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 December 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                     

Commission File Number 1-3880

NATIONAL FUEL GAS COMPANY

(Exact name of registrant as specified in its charter)

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

(716) 857-7000
(Registrant’s telephone number, including area code)

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

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

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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 January 31, 2008: 83,526,251 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
2007 Form 10-K		The Company’s Annual Report on Form 10-K for the year ended September 30, 2007
ARB 51		Accounting Research Bulletin No. 51, Consolidated Financial Statements
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.

GLOSSARY OF TERMS (Cont.)

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.
FIN		FASB Interpretation Number
FIN 48 Firm transportation and/or storage		FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of SFAS 109 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)
Open Season		A bidding procedure used by pipelines to allocate firm transportation or storage capacity among prospective shippers, in which all bids submitted during a defined (“Open Season”) time period are evaluated as if they had been submitted simultaneously.
Proved developed reserves		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
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 “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

GLOSSARY OF TERMS (Concl.)

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
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 141R		Statement of Financial Accounting Standards No. 141R, Business Combinations
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
SFAS 160		Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB 51.
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 Months Ended December 31, 2007 and 2006			6
		b.		Consolidated Balance Sheets — December 31, 2007 and September 30, 2007			7 — 8
		c.		Consolidated Statements of Cash Flows — Three Months Ended December 31, 2007 and 2006			9
		d.		Consolidated Statements of Comprehensive Income — Three Months Ended December 31, 2007 and 2006			10
		e.		Notes to Consolidated Financial Statements			11 — 19
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations					20 — 36
Item 3.		Quantitative and Qualitative Disclosures About Market Risk					36
Item 4.		Controls and Procedures					36 — 37
		Part II. Other Information
Item 1.		Legal Proceedings					37 — 38
Item 1 A.		Risk Factors					38
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds					38
Item 3.		Defaults Upon Senior Securities					•
Item 4.		Submission of Matters to a Vote of Security Holders					39
Item 5.		Other Information					•
Item 6.		Exhibits					39
Signatures							40
EX-10.1
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, 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,” “may,” and similar expressions.

Part I. Financial Information

Item 1. Financial Statements

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

		Three Months Ended
		December 31,
(Thousands of Dollars, Except Per Common Share Amounts)		2007				2006
INCOME
Operating Revenues		$	568,268			$	490,659
Operating Expenses
Purchased Gas			278,010				242,939
Operation and Maintenance			102,455				94,704
Property, Franchise and Other Taxes			17,672				16,952
Depreciation, Depletion and Amortization			44,121				39,407
			442,258				394,002
Operating Income			126,010				96,657
Other Income (Expense):
Income from Unconsolidated Subsidiaries			2,275				1,231
Interest Income			3,093				1,085
Other Income			1,253				715
Interest Expense on Long-Term Debt			(16,289	)			(16,043	)
Other Interest Expense			(724	)			(1,849	)
Income from Continuing Operations Before Income Taxes			115,618				81,796
Income Tax Expense			45,014				31,108
Income from Continuing Operations			70,604				50,688
Income from Discontinued Operations, Net of Tax			—				3,832
Net Income Available for Common Stock			70,604				54,520
EARNINGS REINVESTED IN THE BUSINESS
Balance at October 1			983,776				786,013
			1,054,380				840,533
Share Repurchases			—				(34,018	)
Cumulative Effect of the Adoption of FIN 48			(406	)			—
Dividends on Common Stock (2007 — $0.31; 2006 — $0.30)			(26,023	)			(24,787	)
Balance at December 31		$	1,027,951			$	781,728
Earnings Per Common Share:
Basic:
Income from Continuing Operations		$	0.84			$	0.61
Income from Discontinued Operations			—				0.05
Net Income Available for Common Stock		$	0.84			$	0.66
Diluted:
Income from Continuing Operations		$	0.82			$	0.60
Income from Discontinued Operations			—				0.04
Net Income Available for Common Stock		$	0.82			$	0.64
Weighted Average Common Shares Outstanding:
Used in Basic Calculation			83,611,177				82,679,343
Used in Diluted Calculation			85,819,534				84,730,910

See Notes to Condensed Consolidated Financial Statements

Item 1. Financial Statements (Cont.)

National Fuel Gas Company
Consolidated Balance Sheets
(Unaudited)

