National Fuel Gas Co (NFG) 2003 Q2 法說會逐字稿

Welcome and thanks for joining us for the second quarter earnings talk. All lines will remain in a listen-only fashion until the question and answer session and at that time, instructions will be given. The conference call is being recorded for replay purposes and I'd now like to turn the conference over to the Director of Investor Relations, Miss Margaret Suto, you may begin.

Thank you, Shawn. Good morning, everyone. Thanks for joining us on this consume for a discussion of last evening's earnings release. Also, since this call is being publicly broadcast, it is necessary to remind you that today's teleconference discussion will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. While National Fuel's expectations, beliefs and projections are made in good faith and believed to are a reasonable basis, actual results may differ materially. These statements speak only as of the date on which they are made and you can refer to National Fuel Gas form 10K on pages 57 and 58 of the 2002 annual report for a listing of certain specific risk factors. Today's presenters are Phil Ackerman, Chairman, President and Chief Executive Officer of National Fuel Gas Company, Joe Pawlowski, Treasurer of National Fuel Gas Company and James A. Beck, President of Seneca Resources Corporation. After the prepared remarks, we will open the discussion to questions. With that, we begin with Joe.

Thank you, Margaret and good morning, everyone. Earnings on a diluted basis for our second quarter of fiscal '03 amounted to 99 cents per share, 22 cents per share greater than last year's second quarter earnings of 77 cents per share. Earnings this quarter represent the highest second quarter earnings in the company's history. As noted in the earnings release, the increase in earnings from the prior year was experienced across all segments. The utility segment posted 49 cents per share of earnings in the second quarter, 5 cents per share higher than last year. The 5 cents per share increase this quarter was driven principally by weather in our Pennsylvania division, where it was 28% colder than last year. The colder weather contributed about 4 cents per share this quarter and as you know, our New York jurisdiction has a weather normalization clause, so earnings there weren't affected by weather.

In the pipe line and storage segment, earnings went up 3 cents per share from the prior year to 15 cents for the quarter. The principal drivers here were earnings for the newly-acquired Empire pipeline and efficiency gas revenues. In the emp segment, earnings were up 7 cents from the prior year. Higher commodity prices for oil and gas production offset lower production volumes of 1.7 billion feet equivalent. And Jim Beck will have more to say on this segment in a few minutes.

Earnings in the international segment were up 2 cents from the prior year. Colder weather in the Czech Republic accounts for the increase there. Our energy marketing segment posted earnings of 6 cents per share this quarter, up 3 cents from the prior year. Volumes of natural gas sold went up by approximately 7.6 billion cubic feet to 19.3 billion cubic feet for the quarter. Cold weather and the addition of several high-volume customers provided the increase to earnings with cold weather the predominant factor.

Our timber segment contributed an additional 3 cents this quarter, to where they posted 5 cents per share of earnings. As reflected on the bottom of page 16, sales were up in all categories. Also, timber prices per thousand board feet this quarter were higher compared to last year's second quarter.

In summary, the second quarter earnings for fiscal '03 were up 29% from the prior year, and as I mentioned, this quarter earnings represent a new record high for National Fuel. Earnings per diluted share for the first six months of fiscal '03 were $1.58 per share and $1.47 per share after nonrecurring items. Regarding earnings guidance, we revised the earnings range for fiscal '03 before nonrecurring items to $1.75 to $1.85 per share from the previous guidance of 1.60 to $1.70 per share. You will also notice that we provided GAAP earnings guidance in the range of $1.65 to $1.75 per share, which is net of the nonrecurring items. Nonrecurring items can be found on page 7 and 8 of the earnings release under the column heading "6 months ended March 31, 2003." One of the items is in the EMP segment and amounts to $637,000 or 1 cent per share and the second one is located in the international segment and amounts to $8,255,000 or 10 cents per share. Both items relate to the adoption of new accounting pronouncements, which is discussed on the bottom of page 4 of the earnings release. The dual presentation for earnings guidance is due to the new disclosure requirement, regulation "G"' adopted by the SEC, effective March 28, 2003. The new regulation requires a GAAP financial measure, which in our particular circumstance calls for the inclusion of nonrecurring items in our earnings guidance. The SEC states the new rule reflects the letter and spirit of the Oxley Act.

