks and Commercial Paper			—				—
Current Portion of Long-Term Debt			96,393				22,925
Accounts Payable			166,990				133,034
Amounts Payable to Customers			10,596				23,935
Dividends Payable			24,927				25,008
Interest Payable on Long-Term Debt			18,419				18,420
Other Accruals and Current Liabilities			176,307				27,040
Fair Value of Derivative Financial Instruments			32,122				39,983
			525,754				290,345
Deferred Credits
Deferred Income Taxes			556,115				544,502
Taxes Refundable to Customers			10,433				10,426
Unamortized Investment Tax Credit			5,743				6,094
Cost of Removal Regulatory Liability			87,986				85,076
Other Regulatory Liabilities			70,842				75,456
Post-Retirement Liabilities			26,953				32,918
Asset Retirement Obligations			79,609				77,392
Other Deferred Credits			93,007				72,885
			930,688				904,749
Commitments and Contingencies			—				—
Total Capitalization and Liabilities		$	3,961,018			$	3,734,331

See Notes to Condensed Consolidated Financial Statements

Item 1. Financial Statements (Cont.)

National Fuel Gas Company

		Six Months Ended
		March 31,
(Thousands of Dollars)		2007				2006
OPERATING ACTIVITIES
Net Income Available for Common Stock		$	132,967			$	136,013
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation, Depletion and Amortization			84,886				87,324
Deferred Income Taxes			21,803				(1,435	)
(Income) Loss from Unconsolidated Subsidiaries, Net of Cash Distributions			(960	)			1,166
Excess Tax Benefits Associated with Stock-Based Compensation Awards			(13,689	)			(6,515	)
Other			3,818				(5,297	)
Change in:
Hedging Collateral Deposits			17,642				60,894
Receivables and Unbilled Utility Revenue			(225,511	)			(249,466	)
Gas Stored Underground and Materials and Supplies			47,243				33,486
Unrecovered Purchased Gas Costs			(992	)			14,817
Prepayments and Other Current Assets			28,659				24,372
Accounts Payable			34,417				(9,951	)
Amounts Payable to Customers			(13,339	)			11,492
Other Accruals and Current Liabilities			163,928				139,020
Other Assets			(3,765	)			(11,837	)
Other Liabilities			(2,434	)			19,107
Net Cash Provided by Operating Activities			274,673				243,190
INVESTING ACTIVITIES
Capital Expenditures			(132,313	)			(134,961	)
Investment in Partnership			(3,300	)			—
Net Proceeds from Sale of Oil and Gas Producing Properties			2,330				4
Other			(339	)			(1,396	)
Net Cash Used in Investing Activities			(133,622	)			(136,353	)
FINANCING ACTIVITIES
Excess Tax Benefits Associated with Stock-Based Compensation Awards			13,689				6,515
Shares Repurchased under Repurchase Plan			(43,344	)			(26,577	)
Reduction of Long-Term Debt			(23,207	)			(4,529	)
Dividends Paid on Common Stock			(49,808	)			(48,933	)
Net Proceeds from Issuance of Common Stock			14,604				7,164
Net Cash Used in Financing Activities			(88,066	)			(66,360	)
Effect of Exchange Rates on Cash			(787	)			15
Net Increase in Cash and Temporary Cash Investments			52,198				40,492
Cash and Temporary Cash Investments at October 1			69,611				57,607
Cash and Temporary Cash Investments at March 31		$	121,809			$	98,099

See Notes to Condensed Consolidated Financial Statements

Item 1. Financial Statements (Cont.)