		December 31,				September 30,
		2007				2007
(Thousands of Dollars)
ASSETS
Property, Plant and Equipment		$	4,525,608			$	4,461,586
Less — Accumulated Depreciation, Depletion and Amortization			1,616,488				1,583,181
			2,909,120				2,878,405
Current Assets
Cash and Temporary Cash Investments			189,767				124,806
Cash Held in Escrow			—				61,964
Hedging Collateral Deposits			1,996				4,066
Receivables — Net of Allowance for Uncollectible Accounts of $34,106 and $28,654, Respectively			242,440				172,380
Unbilled Utility Revenue			78,480				20,682
Gas Stored Underground			60,481				66,195
Materials and Supplies — at average cost			41,569				35,669
Unrecovered Purchased Gas Costs			12,186				14,769
Other Current Assets			32,453				45,057
Deferred Income Taxes			17,468				8,550
			676,840				554,138
Other Assets
Recoverable Future Taxes			83,787				83,954
Unamortized Debt Expense			11,586				12,070
Other Regulatory Assets			131,154				137,577
Deferred Charges			5,582				5,545
Other Investments			85,325				85,902
Investments in Unconsolidated Subsidiaries			17,825				18,256
Goodwill			5,476				5,476
Intangible Assets			28,170				28,836
Prepaid Pension and Post-Retirement Benefit Costs			63,188				61,006
Fair Value of Derivative Financial Instruments			6,026				9,188
Other			7,344				8,059
			445,463				455,869
Total Assets		$	4,031,423			$	3,888,412

See Notes to Condensed Consolidated Financial Statements

Item 1. Financial Statements (Cont.)

National Fuel Gas Company
Consolidated Balance Sheets
(Unaudited)

		December 31,				September 30,
(Thousands of Dollars)		2007				2007
CAPITALIZATION AND LIABILITIES
Capitalization:
Comprehensive Shareholders’ Equity
Common Stock, $1 Par Value
Authorized - 200,000,000 Shares; Issued And Outstanding — 83,946,575 Shares And 83,461,308 Shares, Respectively		$	83,947			$	83,461
Paid in Capital			595,375				569,085
Earnings Reinvested in the Business			1,027,951				983,776
Total Common Shareholder Equity Before Items of Other Comprehensive Loss			1,707,273				1,636,322
Accumulated Other Comprehensive Loss			(16,286	)			(6,203	)
Total Comprehensive Shareholders’ Equity			1,690,987				1,630,119
Long-Term Debt, Net of Current Portion			799,000				799,000
Total Capitalization			2,489,987				2,429,119
Current and Accrued Liabilities
Notes Payable to Banks and Commercial Paper			—				—
Current Portion of Long-Term Debt			200,000				200,024
Accounts Payable			152,155				109,757
Amounts Payable to Customers			9,181				10,409
Dividends Payable			26,023				25,873
Interest Payable on Long-Term Debt			13,541				18,158
Customer Advances			23,498				22,863
Other Accruals and Current Liabilities			50,207				36,062
Fair Value of Derivative Financial Instruments			29,089				16,200
			503,694				439,346
Deferred Credits
Deferred Income Taxes			581,692				575,356
Taxes Refundable to Customers			14,031				14,026
Unamortized Investment Tax Credit			5,217				5,392
Cost of Removal Regulatory Liability			98,613				91,226
Other Regulatory Liabilities			78,374				76,659
Post-Retirement Liabilities			66,706				70,555
Asset Retirement Obligations			77,253				75,939
Other Deferred Credits			115,856				110,794
			1,037,742				1,019,947
Commitments and Contingencies			—				—
Total Capitalization and Liabilities		$	4,031,423			$	3,888,412

See Notes to Condensed Consolidated Financial Statements

Item 1. Financial Statements (Cont.)

National Fuel Gas Company
Consolidated Statements of Cash Flows
(Unaudited)

		Three Months Ended
		December 31,
(Thousands of Dollars)		2007				2006
OPERATING ACTIVITIES
Net Income Available for Common Stock		$	70,604			$	54,520
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation, Depletion and Amortization			44,121				42,825
Deferred Income Taxes			5,296				11,198
Income from Unconsolidated Subsidiaries, Net of Cash Distributions			431				(18	)
Excess Tax Benefits Associated with Stock-Based Compensation Awards			(16,275	)			(13,717	)
Other			4,916				5,728
Change in:
Hedging Collateral Deposits			2,070				9,916
Receivables and Unbilled Utility Revenue			(127,894	)			(91,875	)
Gas Stored Underground and Materials and Supplies			(186	)			5,324
Unrecovered Purchased Gas Costs			2,583				(11,021	)
Prepayments and Other Current Assets			10,422				20,398
Accounts Payable			42,398				11,736
Amounts Payable to Customers			(1,228	)			3,166
Customer Advances			635				534
Other Accruals and Current Liabilities			25,400				(756	)
Other Assets			10,163				1,883
Other Liabilities			1,889				(6,810	)
Net Cash Provided by Operating Activities			75,345				43,031
INVESTING ACTIVITIES
Capital Expenditures			(69,744	)			(65,302	)
Investment in Partnership			—				(1,650	)
Cash Held in Escrow			58,397				—
Net Proceeds from Sale of Oil and Gas Producing Properties			1,500				2,141
Other			(761	)			(316	)
Net Cash Used in Investing Activities			(10,608	)			(65,127	)
FINANCING ACTIVITIES
Change in Notes Payable to Banks and Commercial Paper			—				71,600
Excess Tax Benefits Associated with Stock-Based Compensation Awards			16,275				13,717
Shares Repurchased under Repurchase Plan			—				(42,921	)
Reduction of Long-Term Debt			(24	)			(23,005	)
Dividends Paid on Common Stock			(25,873	)			(25,026	)
Net Proceeds from Issuance of Common Stock			9,846				6,743
Net Cash Provided by Financing Activities			224				1,108
Effect of Exchange Rates on Cash			—				(1,025	)
Net Increase (Decrease) in Cash and Temporary Cash Investments			64,961				(22,013	)
Cash and Temporary Cash Investments at October 1			124,806				69,611
Cash and Temporary Cash Investments at December 31		$	189,767			$	47,598

See Notes to Condensed Consolidated Financial Statements

Item 1. Financial Statements (Cont.)