Regarding earnings expectations for the third quarter of fiscal '03, we expect earnings to be within the range of 28 to 33 cents per diluted share on a GAAP basis. A sale of a timber assets to finance the acquisition of an Empire pipeline is expected to take place in the fourth quarter of this fiscal year. And just a brief comment on our debt to equity ratio, the equity component of total capitalization, including short-term debt at the end of the second quarter is approximately 40%.

The anticipated closing of the sale of 50% of our timber holdings in this year's fourth quarter should produce about 95 to $100 million to net income and, obviously, to equity. The proceeds from the sale, given the like kind exchange treatment, will allow us to pay off the $180 million of short-term debt we borrowed in February 2003 to temporarily finance the acquisition of the Empire pipeline.

A combination of the increase to equity in the lowering of the short-term indebtness will increase the equity component as a percentage of total capitalization by about 500 basis points. This puts us well on the way to our goal of a 50/50 debt equity ratio. And one final note in our utility segment. On April 16, 2003, we filed a rate case in the Pennsylvania division for an increase in rates of approximately $16.5 million. New rates go into effect, assuming full litigation, on January 15, 2004. The rate case assumes a 9.96% return on rate base and a 12.75% return on equity. The main drivers for filing the case are higher pensions and post-retirement benefit costs.

Also on March 28, 2003, we filed with the Pennsylvania Commission a petition to defer for fiscal 2003 and beyond, the difference between the amount in the rates for pension costs and the amount we fund or pay into the pension plan. We expect this petition will be consolidated with a rate case and resolved in the base case proceeding, and we'll keep you posted as this case moves along. So, I turn over to Jim Beck at this time. Jim?

Thank you, Joe and good morning, everyone. As Phil has said many times, Seneca is one of National Fuel's hedges against high commodity prices and in the second quarter, National Fuel received the benefits from both high oil and high gas prices. A review of Seneca's financial results are as summarized on pages 14 and 15 of yesterday's press release.

Year on year oil prices after hedging increased an average of 27% to $23.51 per barrel, and gas prices after hedging increased 22% to $4.60 per MCF. Production was down 8%, primarily due to the expected declines in the gulf along with our shift in our Canadian drilling to shallow gas. With producers at lower rates and requires more wells to have an impact on results.

Revenues increased 15% to $84.5 million. Andersen ka's net income for the quarter was $14.2 million or 18 cents a share. This is 63% above the 2002 levels.

Year to date expenses on a cost per mcf basis are in line with the 2003 guidance we provided in last October. Drilling is on plan with 30 wells drilled during the quarter and a 90% success rate. And our capital budget for the year remains unchanged at $81.6 million. While the second quarter activity can be characterized as quiet, we were very active in the oil and gas hedging markets, taking advantage of the high prices that occurred during the quarter.

At the end of the quarter, we had increased our hedge position for 2003/2004 by approximately 5.4 bcf and 2 million barrels. For the remainder of 2003, we have 11.6 bcf of gas hedged at an average price of 453 per mcf and 2.1 million barrels of oil hedged at an average price of $22.41. For 2004, we have 10.3 bcf of gas hedged at an average price of 4.23 and 2.3 million barrels of oil at 22.58 per barrel.

We're continuing to take advantage of high commodity prices by layering in more hedges as target prices are achieved. In the Gulf, we started our first offshore well in 10 months. And we have two other blocks that we intend to drill this year. We're also negotiating with other offshore operators to farm out additional offshore blocks.

As noted in our press release, we high bidder on two low risk blocks. If they're awarded, we will drill them next year. We expanded our acreage holdings in Canada and New York on solid gas plays we identified in each area. We have acquired 29,600 acres and 32,600 acres respectively in the new trends.

In Canada, we've already participated in nine successful wells where we have a 50% working interest, and we expect to drill three exploratory wells in New York in the year where we have a 100% working interest. And it should be noted that in Canada we have engaged Theress and Company to recommend strategic alternatives for our oil production. We expect to make a decision in June as to our plans for these properties and we'll keep you advised any decisions we make.

Looking ahead for our expectations for the third quarter, production should be in the range of 18 to 20 bcfe and our 2003 production forecast remains in the range of 76 to 81 bcfe. We do not anticipate our making any production forecasts for 2004 until we make a decision on our disposition of our southeast oil production.

Lastly, in these times of high commodity prices and our increased hedge positions, the question always arises to the impact of price changes on Seneca's earnings impact for 2003. Currently, for each $1 change in the average annual oil price, earnings will change about 3 cents per share and for each 25 cent change in our average annual gas price, earnings will also change about 3 cents per share. At this point, I'll turn it back over to Phil.