National Fuel Gas Company

		Three Months Ended
		March 31,
(Thousands of Dollars)		2007				2006
Net Income Available for Common Stock		$	78,447			$	78,594
Other Comprehensive Income (Loss), Before Tax:
Foreign Currency Translation Adjustment			1,223				(991	)
Minimum Pension Liability Adjustment			(320	)			—
Unrealized Gain on Securities Available for Sale Arising During the Period			483				1,121
Unrealized Gain (Loss) on Derivative Financial Instruments Arising During the Period			(20,456	)			21,618
Reclassification Adjustment for Realized (Gains) Losses on Derivative Financial Instruments in Net Income			(958	)			25,794
Other Comprehensive Income (Loss), Before Tax			(20,028	)			47,542
Income Tax Benefit Related to Minimum Pension Liability Adjustment			(121	)			—
Income Tax Expense Related to Unrealized Gain on Securities Available for Sale Arising During the Period			209				392
Income Tax Expense (Benefit) Related to Unrealized Gain (Loss) on Derivative Financial Instruments Arising During the Period			(8,494	)			8,334
Reclassification Adjustment for Income Tax (Expense) Benefit on Realized (Gains) Losses from Derivative Financial Instruments In Net Income			(364	)			10,000
Income Taxes — Net			(8,770	)			18,726
Other Comprehensive Income (Loss)			(11,258	)			28,816
Comprehensive Income		$	67,189			$	107,410

		Six Months Ended
		March 31,
(Thousands of Dollars)		2007				2006
Net Income Available for Common Stock		$	132,967			$	136,013
Other Comprehensive Income (Loss), Before Tax:
Foreign Currency Translation Adjustment			(3,645	)			(736	)
Minimum Pension Liability Adjustment			(320	)			—
Unrealized Gain on Securities Available for Sale Arising During the Period			1,274				2,263
Unrealized Gain (Loss) on Derivative Financial Instruments Arising During the Period			(10,955	)			62,615
Reclassification Adjustment for Realized Losses on Derivative Financial Instruments in Net Income			2,218				63,725
Other Comprehensive Income (Loss), Before Tax			(11,428	)			127,867
Income Tax Benefit Related to Minimum Pension Liability Adjustment			(121	)			—
Income Tax Expense Related to Unrealized Gain on Securities Available for Sale Arising During the Period			484				791
Income Tax Expense (Benefit) Related to Unrealized Gain (Loss) on Derivative Financial Instruments Arising During the Period			(4,764	)			24,110
Reclassification Adjustment for Income Tax Benefit on Realized Losses from Derivative Financial Instruments In Net Income			1,656				24,586
Income Taxes — Net			(2,745	)			49,487
Other Comprehensive Income (Loss)			(8,683	)			78,380
Comprehensive Income		$	124,284			$	214,393

See Notes to Condensed Consolidated Financial Statements

Item 1. Financial Statements (Cont.)

National Fuel Gas Company

Note 1 — Summary of Significant Accounting Policies

Principles of Consolidation. The Company consolidates its majority owned entities. The equity method is used to account for minority owned entities. All significant intercompany balances and transactions are eliminated.

     The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Earnings for Interim Periods. The Company, in its opinion, has included all adjustments that are necessary for a fair statement of the results of operations for the reported periods. The consolidated financial statements and notes thereto, included herein, should be read in conjunction with the financial statements and notes for the years ended September 30, 2006, 2005 and 2004 that are included in the Company’s 2006 Form 10-K. The consolidated financial statements for the year ended September 30, 2007 will be audited by the Company’s independent registered public accounting firm after the end of the fiscal year.

     The earnings for the six months ended March 31, 2007 should not be taken as a prediction of earnings for the entire fiscal year ending September 30, 2007. Most of the business of the Utility and Energy Marketing segments is seasonal in nature and is influenced by weather conditions. Due to the seasonal nature of the heating business in the Utility and Energy Marketing segments, earnings during the winter months normally represent a substantial part of the earnings that those segments are expected to achieve for the entire fiscal year. The Company’s business segments are discussed more fully in Note 5 – Business Segment Information.

Consolidated Statement of Cash Flows. For purposes of the Consolidated Statement of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity of generally three months or less to be cash equivalents.

Hedging Collateral Deposits. Cash held in margin accounts serve as collateral for open positions on exchange-traded futures contracts, exchange-traded options and over-the-counter swaps and collars.

Gas Stored Underground — Current. In the Utility segment, gas stored underground – current is carried at lower of cost or market, on a LIFO method. Gas stored underground – current normally declines during the first and second quarters of the year and is replenished during the third and fourth quarters. In the Utility segment, the current cost of replacing gas withdrawn from storage is recorded in the Consolidated Statements of Income and a reserve for gas replacement is recorded in the Consolidated Balance Sheets under the caption “Other Accruals and Current Liabilities.” Such reserve, which amounted to $141.8 million at March 31, 2007, is reduced to zero by September 30 of each year as the inventory is replenished.