National Fuel Gas Company
Consolidated Statements of Comprehensive Income
(Unaudited)

		Three Months Ended
		December 31,
(Thousands of Dollars)		2007				2006
Net Income Available for Common Stock		$	70,604			$	54,520
Other Comprehensive Income (Loss), Before Tax:
Foreign Currency Translation Adjustment			(18	)			(4,868	)
Unrealized Gain (Loss) on Securities Available for Sale Arising During the Period			(1,201	)			790
Unrealized Gain (Loss) on Derivative Financial Instruments Arising During the Period			(20,859	)			9,501
Reclassification Adjustment for Realized Losses on Derivative Financial Instruments in Net Income			5,421				3,177
Other Comprehensive Income (Loss), Before Tax			(16,657	)			8,600
Income Tax Expense (Benefit) Related to Unrealized Gain (Loss) on Securities Available for Sale Arising During the Period			(59	)			275
Income Tax Expense (Benefit) Related to Unrealized Gain (Loss) on Derivative Financial Instruments Arising During the Period			(8,648	)			3,730
Reclassification Adjustment for Income Tax Benefit on Realized Losses from Derivative Financial Instruments In Net Income			2,133				2,020
Income Taxes — Net			(6,574	)			6,025
Other Comprehensive Income (Loss)			(10,083	)			2,575
Comprehensive Income		$	60,521			$	57,095

See Notes to Condensed Consolidated Financial Statements

Item 1. Financial Statements (Cont.)

National Fuel Gas Company
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1 — Summary of Significant Accounting Policies

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

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

Reclassification. Certain prior year amounts have been reclassified to conform with current year presentation.

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, 2007, 2006 and 2005 that are included in the Company’s 2007 Form 10-K. The consolidated financial statements for the year ended September 30, 2008 will be audited by the Company’s independent registered public accounting firm after the end of the fiscal year.

     The earnings for the three months ended December 31, 2007 should not be taken as a prediction of earnings for the entire fiscal year ending September 30, 2008. Most of the business of the Utility and Energy Marketing segments is seasonal in nature and is influenced by weather conditions. Due to the seasonal nature of the heating business in the Utility and Energy Marketing segments, earnings during the winter months normally represent a substantial part of the earnings that those segments are expected to achieve for the entire fiscal year.

Consolidated Statement of Cash Flows. For purposes of the Consolidated Statement of Cash Flows, the Company considers all highly liquid 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.

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. In December 2007, the Canadian government issued the tax clearance certificate, thereby releasing the proceeds from restriction as of December 31, 2007. To hedge against foreign currency exchange risk related to the cash being held in escrow, the Company holds a forward contract to sell Canadian dollars. For presentation purposes on the Consolidated Statement of Cash Flows, for the three months ended December 31, 2007, the Cash Held in Escrow line item within Investing Activities reflects the net proceeds to the Company after adjusting for the impact of the foreign currency hedge.

Item 1. Financial Statements (Cont.)

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 $13.8 million at December 31, 2007, is reduced to zero by September 30 of each year as the inventory is replenished.

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

		At December 31, 2007				At September 30, 2007
Funded Position of the Pension and Other Post-Retirement Benefit Plans Adjustment		$	(12,482	)		$	(12,482	)
Cumulative Foreign Currency Translation Adjustment			(101	)			(83	)
Net Unrealized Loss on Derivative Financial Instruments			(12,809	)			(3,886	)
Net Unrealized Gain on Securities Available for Sale			9,106				10,248
Accumulated Other Comprehensive Loss		$	(16,286	)		$	(6,203	)

Earnings Per Common Share. Basic earnings per common share is computed by dividing income available for common stock by the weighted average number of common shares outstanding for the period. Diluted earnings per common share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For purposes of determining diluted earnings per common share, the only potentially dilutive securities the Company has outstanding are stock options and stock-settled SARs. The diluted weighted average shares outstanding shown on the Consolidated Statement of Income reflects the potential dilution as a result of these stock options and stock-settled SARs as determined using the Treasury Stock Method. Stock options and stock-settled SARs that are antidilutive are excluded from the calculation of diluted earnings per common share. For the quarter ended December 31, 2007, there were no stock options or stock-settled SARs excluded as being antidilutive. For the quarter ended December 31, 2006, there were 122,253 stock options excluded as being antidilutive. There were no stock-settled SARs excluded as being antidilutive for the quarter ended December 31, 2006.