Thank you, Jim. The quarter was obviously a good one. With all segments being up year-over-year, the empire pipeline acquisition being completed and the timber sales proceeding as planned. Oil and gas prices remain strong and we have raised our earnings guidance for the year to 1.75 to $1.85 without gain on the timber sale or another nonrecurring items. On an operational note, we were very pleased with the way our system performed in our first really cold winter in many years. In order to keep our rates as low as possible, we have been operating with fewer and fewer employees, while at the same time, spending significant capital dollars in ways we believed would enhance reliability.

Our -- our system performed well and our remaining employees handled any problems professional 4r5e678 and capablely. Two, although storages were drawn down to an unusual decree, we have no shortages. Our own supplies, coupled with the cooperation of the remaining marketers on our system, kept our customers in gas on even the coldest days. And even a more positive note, we're seeing signs that this unusually cold winter and high prices are restoring the belief that firm gas supplies and firm pipeline capacity are important. We believe that this cold winter is what was needed to get pipeline projects off the ground, and we think our acquisition of Empire, with the expansion opportunities it affords us, came at just the right time.

While I'll personally be sorry to see a large chunk of our timber assets go, the chance to cash in on some of that gain, acquire Empire, and improve our balance sheet without issuing equity at what would have been a depressed price; a winner any way you look at it. At the same time, we looked at ways to finance the empire acquisition, we also identified our southeastern oil properties as possible candidates for sale, and indications were that they could be worth more to someone else than to us. Accordingly, we're soliciting bids and will see what someone might be willing to pay.

We also have talked to -- and are talking to - potential buyers for our check assets, but I will note that those assets also had an improved quarter in six months.

All in all, I'm very pleased with the progress we've made and are making. Income is up, our pipeline investment increased, our balance sheet will be strengthened by the timber sale as well as focusing our capital expense. The future finally looks bright for pipeline and storage and, of course, the high oil and gas prices benefit expiration and production. I look forward to seeing many of you at the AGA, the week after next, where we will have q-and-a.

Thank you, at this time, if you have a question, press star 1 on your touch-tone phone and if you are using speaker equipment, you may lift to handset prior to pressing star 1. In order to cancel your question, press star 2. Star 1 to ask a question and star 2 to cancel. One moment while the questions register, please. The first question comes from James Yannello with UBS Warburg.

Good morning, I want to first thank you again for the improved disclosure, it really helps a lot. Also, as far as efficiency gas is concerned, can we have the year-over-year comps, please?

Yeah, Jay, this is Joe. The efficiency gas volumes were up about 129,000 mcf this quarter to 911,000 mcf for the first six months. And the average revenue rate was $4.48 this year compared to $2.51 per mcf last year.

What was the volume last year just so I have it right here?

It's going to be 911 minus 129 --

Yeah, you're right, you're right.

In other words, we don't have it right here, Jay!

Okay.

Also, with regard to the cold weather we've seen and the high prices, we've seen some other companies increase their accruals for bad debt, did you do that? What -- can you give us some flavor on that? What percentage of revenues or however you want to gauge it and if you have any revenue so far on how receivables have been trending?

Yeah, again, Jay, this is Joe. We have not increased our reserve for bad debts this year. I don't have the numbers at -- at my fingertips, but certainly in the utility, the receivable balances have gone up due to the cold weather and also due to the higher gas costs. But I think, you know, the utility is where we have not risk, we have a fairly good regulatory relationship with the New York commission, where the majority of those receivables are. We also have a little delay in when we write those off. And currently we're in the early stages of discussions with the New York commission as to what rates might look like October 1st of this year, as you may recall, our three-year settlement expires September 30 of fiscal '03 and any bad debts experienced due to final bills this spring and summer, we would be looking to collect next year.

Okay. Just a quick question on storage. It has been replenished greatly, without giving away what you're doing in the marketplace, can you give us a little background on what you're doing right now? Is it as simple as replenishing it as fast as possible? Or a background on how you're handling storage for next winter?

No, it's not quite as simple as replenishing it as fast as possible. But we have every intention of being totally replenished by next winter. You know, there's never been any doubt in the utility business that we will have our storages full before the winter starts because of reliability as Paramount. With respect to the storage compass -- capacity that's held in our marking company, they, too, will have the storages filled to the extent that they need to in order to satisfy their customers' demands and to meet the requirements in the system in which they operate. But we're going -- we're going a little bit light on the replenishment at this point in time. On the other hand, there's a physical limitation to how much you can put off as the storages fill up, you can't stuff the gas back into them as rapidly as you can early in the injection season. There's -- there's a little bit of flexibility, but not as much as you might like. You need get them filled up and you need to start filling them sooner rather than later.