Accumulated Other Comprehensive Income. The components of Accumulated Other Comprehensive Income, net of related tax effect, are as follows (in thousands):

Item 1. Financial Statements (Cont.)

		At March 31, 2007				At September 30, 2006
Minimum Pension Liability Adjustment		$	(199	)		$	—
Cumulative Foreign Currency Translation Adjustment			31,056				34,701
Net Unrealized Loss on Derivative Financial Instruments			(17,139	)			(11,510	)
Net Unrealized Gain on Securities Available for Sale			8,015				7,225
Accumulated Other Comprehensive Income		$	21,733			$	30,416

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. For purposes of determining earnings per common share, the only potentially dilutive securities the Company has outstanding are stock options and stock-settled SARs. The diluted weighted average shares outstanding shown on the Consolidated 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 the quarter and six months ended March 31, 2007, 11,879 and 283,288 stock options, respectively, were excluded as being antidilutive. In addition, there were 11,111 and 5,494 stock-settled SARs excluded as being antidilutive for the quarter and six months ended March 31, 2007, respectively. For the quarter and six months ended March 31, 2006, there were no stock options or stock-settled SARs excluded as being antidilutive.

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 3 – Capitalization for further discussion of the share repurchase program.

Stock-Based Compensation. For the quarter and six months ended March 31, 2007, the Company granted 50,000 stock-settled SARs having a weighted average exercise price of $41.20 per share. The weighted average grant date fair value of these stock-settled SARs was $7.81 per share for the quarter and six months ended March 31, 2007. The accounting treatment for such stock-settled SARs is the same under SFAS 123R as the accounting for stock options under SFAS 123R. There were no stock options granted during the quarter ended March 31, 2007. During the six months ended March 31, 2007, the Company granted 448,000 stock options having a weighted average exercise price of $39.48 per share. The weighted average grant date fair value of such options was $7.27 per share for the six months ended March 31, 2007. The Company also granted 10,000 and 25,000 restricted share awards (non-vested stock as defined in SFAS 123R), during the quarter and six months ended March 31, 2007, respectively. The weighted average fair values of such restricted shares were $41.20 and $40.18 per share, respectively, for the quarter and six months ended March 31, 2007.

New Accounting Pronouncements. In July 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. The cumulative effect of applying FIN 48 at

Item 1. Financial Statements (Cont.)

adoption, if any, is to be 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. The Company is currently assessing the potential effect of FIN 48 on its 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. The Company is required to recognize the funded status of its benefit plans and the disclosure requirements of SFAS 158 by the fourth quarter of fiscal 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. If the Company recognized the funded status of its pension and post-retirement benefit plans at September 30, 2006, the Company’s Consolidated Balance Sheet would reflect a liability of $232.5 million instead of the prepaid pension and post-retirement costs of $64.1 million and post-retirement liabilities of $32.9 million that were presented on the balance sheet at September 30, 2006. The Company expects that it will record a regulatory asset for the majority of this liability with the remainder reflected in accumulated other comprehensive income. The Company will recalculate the funded status of its pension and post-retirement benefit plans during the fourth quarter of fiscal 2007.

     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 2 — Income Taxes

     The components of federal, state and foreign income taxes included in the Consolidated Statements of Income are as follows (in thousands):

Item 1. Financial Statements (Cont.)