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. The Company granted 25,000 restricted share awards (non-vested stock as defined in SFAS 123R) during the quarter ended December 31, 2007. The weighted average fair value of such restricted shares was $48.41 per share. There were no stock options or stock-settled SARs granted during the quarter ended December 31, 2007.

Item 1. Financial Statements (Cont.)

New Accounting Pronouncements. On October 1, 2007, the Company adopted 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 adoption of FIN 48 did not have a material impact on the Company’s consolidated financial statements. For further discussion of the impact of adopting FIN 48, refer to Note 2 — Income Taxes.

     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 for financial assets and financial liabilities that are recognized or disclosed at fair value on a recurring basis as of the Company’s first quarter of fiscal 2009. The pronouncement is effective for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value on a recurring basis, as of the Company’s first quarter of fiscal 2010. 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.

     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.

     In December 2007, the FASB issued SFAS 141R, “Business Combinations.” SFAS 141R will significantly change the accounting for business combinations in a number of areas including the treatment of contingent consideration, contingencies, acquisition costs, in process research and development and restructuring costs. In addition, under SFAS 141R, changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will impact income tax expense. SFAS 141R is effective as of the Company’s first quarter of fiscal 2010.

     In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB 51.” SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests (NCI) and classified as a component of equity. This new consolidation method will significantly change the accounting for transactions with minority interest holders. SFAS 160 is effective as of the Company’s first quarter of fiscal 2010. The Company currently does not have any NCI.

Item 1. Financial Statements (Cont.)

Note 2 — Income Taxes

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

		Three Months Ended
		December 31,
		2007				2006
Current Income Taxes
Federal		$	34,259			$	16,653
State			5,459				5,036
Foreign			—				—
Deferred Income Taxes
Federal			(80	)			8,210
State			5,376				1,209
Foreign			—				1,779
			45,014				32,887
Deferred Investment Tax Credit			(174	)			(174	)
Total Income Taxes		$	44,840			$	32,713
Presented as Follows:
Other Income		$	(174	)		$	(174	)
Income Tax Expense — Continuing Operations			45,014				31,108
Income from Discontinued Operations			—				1,779
Total Income Taxes		$	44,840			$	32,713

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

		Three Months Ended
		December 31,
		2007				2006
U.S.		$	115,389			$	81,575
Foreign			55				5,658
		$	115,444			$	87,233

     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):

		Three Months Ended
		December 31,
		2007				2006
Income Tax Expense, Computed at Statutory Rate of 35%		$	40,405			$	30,532
Increase (Reduction) in Taxes Resulting From:
State Income Taxes			7,043				4,059
Miscellaneous			(2,608	)			(1,878	)
Total Income Taxes		$	44,840			$	32,713

Item 1. Financial Statements (Cont.)

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

		At December 31, 2007				At September 30, 2007
Deferred Tax Liabilities:
Property, Plant and Equipment		$	626,814			$	612,648
Other			49,684				61,616
Total Deferred Tax Liabilities			676,498				674,264
Deferred Tax Assets:
Other			(112,274	)			(107,458	)
Total Deferred Tax Assets			(112,274	)			(107,458	)
Total Net Deferred Income Taxes		$	564,224			$	566,806
Presented as Follows:
Net Deferred Tax Asset — Current		$	(17,468	)		$	(8,550	)
Net Deferred Tax Liability — Non-Current			581,692				575,356
Total Net Deferred Income Taxes		$	564,224			$	566,806

     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 $14.0 million at both December 31, 2007 and September 30, 2007. Also, regulatory assets representing future amounts collectible from customers, corresponding to additional deferred income taxes not previously recorded because of prior ratemaking practices, amounted to $83.8 million and $84.0 million at December 31, 2007 and September 30, 2007, respectively.

     As indicated under “New Accounting Pronouncements” in Note 1 — Summary of Significant Accounting Policies, the Company adopted FIN 48 on October 1, 2007. As of the date of adoption, a cumulative effect adjustment was recorded that resulted in a decrease to retained earnings of $0.4 million. Upon adoption, the unrecognized tax benefits were $1.7 million, all of which would impact the effective tax rate (net of federal benefit) if recognized. There was no change in the balance of unrecognized tax benefits during the quarter ended December 31, 2007 and the Company does not expect a material change within the next twelve months.

     Consistent with existing policies, the Company recognizes estimated interest payable relating to income taxes in Other Interest Expense and estimated penalties relating to income taxes in Other Income. As of October 1, 2007, the Company has accrued interest of $0.5 million and has not accrued any penalties.

     The Company files U.S. federal and various state income tax returns. The Internal Revenue Service (IRS) is currently conducting an examination of the Company for fiscal 2007 in accordance with the Compliance Assurance Process (“CAP”). The CAP audit employs a real time review of the Company’s books and tax records by the IRS that is intended to permit issue resolution prior to the filing of the tax return. While the federal statute of limitations remains open for fiscal 2004 and later years, IRS examinations for years prior to fiscal 2007 have been completed and the Company believes such years are effectively settled.