Okay. Last question. Phil, you mention tlaed might be some interest in a check assets. Is that a fiscal 3Q event? Possibly 4Q? And are additional international assets off the table at this point?

You know, I don't see it beak a third quarter, certainly not our third fiscal quarter at all. Possibly -- possibly our fourth quarter, but -- but more possibly the fourth quarter of the calendar year. We -- we have no other European assets, we have the Canadian assets, of course, but I assume you're talking about the -- the European assets --

Yes. Are they off the table? You mean the possibility of additional investments there?

No, no, I would not say that they're off the table at this point. We still think that they're interesting opportunities there. I still will not, you know, commit 100% of National Fuel's funds to those areas. There are various U.S. and international agencies that will provide financing for those things on a nonrecourse basis or provide insurance and we continue to explore those.

Okay. My only comment --

I say from time to time, yeah, we have nothing on the balance sheet with respect to any other projects.

Okay, that's fair. My only comment would be we've seen such disasters throughout the industry that I'd hope you would apply an extremely high standard to whatever you're considering. Thank you.

You bet! That's a very, very appropriate observation.

Thank you. The next question comes from Donato Este with Royalist Research.

Good morning and my congratulations on a great quarter, as well. Joe, you'd mentioned that the pension is, you know, you'll requested for a develop, was there, you know, could you kind of capture the amount -- was there any amount for this quarter that was deferred or is it something you're looking forward and anticipating a develop -- deferral?

It would be an anticipation. In the Pennsylvania jurisdiction, we basically have expensed what we're funding which is greater than what's in rates and our deferral position is requesting that the amount that we're funding, which is about maybe $2.5 million and is about $500,000 in rates, we would like that $2 million deferred to be collected in a future rate proceeding. But it's 23409 not a great deal of money, you know, three, but we would probably get larger as we go through fiscal '04 and that's the reason for filing the rate case is to try to catch up and include in the rate case the funded amounts for pension.

Okay, but it is reflected in the numbers, that's what matters. Appreciate it and good luck for the balance of '03.

Thank you.

Thank you. And if you have a question, you may press star 1 on your telephone touch pad. The next question comes from Sven DelPozzo with John S. Harold. Good morning.

Good morning. I'm wondering about the timber segment. If the provisional sales price for half of the assets is $190 million, dust this imply that the other half is also worth $190 million?

It's certainly in that ballpark. If it's not , you know, exactly to the last dollar until you would actually try to conduct a sale, but sure, it's certainly in the ballpark.

Okay, will you be selling any of your sawmills or kilns along with the half of your timber assets?

We are not going to sell any of the mills along with the assets. We probably will be shutting down at least one of the mills and -- and either piecing it off or trying to sell it as a -- a standing unit. But -- but that's not part of the existing sale deal -- the existing sale deal is for timber only.

Okay, and would you -- I read in the annual report, it says that about 70% of the lumber that's provided -- the raw lumber provided to the saw mills comes from Seneca's properties. Will that percentage be increased or decreased after the sale? Or be the same?

I don't know at this point. It depends on which of the mills we shut down, whether we -- we decrease the whole operation proportionately or not. I would suspect at this point that -- that percentage coming from nonowned properties will increase by virtue of the fact that the amount of property that we own decreases.

Okay. And should that have a positive impact on -- on margins say per board foot in the timber segment?

No, it will actually have a negative impact on margins because the -- the properties that we are selling had very low basis so that our margins were greater on the timber that we cut from our own property and will be greater on the timber we cut from our own property than on the timber that comes from newly-acquired properties or -- or third party properties.

Okay. And the -- in reference again to the margins, with -- I see that per board foot it seems that the operating income per board foot has increased significantly through the first six months of your fiscal year compared to last year and I was thinking well, with the economic situation in Germany and Japan not being as -- as good, I was wondering what canted for this, whether any foreign currency appreciation relative to the dollar was influencing these margins that I'm derived from what you reported?