		Six Months Ended
		March 31,
		2007				2006
Operating Expenses:
Current Income Taxes
Federal		$	49,937			$	62,466
State			14,823				15,181
Foreign			244				2,328
Deferred Income Taxes
Federal			14,181				(1,433	)
State			3,546				(223	)
Foreign			4,076				223
			86,807				78,542
Other Income:
Deferred Investment Tax Credit			(348	)			(348	)
Total Income Taxes		$	86,459			$	78,194

     The U.S. and foreign components of income before income taxes are as follows (in thousands):

		Six Months Ended
		March 31,
		2007				2006
U.S.		$	208,512			$	195,503
Foreign			10,914				18,704
		$	219,426			$	214,207

     Total income taxes as reported differ from the amounts that were computed by applying the federal income tax rate to income before income taxes. The following is a reconciliation of this difference (in thousands):

		Six Months Ended
		March 31,
		2007				2006
Income Tax Expense, Computed at Statutory Rate of 35%		$	76,799			$	74,972
Increase (Reduction) in Taxes Resulting From:
State Income Taxes			11,940				9,723
Foreign Tax Differential			428				(4,704	)(1)
Miscellaneous			(2,708	)			(1,797	)
Total Income Taxes		$	86,459			$	78,194

(1)		Includes a $5.1 million deferred tax benefit relating to additional future tax deductions forecasted in the Exploration and Production segment’s Canadian division.

     Significant components of the Company’s deferred tax liabilities and assets were as follows (in thousands):

Item 1. Financial Statements (Cont.)

		At March 31, 2007				At September 30, 2006
Deferred Tax Liabilities:
Property, Plant and Equipment		$	593,523			$	569,677
Other			35,876				37,865
Total Deferred Tax Liabilities			629,399				607,542
Deferred Tax Assets:
Capital Loss Carryover			(5,976	)			(8,786	)
Other			(95,886	)			(86,659	)
Total Deferred Tax Assets			(101,862	)			(95,445	)
Total Net Deferred Income Taxes		$	527,537			$	512,097
Presented as Follows:
Net Deferred Tax Asset – Current		$	(23,951	)		$	(23,402	)
Net Deferred Tax Asset – Non-Current			(4,627	)			(9,003	)
Net Deferred Tax Liability – Non-Current			556,115				544,502
Total Net Deferred Income Taxes		$	527,537			$	512,097

     Regulatory liabilities representing the reduction of previously recorded deferred income taxes with rate-regulated activities that are expected to be refundable to customers amounted to $10.4 million at both March 31, 2007 and September 30, 2006. 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 $79.2 million and $79.5 million at March 31, 2007 and September 30, 2006, respectively.

     A capital loss carryover of $17.1 million existed at March 31, 2007, which expires if not utilized by September 30, 2008. Although realization is not assured, management determined that it is more likely than not that the entire deferred tax asset associated with this carryover will be realized during the carryover period, and as such, no valuation allowance has been provided at March 31, 2007.

     A deferred tax asset of $4.6 million and $9.0 million relating to Canadian operations existed at March 31, 2007 and September 30, 2006, respectively. Although realization is not assured, management determined that it is more likely than not that future taxable income will be generated in Canada to fully utilize this asset, and as such, no valuation allowance has been provided.

Note 3 — Capitalization

Common Stock. During the six months ended March 31, 2007, the Company issued 1,264,117 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). The Company also issued 4,346 original issue shares of common stock to the non-employee directors of the Company as partial consideration for the directors’ services during the six months ended March 31, 2007. Holders of stock options or restricted stock will often tender shares of common stock to the Company for payment of option exercise prices and/or applicable withholding taxes. During the six months ended March 31, 2007, 368,656 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.

     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 the six months ended March 31, 2007, the Company repurchased 1,195,328 shares

Item 1. Financial Statements (Cont.)

for $43.3 million under this program, funded with cash provided by operating activities and/or through the use of the Company’s bi-lateral lines of credit. Since the share repurchase program was implemented, the Company has repurchased 3,721,878 shares for $128.5 million.

Long-Term Debt. 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.

Note 4 — Commitments and Contingencies

Environmental Matters. The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. The Company has established procedures for the ongoing evaluation of its operations to identify potential environmental exposures and comply with regulatory policies and procedures. It is the Company’s policy to accrue estimated environmental clean-up costs (investigation and remediation) when such amounts can reasonably be estimated and it is probable that the Company will be required to incur such costs.

     As disclosed in Note H of the Company’s 2006 Form 10-K, the Company received, in 1998 and again in October 1999, notice that the NYDEC believes the Company is responsible for contamination discovered at a former manufactured gas plant site in New York for which the Company had not been named as a potentially responsible party. In February 2007, the NYDEC identified the Company as a potentially responsible party 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. The Company has not incurred any clean-up costs at this site. The Company expects to enter negotiations with the NYDEC regarding this site and anticipates that negotiations will extend into 2008.