     For the major states in which the various subsidiary companies operate, the earliest tax year open for examination is as follows:

New York		Fiscal 2002
Pennsylvania		Fiscal 2003
California		Fiscal 2003
Texas		Fiscal 2003

Item 1. Financial Statements (Cont.)

Note 3 — Capitalization

Common Stock. During the three months ended December 31, 2007, the Company issued 496,714 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 2,400 original issue shares of common stock to the non-employee directors of the Company as partial consideration for the directors’ services during the three months ended December 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 three months ended December 31, 2007, 38,847 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 quarter ended December 31, 2007, the Company did not repurchase any shares under this program. Since the share repurchase program was implemented, the Company has repurchased 3,834,878 shares for $133.2 million.

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 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.

     As disclosed in Note H of the Company’s 2007 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 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 Court dismissed the appeal in January 2008. The Company is reviewing its options in this matter and believes that a negotiated resolution with the NYDEC regarding the site remains possible.

     At December 31, 2007, the Company has estimated its remaining clean-up costs related to former manufactured gas plant sites and third party waste disposal sites (including the former manufactured gas plant site discussed above) will be in the range of $12.1 million to $15.8 million. The minimum estimated liability of $12.1 million has been recorded on the Consolidated Balance Sheet at December 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

Item 1. Financial Statements (Cont.)

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.

Note 5 — Discontinued Operations

     On August 31, 2007, the Company, in its Exploration and Production segment, completed the sale of SECI, Seneca’s wholly owned subsidiary that operated in Canada. 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. In December 2007, the Canadian government issued the tax clearance certificate, thereby releasing the proceeds from restriction as of December 31, 2007. 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, 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:

		Three Months Ended
		December 31,
(Thousands)		2006
Operating Revenues		$	13,581
Operating Expenses			8,248
Operating Income			5,333
Interest Income			278
Income before Income Taxes			5,611
Income Tax Expense			1,779
Income from Discontinued Operations		$	3,832

Note 6 — 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 2007 Form 10-K, the Company evaluates segment performance based on income before discontinued operations, extraordinary items and cumulative effects of changes in accounting (when applicable). When these items are not applicable, the Company evaluates performance based on net income. There have been no changes in the basis of segmentation nor in the basis of measuring segment profit or loss from those used in the Company’s 2007 Form 10-K. There have been no material changes in the amount of assets for any operating segment from the amounts disclosed in the 2007 Form 10-K.

Item 1. Financial Statements (Cont.)

Quarter Ended December 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		$	327,125			$	31,884			$	107,955			$	86,719			$	12,900			$	566,583			$	1,550			$	135			$	568,268
Intersegment Revenues		$	4,299			$	20,347			$	—			$	—			$	—			$	24,646			$	2,714			$	(27,360	)		$	—
Segment Profit:
Net Income (Loss)		$	20,217			$	12,778			$	34,022			$	954			$	397			$	68,368			$	2,339			$	(103	)		$	70,604

Quarter Ended December 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		$	288,782			$	29,809			$	75,128			$	83,318			$	11,763			$	488,800			$	1,676			$	183			$	490,659
Intersegment Revenues		$	4,029			$	20,368			$	—			$	—			$	—			$	24,397			$	2,198			$	(26,595	)		$	—
Segment Profit:
Income from Continuing Operations		$	17,174			$	13,688			$	16,891			$	492			$	217			$	48,462			$	985			$	1,241			$	50,688

Note 7 — Intangible Assets

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

														At September 30,
		At December 31, 2007												2007
		Gross								Net				Net
		Carrying				Accumulated				Carrying				Carrying
		Amount				Amortization				Amount				Amount
Intangible Assets Subject to Amortization:
Long-Term Transportation Contracts		$	8,580			$	(5,256	)		$	3,324			$	3,591
Long-Term Gas Purchase Contracts			31,864				(7,018	)			24,846				25,245
		$	40,444			$	(12,274	)		$	28,170			$	28,836
Aggregate Amortization Expense:
(Thousands)
Three Months Ended December 31, 2007		$	666
Three Months Ended December 31, 2006		$	665

Item 1. Financial Statements (Cont.)

     The gross carrying amount of intangible assets subject to amortization at December 31, 2007 remained unchanged from September 30, 2007. The only activity with regard to intangible assets subject to amortization was amortization expense as shown in the table above. Amortization expense for the transportation contracts is estimated to be $0.8 million for the remainder of 2008 and $0.5 million for 2009. Amortization expense for transportation contracts is estimated to be $0.4 million for 2010, 2011 and 2012. Amortization expense for the long-term gas purchase contracts is estimated to be $1.2 million for the remainder of 2008 and $1.6 million annually for 2009, 2010, 2011 and 2012.