Perhaps but I doubt that's the driving factor. You know, we -- we do all of your transactions in dollars and -- in the United States so so, whether there was any impact from the change of currency, I couldn't really say. What I do know for sure and is very clear is that the mix in the timber that we were able to cut had a significant impact. Now, there's just much greater value in the cherries and year logs than there is in other types of timber. And the weather conditions, particularly in the second quarter, were much more favorable this year for getting into the woods and getting to the timber than they were a year ago. It was the cold weather and that only helped the aspen business and also helped the timber business, just a lot easier in this part of the droy get into the woods when the ground is frozen than it was a year ago when it was warm and muddy and wet and miserable operating conditions.

Okay, so it's more a factor of you being able to get into the woods, not necessarily that the market fundamentals for cherry vein year are stronger now than they have been in the past?

Yes, that's correct.

Okay, and then I had a question on the international segment, as well. I read it was a relatively cold winter in the Czech republic which helped results in that segment, which seemed to be the best quarterly results I've seen in recent history, anyway. I'm wondering whether going forward what will happen -- I mean can you give us any indication of what might happen going forward, whether the strength will continue, whether Czech has any influence over what the future will be like? And whether the Czech Republic's entry into the European union will have an impact on the policy going forward? Thank you.

That's a tough question! You know, clearly the strength in our results in this quarter was -- was due substantially to an improvement in the weather, meaning it got colder and I can't make any predictions about them going forward, other than to say on a going forward, it's more likely that the weather will be normal on average, warmer than normal in prior years. So, you would expect the fundamentals of that business to improve. We certainly thought that the Czech Republic's entry into the European union and joining NATO and so on would have a beneficial effect on the overall business there. That's developing more slowly than we anticipated it would happen. The ability to transport -- or transmit electricity internationally is not developing and the Czech's economy is not burgeoning as rapidly as we thought it would. I still think that will happen in the long run, but the long run can be a substantial period of time.

Okay. Thank you very much.

You're welcome.

Thank you. And the next question comes from Mike Heim with AG Edwards.

Thank you, good morning.

Good morning.

Excuse me if I missed it, but did you say what gas price you're assuming for the rest of the year in your '03 guidance?

For the EMP operation, we typically will run off the 9 X strip when we look at gas prices and oil prices typically.

Have you said if you will be booking a gain or loss on the timber sale in the fourth quarter? And if so, how much?

Yes. Yeah, Mike, this is Joe. I indicated that we expected the closing of the timber sale to occur in the fourth quarter and the amount to net income would be between 95 and $100 million.

Okay. And -- and Joe, when you were talking about the pension deferal, was that referring just to Pennsylvania or New York, as well.

Just to Pennsylvania. We already have a if he ferl -- deferral mechanism in New York.

Okay. And finally, looking at the improved resulted for the marketing, this is a little bit more subjective of a question, was that just due to the refocus you did? Or are you seeing the benefits from the higher pricing? And how are you able to avoid some of the supply shortfall that some of the others are seeing, is that just your storage? Or other flavor you can get to help explain the improved marketing results.

There are a number of things, certainly the -- the improved focusing helped, there is no doubt about that. Secondly, as we acquired some additional large-volume customers from one of the marketers who are exiting this area, we made some Moe them and that helped. You know, among other ways that we were able to avoid supply shortfalls is very close attention to not being caught short, pretty emphatic with those people that were not speculateors that tried to match purchase and sales. We do have storage service that the marketing company owns and -- and they go in there with the asset storage am they did have to buy some gas on a short-term basis at a relatively high price and that did impair their results but that's all included in the numbers and they're -- that business is a money maiker for us if we stick to our knitting and I think our knitting consists of staying at our local area, not trading and dealing with credit worthy customers. The question was raised earlier about bad debts or the potential for bad debts and Joe talked about the utility. We looked at that closely in the marking company and think we're adequately reserved there. We pay very close attention to the -- the credit weatherness of the customers that the marketing company deals with.

Okay, thank you. Congratulation ease a good quarter.

Thank you.

Thank you. The next question comes from David Maccarrone with Goldman Sachs.

Thank you. Jim, I hoped you could discuss a little bit the skewan properties, that's part of the filing reserves?

That's correct.

And what's the production on the books now? And, well, let me get that out of way.

Okay, currently our production up there, gross, is about 7200 barrels a day and I will have to get you the total reserves that we've got on the books on that --

Would you expect to get something comparable to what you paid for it a few years back or...

That's why we're in the market, to find out.

Okay.

Where there's been an expression of interest from a number of companies and so we're going to test the market to -- if it works out, we would go forward. If not, we're very happy with the properties.