     At March 31, 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 $12.5 million to $16.1 million. The minimum estimated liability of $12.5 million has been recorded on the Consolidated Balance Sheet at March 31, 2007. The Company expects to recover its environmental clean-up costs from a combination of rate recovery and insurance proceeds.

     The Company is currently not aware of any material additional exposure to environmental liabilities. However, changes in environmental regulations or other factors could adversely impact the Company.

Other. The Company is involved in other litigation and regulatory matters arising in the normal course of business. These other matters may include, for example, negligence claims and tax, regulatory or other governmental audits, inspections, investigations and other proceedings. These matters may involve state and federal taxes, safety, compliance with regulations, rate base, cost of service and purchased gas cost issues, among other things. While these normal-course matters could have a material effect on earnings and cash flows in the quarterly and annual period in which they are resolved, they are not expected to change materially the Company’s present liquidity position, nor to have a material adverse effect on the financial condition of the Company.

Item 1. Financial Statements (Cont.)

Note 5 – Business Segment Information.

     The Company has five reportable segments: Utility, Pipeline and Storage, Exploration and Production, Energy Marketing, and Timber. The division of the Company’s operations into the reportable segments is based upon a combination of factors including differences in products and services, regulatory environment and geographic factors.

     The data presented in the tables below reflect the reportable segments and reconciliations to consolidated amounts. As stated in the 2006 Form 10-K, the Company evaluates segment performance based on income before discontinued operations, extraordinary items and cumulative effects of changes in accounting (where applicable). When these items are not applicable, the Company evaluates performance based on net income. There have been no changes in the basis of segmentation nor in the basis of measuring segment profit or loss from those used in the Company’s 2006 Form 10-K. There have been no material changes in the amount of assets for any operating segment from the amounts disclosed in the 2006 Form 10-K.

Item 1. Financial Statements (Cont.)

Quarter Ended March 31, 2007 (Thousands)

						Pipeline				Exploration												Total								Corporate and
						and				and				Energy								Reportable								Intersegment				Total
		Utility				Storage				Production				Marketing				Timber				Segments				All Other				Eliminations				Consolidated
Revenue from External Customers		$	501,473			$	34,952			$	92,610			$	163,338			$	18,184			$	810,557			$	1,403			$	196			$	812,156
Intersegment Revenues		$	5,941			$	20,884			$	—			$	—			$	—			$	26,825			$	2,090			$	(28,915	)		$	—
Segment Profit:
Net Income		$	33,444			$	13,936			$	19,801			$	6,706			$	3,200			$	77,087			$	467			$	893			$	78,447

Six Months Ended March 31, 2007 (Thousands)

						Pipeline				Exploration												Total								Corporate and
						and				and				Energy								Reportable								Intersegment				Total
		Utility				Storage				Production				Marketing				Timber				Segments				All Other				Eliminations				Consolidated
Revenue from External Customers		$	790,256			$	64,761			$	181,318			$	246,656			$	29,947			$	1,312,938			$	3,079			$	379			$	1,316,396
Intersegment Revenues		$	9,970			$	41,252			$	—			$	—			$	—			$	51,222			$	4,287			$	(55,509	)		$	—
Segment Profit:
Net Income		$	50,618			$	27,624			$	40,523			$	7,198			$	3,417			$	129,380			$	1,453			$	2,134			$	132,967

Quarter Ended March 31, 2006 (Thousands)

						Pipeline				Exploration												Total								Corporate and
						and				and				Energy								Reportable								Intersegment				Total
		Utility				Storage				Production				Marketing				Timber				Segments				All Other				Eliminations				Consolidated
Revenue from External Customers		$	536,235			$	39,346			$	88,719			$	206,061			$	19,157			$	889,518			$	1,075			$	388			$	890,981
Intersegment Revenues		$	5,681			$	19,711			$	—			$	—			$	(23	)		$	25,369			$	2,057			$	(27,426	)		$	—
Segment Profit:
Net Income		$	28,654			$	16,892			$	25,845			$	3,877			$	2,242			$	77,510			$	46			$	1,038			$	78,594