Note 8 — Retirement Plan and Other Post-Retirement Benefits

     Components of Net Periodic Benefit Cost (in thousands):

Three months ended December 31,

		Retirement Plan								Other Post-Retirement Benefits
		2007				2006				2007				2006
Service Cost		$	3,150			$	3,225			$	1,276			$	1,403
Interest Cost			11,237				11,088				6,771				6,800
Expected Return on Plan Assets			(13,750	)			(12,809	)			(8,429	)			(6,740	)
Amortization of Prior Service Cost			202				220				1				1
Amortization of Transition Amount			—				—				1,782				1,782
Amortization of Losses			2,766				3,382				732				2,053
Net Amortization and Deferral
For Regulatory Purposes (Including Volumetric Adjustments) (1)			1,100				155				7,212				2,339
Net Periodic Benefit Cost		$	4,705			$	5,261			$	9,345			$	7,638

Employer Contributions. During the three months ended December 31, 2007, the Company contributed $2.5 million to its retirement plan and $9.5 million to its other post-retirement benefit plan. In the remainder of 2008, the Company expects to contribute in the range of $12.0 million to $17.0 million to its retirement plan and to contribute in the range of $15.0 million to $25.0 million to its other post-retirement benefit plan.

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 December 31, 2007 compared to the quarter ended December 31, 2006, the Company has experienced an overall increase in earnings of $16.1 million primarily due to higher earnings in the Exploration and Production segment. Earnings were also higher in the Utility, Energy Marketing, and Timber segments, as well as the All Other category. Lower earnings in the Pipeline and Storage segment and the Corporate category slightly offset these increases. 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 $69.7 million on capital expenditures during the quarter ended December 31, 2007, with approximately 44% being spent in the Exploration and Production segment, 36% in the Pipeline and Storage segment and 18% in the Utility segment. In the Pipeline and Storage segment, the majority of the expenditures were for construction of 18 miles of the Empire Connector project. The Company expects to complete the project by November 1, 2008. This project and other capital expenditures 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 included 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. In December 2007, the NYPSC issued an Order that provides for an annual rate increase, effective December 28, 2007, of $1.8 million as well as a monthly bill surcharge that would collect up to $10.8 million to recover expenses arising from the conservation program. The Order also approved the Company’s proposed revenue decoupling mechanism. This matter is discussed more fully in the Rate and Regulatory Matters section that follows.

CRITICAL ACCOUNTING ESTIMATES

     For a complete discussion of critical accounting estimates, refer to “Critical Accounting Estimates” in Item 7 of the Company’s 2007 Form 10-K. There have been no subsequent changes to that disclosure.

RESULTS OF OPERATIONS

Earnings

     The Company’s earnings were $70.6 million for the quarter ended December 31, 2007 compared to earnings of $54.5 million for the quarter ended December 31, 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 $70.6 million for the quarter ended December 31, 2007 compared to earnings from continuing operations of $50.7 million for the quarter ended December 31, 2006. The increase in earnings from continuing operations of $19.9 million is the result of higher earnings in the Exploration and Production, Utility, Energy Marketing, and Timber segments, and the All Other category, slightly offset by lower earnings in the Pipeline and Storage segment and the Corporate category. Additional discussion of earnings in each of the business segments can be found in the business segment information that follows. Note that all amounts used in the earnings discussions are after-tax amounts, unless otherwise noted.

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

Earnings (Loss) by Segment

										Increase
Three Months Ended December 31 (Thousands)		2007				2006				(Decrease)
Utility		$	20,217			$	17,174			$	3,043
Pipeline and Storage			12,778				13,688				(910	)
Exploration and Production			34,022				16,891				17,131
Energy Marketing			954				492				462
Timber			397				217				180
Total Reportable Segments			68,368				48,462				19,906
All Other			2,339				985				1,354
Corporate			(103	)			1,241				(1,344	)
Total Earnings from Continuing Operations			70,604				50,688				19,916
Earnings from Discontinued Operations			—				3,832				(3,832	)
Total Consolidated		$	70,604			$	54,520			$	16,084

Utility

Utility Operating Revenues

										Increase
Three Months Ended December 31 (Thousands)		2007				2006				(Decrease)
Retail Sales Revenues:
Residential		$	246,797			$	225,432			$	21,365
Commercial			38,033				35,635				2,398
Industrial			1,651				1,901				(250	)
			286,481				262,968				23,513
Transportation			33,424				26,876				6,548
Off-System Sales			8,213				—				8,213
Other			3,306				2,967				339
		$	331,424			$	292,811			$	38,613

Utility Throughput

										Increase
Three Months Ended December 31 (MMcf)		2007				2006				(Decrease)
Retail Sales:
Residential			17,127				16,678				449
Commercial			2,877				2,868				9
Industrial			123				192				(69	)
			20,127				19,738				389
Transportation			17,827				15,853				1,974
Off-System Sales			1,031				—				1,031
			38,985				35,591				3,394

Degree Days

														Percent
Three Months Ended														Colder (Warmer) Than
December 31		Normal				2007				2006				Normal				Prior Year
Buffalo			2,260				2,094				1,947				(7.3	)			7.6
Erie			2,081				1,871				1,878				(10.1	)			(0.4	)