Six Months Ended March 31, 2006 (Thousands)

						Pipeline				Exploration												Total								Corporate and
						and				and				Energy								Reportable								Intersegment				Total
		Utility				Storage				Production				Marketing				Timber				Segments				All Other				Eliminations				Consolidated
Revenue from External Customers		$	967,714			$	74,085			$	170,806			$	351,620			$	36,066			$	1,600,291			$	1,058			$	388			$	1,601,737
Intersegment Revenues		$	9,803			$	41,006			$	—			$	—			$	—			$	50,809			$	6,584			$	(57,393	)		$	—
Segment Profit:
Net Income		$	50,407			$	32,742			$	43,280			$	4,864			$	3,706			$	134,999			$	616			$	398			$	136,013

Item 1. Financial Statements (Cont.)

Note 6 — Intangible Assets

     The components of the Company’s intangible assets were as follows (in thousands):

														At September 30,
		At March 31, 2007												2006
		Gross								Net				Net
		Carrying				Accumulated				Carrying				Carrying
		Amount				Amortization				Amount				Amount
Intangible Assets Subject to Amortization:
Long-Term Transportation Contracts		$	8,580			$	(4,454	)		$	4,126			$	4,660
Long-Term Gas Purchase Contracts			31,864				(5,823	)			26,041				26,838
Intangible Assets Not Subject to Amortization:
Non-Qualified Benefit Plan Intangible Asset			256				—				256				—
		$	40,700			$	(10,277	)		$	30,423			$	31,498
Aggregate Amortization Expense:
(Thousands)
Three Months Ended March 31, 2007		$	666
Three Months Ended March 31, 2006		$	665
Six Months Ended March 31, 2007		$	1,331
Six Months Ended March 31, 2006		$	1,331

     The gross carrying amount of intangible assets subject to amortization at March 31, 2007 remained unchanged from September 30, 2006. The only activity with regard to intangible assets subject to amortization was amortization expense as shown in the table above. Amortization expense for the long-term transportation contracts is estimated to be $0.5 million for the remainder of 2007 and $1.1 million and $0.5 million for 2008 and 2009, respectively. Amortization expense for transportation contracts is estimated to be $0.4 million annually for 2010 and 2011. Amortization expense for the long-term gas purchase contracts is estimated to be $0.8 million for the remainder of 2007 and $1.6 million annually for 2008, 2009, 2010 and 2011.

Note 7 – Retirement Plan and Other Post-Retirement Benefits

     Components of Net Periodic Benefit Cost (in thousands):

Three months ended March 31,

		Retirement Plan								Other Post-Retirement Benefits
		2007				2006				2007				2006
Service Cost		$	3,225			$	4,104			$	1,403			$	2,007
Interest Cost			11,088				10,049				6,800				6,701
Expected Return on Plan Assets			(12,809	)			(12,486	)			(6,740	)			(5,576	)
Amortization of Prior Service Cost			220				239				1				1
Amortization of Transition Amount			—				—				1,782				1,782
Amortization of Losses			3,382				5,777				2,053				5,850
Net Amortization and Deferral
For Regulatory Purposes (Including Volumetric Adjustments) (1)			4,074				1,907				10,732				2,634
Net Periodic Benefit Cost		$	9,180			$	9,590			$	16,031			$	13,399

Item 1. Financial Statements (Concl.)

Six months ended March 31,

		Retirement Plan								Other Post-Retirement Benefits
		2007				2006				2007				2006
Service Cost		$	6,450			$	8,208			$	2,807			$	4,015
Interest Cost			22,175				20,098				13,599				13,402
Expected Return on Plan Assets			(25,618	)			(24,972	)			(13,480	)			(11,151	)
Amortization of Prior Service Cost			441				478				2				2
Amortization of Transition Amount			—				—				3,563				3,564
Amortization of Losses			6,764				11,554				4,107				11,701
Net Amortization and Deferral
For Regulatory Purposes (Including Volumetric Adjustments) (1)			4,229				379				13,071				(51	)
Net Periodic Benefit Cost		$	14,441			$	15,745			$	23,669			$	21,482

(1)		The Company’s policy is to record retirement plan and other post-retirement benefit costs in the Utility segment on a volumetric basis to reflect the fact that the Utility segment experiences higher throughput of natural gas in the winter months and lower throughput of natural gas in the summer months.

Employer Contributions. During the six months ended March 31, 2007, the Company contributed $11.4 million to its retirement plan and $27.6 million to its other post-retirement benefit plan. In the remainder of 2007, the Company expects to contribute in the range of $3.0 million to $7.0 million to its retirement plan and to contribute in the range of $12.0 million to $16.0 million to its other post-retirement benefit plan.

Note 8 – Subsequent Event

     On April 30, 2007, the Company repaid $96.3 million of 6.5% unsecured notes. Such amount was classified as Current Portion of Long-Term Debt on the Company’s Consolidated Balance Sheet at March 31, 2007. These notes were callable by the Company at par at any time after September 15, 2006.

Item 2. 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. For the quarter ended March 31, 2007 compared to the quarter ended March 31, 2006, the Company has experienced a slight decrease in earnings primarily due to lower earnings in the Pipeline and Storage, and Exploration and Production segments. Higher earnings in the Utility, Energy Marketing, and Timber segments largely offset these decreases. For the six months ended March 31, 2007 compared to the six months ended March 31, 2006, the Company experienced a decrease in earnings of $3.0 million due primarily to lower earnings in the Pipeline and Storage, and Exploration and Production segments. Higher earnings in the Energy Marketing segment and the Corporate and All Other categories partially offset these decreases. The Company’s earnings are discussed further in the Results of Operations section that follows.

     From a capital resources and liquidity perspective, the Company spent $132.3 million on capital expenditures during the six months ended March 31, 2007, with approximately 72% being spent in the Exploration and Production segment. This is in line with the Company’s expectations.

     The Company is still pursuing its Empire Connector project to expand its natural gas pipeline operations. On December 21, 2006, 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. Empire has accepted that Certificate and has also filed a request for clarification of limited aspects of the December 21, 2006 order. The Company expects to make a final decision by May 31, 2007 on whether it will build these facilities and place them in service by November 2008.* The total cost of the Empire Connector project is estimated at $177 million, which is higher than the costs estimated in Empire’s 2005 application.* The Company is seeking to mitigate the impact of this cost increase. There are no other significant changes in the status of the project. The project is discussed further in the Capital Resources and Liquidity section that follows.

     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 March 31, 2007, the Company had repurchased 3,721,878 shares for $128.5 million under this program, including 1,195,328 shares for $43.3 million during the six months ended March 31, 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 rate 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 explains 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. This matter is discussed more fully in the “Rate and Regulatory Matters” section that follows.

     On April 7, 2006, the NYPSC, PaPUC, and Pennsylvania Office of Consumer Advocate filed a complaint and motion for summary disposition against Supply Corporation with the FERC. The complainants alleged that Supply Corporation’s rates were unjust and unreasonable, and that Supply Corporation was permitted to retain more gas from shippers than it needed for fuel and loss. A settlement was reached with all parties and filed with the FERC in November 2006. On February 9, 2007, the FERC issued an order approving the settlement among the parties and Supply Corporation. No parties sought rehearing or challenged the settlement in court, so the settlement is now final and unappealable. This matter is discussed more fully in the “Rate and Regulatory Matters” and “Results of Operations” sections that follow.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont.)

     Lastly, the Company recently announced plans for its Exploration and Production unit, Seneca, to explore the sale of SECI, Seneca’s wholly owned subsidiary that operates in Canada. Seneca plans to focus on areas of value and recent success for its properties in the Gulf of Mexico, maintain its California properties in the West, and dedicate significant additional resources to the development of its Appalachian properties.*

CRITICAL ACCOUNTING ESTIMATES

     For a complete discussion of critical accounting estimates, refer to “Critical Accounting Estimates” in Item 7 of the Company’s 2006 Form 10-K. There have been no subsequent changes to that disclosure.