2007 Compared with 2006

     Operating revenues for the Utility segment increased $38.6 million for the quarter ended December 31, 2007 as compared with the quarter ended December 31, 2006. This increase largely resulted from a $23.5 million increase in retail gas revenues coupled with an $8.2 million increase in off-system sales revenues and a $6.5 million increase in transportation revenues. The increase in retail gas

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

sales revenues for the Utility segment was largely a function of higher gas costs (gas costs are recovered dollar for dollar in revenues), coupled with the revenue impact of higher sales volumes, as shown in the table above. The increase in transportation revenues was primarily due to a 2.0 Bcf increase in transportation throughput, largely due to the migration of retail sales customers to transportation service.

     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. Total off-system sales revenues for the quarter ended December 31, 2007 amounted to $8.2 million. Due to profit sharing with retail customers, the margins resulting from off-system sales are minimal and there was no material impact to margins for the quarter ended December 31, 2007.

     The Utility segment’s earnings for the quarter ended December 31, 2007 were $20.2 million, an increase of $3.0 million when compared with earnings of $17.2 million for the quarter ended December 31, 2006. In the Pennsylvania jurisdiction, earnings increased $2.1 million. The major factors contributing to this increase were the base rate increase effective January 1, 2007 ($2.0 million) and higher usage per account ($1.0 million). These increases were partly offset by the negative earnings impact associated with warmer weather ($0.7 million). In the New York jurisdiction, earnings increased $0.9 million. This increase was primarily the result of higher usage per account.

     The impact of weather variations on earnings in the New York jurisdiction is mitigated by that jurisdiction’s WNC. The WNC in New York, which covers the eight-month period from October through May, has had a stabilizing effect on earnings for the New York rate jurisdiction. For the quarters ended December 31, 2007 and December 31, 2006, the WNC preserved $1.1 million and $1.5 million of earnings, respectively, since it was warmer than normal. In periods of colder than normal weather, the WNC benefits Distribution Corporation’s New York customers.

Pipeline and Storage

Pipeline and Storage Operating Revenues

										Increase
Three Months Ended December 31 (Thousands)		2007				2006				(Decrease)
Firm Transportation		$	31,406			$	29,489			$	1,917
Interruptible Transportation			991				945				46
			32,397				30,434				1,963
Firm Storage Service			16,621				16,402				219
Other			3,213				3,341				(128	)
		$	52,231			$	50,177			$	2,054

Pipeline and Storage Throughput

Three Months Ended December 31 (MMcf)		2007				2006				Increase
Firm Transportation			92,883				74,427				18,456
Interruptible Transportation			1,083				995				88
			93,966				75,422				18,544

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

2007 Compared with 2006

     Operating revenues for the Pipeline and Storage segment increased $2.1 million in the quarter ended December 31, 2007 as compared with the quarter ended December 31, 2006. This increase consisted primarily of a $2.0 million increase in firm and interruptible transportation revenues. The Pipeline and Storage segment was able to renew existing contracts at higher rates due to favorable market conditions related to the demand for storage and the related transportation service associated with storage. While transportation volumes increased by 18.5 Bcf, volume fluctuations generally do not have a significant impact on revenues as a result of Supply Corporation’s straight-fixed variable rate design.

     The Pipeline and Storage segment’s earnings for the quarter ended December 31, 2007 were $12.8 million, a decrease of $0.9 million when compared with earnings of $13.7 million for the quarter ended December 31, 2006. The decrease is largely attributable to the non-recurrence of 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 rate on that secured debt was hedged by an interest rate collar. Upon the repayment of that debt, the corresponding interest rate collar no longer qualified for hedge accounting, and the unrealized gain in accumulated other comprehensive income was reclassified to the income statement in December 2006. Increased operating costs (primarily post-retirement benefit costs) of $0.7 million, higher interest expense of $0.5 million and lower efficiency gas revenues of $0.2 million also contributed to the decrease in earnings. These earnings decreases were partially offset by higher firm and interruptible transportation and storage service revenues ($1.4 million), lower depreciation expense ($0.8 million), and an increase in allowance for funds used during construction ($0.4 million).

Exploration and Production

Exploration and Production Operating Revenues

										Increase
Three Months Ended December 31 (Thousands)		2007				2006				(Decrease)
Gas (after Hedging) from Continuing Operations		$	45,557			$	36,010			$	9,547
Oil (after Hedging) from Continuing Operations			59,643				35,955				23,688
Gas Processing Plant from Continuing Operations			11,075				8,629				2,446
Other from Continuing Operations			(1,309	)			384				(1,693	)
Intrasegment Elimination from Continuing Operations (1)			(7,011	)			(5,850	)			(1,161	)
Operating Revenues from Continuing Operations		$	107,955			$	75,128			$	32,827
Operating Revenues from Canada — Discontinued Operations		$	—			$	13,581			$	(13,581	)