RESULTS OF OPERATIONS

Earnings

     The Company’s earnings were $78.4 million for the quarter ended March 31, 2007 compared to earnings of $78.6 million for the quarter ended March 31, 2006. The slight decrease in earnings is primarily the result of lower earnings in the Pipeline and Storage, and Exploration and Production segments, largely offset by higher earnings in the Utility, Energy Marketing, and Timber segments. The Exploration and Production segment’s earnings for the quarter ended March 31, 2006 include a $5.1 million benefit to earnings resulting from an adjustment to a deferred income tax balance.

     The Company’s earnings were $133.0 million for the six months ended March 31, 2007 compared to earnings of $136.0 million for the six months ended March 31, 2006. The decrease in earnings of $3.0 million is primarily the result of lower earnings in the Pipeline and Storage, and Exploration and Production segments, partially offset by higher earnings in the Energy Marketing segment and the Corporate and All Other categories. As mentioned above, earnings for the six months ended March 31, 2006 include a $5.1 million deferred income tax benefit in the Exploration and Production segment.

     Additional discussion of earnings in each of the business segments can be found in the business segment information that follows. Note that all amounts used in the earnings discussions are after tax amounts.

Earnings (Loss) by Segment

		Three Months Ended												Six Months Ended
		March 31,												March 31,
										Increase												Increase
(Thousands)		2007				2006				(Decrease)				2007				2006				(Decrease)
Utility		$	33,444			$	28,654			$	4,790			$	50,618			$	50,407			$	211
Pipeline and Storage			13,936				16,892				(2,956	)			27,624				32,742				(5,118	)
Exploration and Production			19,801				25,845				(6,044	)			40,523				43,280				(2,757	)
Energy Marketing			6,706				3,877				2,829				7,198				4,864				2,334
Timber			3,200				2,242				958				3,417				3,706				(289	)
Total Reportable Segments			77,087				77,510				(423	)			129,380				134,999				(5,619	)
All Other			467				46				421				1,453				616				837
Corporate (1)			893				1,038				(145	)			2,134				398				1,736
Total Consolidated		$	78,447			$	78,594			$	(147	)		$	132,967			$	136,013			$	(3,046	)

(1)		Includes earnings from the former International segment’s activity.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont.)

Utility

Utility Operating Revenues

		Three Months Ended												Six Months Ended
		March 31,												March 31,
										Increase												Increase
(Thousands)		2007				2006				(Decrease)				2007				2006				(Decrease)
Retail Sales Revenues:
Residential		$	394,218			$	422,495			$	(28,277	)		$	619,650			$	767,368			$	(147,718	)
Commercial			67,469				75,758				(8,289	)			103,105				132,648				(29,543	)
Industrial			3,748				6,272				(2,524	)			5,649				10,724				(5,075	)
			465,435				504,525				(39,090	)			728,404				910,740				(182,336	)
Transportation			38,464				32,360				6,104				65,340				59,276				6,064
Other			3,515				5,031				(1,516	)			6,482				7,501				(1,019	)
		$	507,414			$	541,916			$	(34,502	)		$	800,226			$	977,517			$	(177,291	)

Utility Throughput

		Three Months Ended												Six Months Ended
		March 31,												March 31,
										Increase												Increase
(MMcf)		2007				2006				(Decrease)				2007				2006				(Decrease)
Retail Sales:
Residential			29,372				26,807				2,565				46,050				46,331				(281	)
Commercial			5,428				5,038				390				8,296				8,481				(185	)
Industrial			323				459				(136	)			514				786				(272	)
			35,123				32,304				2,819				54,860				55,598				(738	)
Transportation			24,723				22,119				2,604				40,576				36,461				4,115
			59,846				54,423				5,423				95,436				92,059				3,377

Degree Days

														Percent
Three Months Ended														Colder (Warmer) Than
March 31		Normal				2007				2006				Normal				Prior Year
Buffalo			3,327				3,327				2,875				0.0				15.7
Erie			3,142				3,152				2,705				0.3				16.5
Six Months Ended
March 31
Buffalo			5,587				5,274				5,085				(5.6	)			3.7
Erie			5,223				5,030				4,753				(3.7	)			5.8