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

Production Volumes

										Increase
Three Months Ended December 31		2007				2006				(Decrease)
Gas Production (MMcf)
Gulf Coast			2,826				2,723				103
West Coast			1,027				944				83
Appalachia			1,917				1,394				523
Total Production from Continuing Operations			5,770				5,061				709
Canada — Discontinued Operations			—				1,721				(1,721	)
Total Production			5,770				6,782				(1,012	)
Oil Production (Mbbl)
Gulf Coast			156				202				(46	)
West Coast			629				591				38
Appalachia			37				27				10
Total Production from Continuing Operations			822				820				2
Canada — Discontinued Operations			—				56				(56	)
Total Production			822				876				(54	)

Average Prices

										Increase
Three Months Ended December 31		2007				2006				(Decrease)
Average Gas Price/Mcf
Gulf Coast		$	7.14			$	6.55			$	0.59
West Coast		$	6.77			$	6.09			$	0.68
Appalachia		$	7.45			$	7.22			$	0.23
Weighted Average for Continuing Operations		$	7.18			$	6.65			$	0.53
Weighted Average After Hedging for Continuing Operations		$	7.90			$	7.12			$	0.78
Canada — Discontinued Operations			—			$	6.39			$	(6.39	)
Average Oil Price/Bbl
Gulf Coast		$	89.84			$	56.51			$	33.33
West Coast		$	81.80			$	51.11			$	30.69
Appalachia		$	84.12			$	59.78			$	24.34
Weighted Average for Continuing Operations		$	83.43			$	52.73			$	30.70
Weighted Average After Hedging for Continuing Operations		$	72.59			$	43.82			$	28.77
Canada — Discontinued Operations			—			$	42.58			$	(42.58	)

2007 Compared with 2006

     Operating revenues from continuing operations for the Exploration and Production segment increased $32.8 million for the quarter ended December 31, 2007 as compared with the quarter ended December 31, 2006. Oil production revenue after hedging increased $23.7 million. An increase in the weighted average price of oil after hedging ($28.77 per bbl) was the primary cause, as production increases in the West Coast and Appalachian regions offset a decrease in Gulf Coast production, keeping overall oil production flat. Gas production revenue after hedging increased $9.5 million. An increase in gas production (709 MMcf) and an increase in the weighted average price of gas after hedging ($0.78 per Mcf) contributed similarly to the increase. The increase in gas production occurred primarily in this segment’s Appalachian region (523 MMcf), consistent with increased drilling activity in this region during fiscal 2007. Drilling activity will continue to be significant in the Appalachian region in 2008.

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

     The Exploration and Production segment’s earnings from continuing operations for the quarter ended December 31, 2007 were $34.0 million compared with earnings from continuing operations of $16.9 million for the quarter ended December 31, 2006, an increase of $17.1 million. Higher crude oil prices, higher natural gas prices and higher natural gas production increased earnings by $15.4 million, $2.9 million and $3.3 million, respectively. Higher interest income and lower interest expense also increased earnings by $1.1 million and $1.2 million, respectively. These increases were partially offset by increased depletion expense ($3.5 million), higher lease operating expenses ($1.5 million) and higher state income tax expense ($1.1 million).

Energy Marketing

Energy Marketing Operating Revenues

										Increase
Three Months Ended December 31 (Thousands)		2007				2006				(Decrease)
Natural Gas (after Hedging)		$	86,735			$	83,270			$	3,465
Other			(16	)			48				(64	)
		$	86,719			$	83,318			$	3,401

Energy Marketing Volumes

Three Months Ended December 31		2007				2006				Decrease
Natural Gas — (MMcf)			10,841				11,116				(275	)

2007 Compared with 2006

     Operating revenues for the Energy Marketing segment increased $3.4 million for the quarter ended December 31, 2007 as compared with the quarter ended December 31, 2006. This increase primarily reflects higher gas sales revenue due to an increase in the price of natural gas, slightly offset by a decrease in throughput. The decrease in throughput was due to a decline in volumes sold to certain low-margin wholesale and industrial customers.

     The Energy Marketing segment’s earnings for the quarter ended December 31, 2007 were $1.0 million, an increase of $0.5 million when compared with earnings of $0.5 million for the quarter ended December 31, 2006. Despite warmer weather, gross margin increased by $0.5 million due to higher average margins per Mcf.

Timber

Timber Operating Revenues

										Increase
Three Months Ended December 31 (Thousands)		2007				2006				(Decrease)
Log Sales		$	5,174			$	4,065			$	1,109
Green Lumber Sales			1,401				918				483
Kiln-dried Lumber Sales			6,548				6,270				278
Other			(223	)			510				(733	)
Operating Revenues		$	12,900			$	11,763			$	1,137

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

Timber Board Feet

Three Months Ended December 31 (Thousands)		2007				2006				Increase
Log Sales			2,024				1,709				315
Green Lumber Sales			2,431				1,530				901
Kiln-dried Lumber Sales			3,747				3,157				590
			8,202				6,396				1,806