And then what about your other more gas oriented part of the Canadian business, particularly with -- with royalty trust in such a consolidation mode right now, in the relative appeal of those properties and what you see going forward there?

We like the gas market up there. The new team we have in place there has done an outstanding job of putting new gas in place. We've seen a very solid success rate in our gas drilling and are looking ourselves to expand into the gas arena. So, we want to move forward in the gas arena and really are not at this time looking to sell any of those gas reserves.

What would you point to as measures of the success you talked about the drilling rates, production has been relatively flat, but are costs coming up up on the gas area?

Right, the -- the gas area -- the key there is infrastructure. That's really one of the main drivers on gas costs and that's one of the areas that we would like to expand into is to get those costs under control; in the gas processing plants associated with the high gas that we're actually producing because if we can do that, I think we can dramatically control the expenses related to the gas production, so, we're trying to become more actively involved having not been that strong in the gas arena before and trying to expand into that market, we're trying to work with other companies in the area and increase our -- our participation in the processing portion of that business.

Okay, and for Joe, just a couple of more housekeeping-oriented items, he indicated a 95 to $100 million gain from the sale of timber, I assume that's a book gain, will it be comparable to the after-tax cash proceeds?

No. First, it is the book gain, the 95 to $100 million, but because of the like kind exchange and the opportunity to defer paying the tax in that gain over a longer period of time we would would sufficient proceeds from the $190 million to pay off the $180 million that we -- we borrowed to initially acquire the empire pipeline.

Can you just go into the deferred tax nature of that accounting?

Well, essentially the -- I guess in a nut shell we book substantial deferred tax expense that's not reflected by cash outlay.

And then you pay the taxes over some period of time? Or...

Right, pay the taxes over I guess you could call it the tax life of the empire pipeline.

Okay. I see. And on the Czech Republic, what's the level of investment on the books following the -- I guess the goodwill writedown?

32 --

Yeah, about $132 million.

Okay, thanks very much.

Thank you. And the next question --

Yeah, I would like to expand on one of those answers by Jim there and, you know, from a very, very lofty level, we're in the gas business and National Fuel feels very good about the gas business and part of that is being in the exploration production business for natural gas and so we have no intention of selling off our Canadian gas properties or -- or abandoning our exploration production activity in the gas arena. Next question, I'm sorry to interrupt there.

Thank you. And the next question comes from Philip Salles with CSFB.

Thank you and appreciate all the information on today's call. Just also a couple of housekeeping items, going back to Joe's comments on the efficiency gas sales, I missed early on, what was the earnings or EBIT contribution that benefited the segment in the current quarter?

Well, I didn't really mention the EBIT contribution, but I did indicate that we -- the quantity of efficiency gas was 9,-- 911,000 up this year, up 911,000 from the approximately 782,000 from a year ago and the unit rate was $4.48 per mcf this -- this year versus $2.51 per mcf last year.

Okay. Well -- we'll do the math on that. Joe, while you have the microphone, could you -- could you comment -- you talked about filing a rate case in the Pennsylvania jurisdiction. Could you -- could you comment on if any regulatory lab would exist depending on that -- on that filing and an ultimate decision in either, you know, the, you know, fiscal '04 period?

Well, we filed the case and if it's fully litigated, rates go into effect around the 15th of January '04. And, you know, there's always settlements, we've settled cases in the Pennsylvania jurisdiction, I think maybe the last three cases we filed and we certainly would be looking for the opportunity to settle the case with rates go into effect sooner than January of '04.

And -- and -- and if not, could you quantify for us relative what kind of earnings impact that might be? Is it just a loss, the revenue opportunity? Or is there actually an earnings impact that we'd be looking at?

Well, the -- I think the earnings impact with our January effective date will be -- will be modest in '04, but it allows us to begin to recover additional expenses associated with the -- the pension and post-retirement benefits.

Okay, thank you. A question for Jim. Jim, yi gave a lot of details in the EMP segment relative to production and cost. So, I won't ask that and -- but, could you comment on reserves and reserve replacements and finding costs and if -- if it is within the plan relative to fiscal '03, if we can see a growth in reserves this year or will we see a decline similar to what we saw in fiscal '02?

Okay, on the key -- the key on reserve replacement is capital spending, you can see that we were intentionally keeping those numbers down in the first half of the year, we're going to be significantly increasing our drilling activity in the last half of the year and so that's really where you're going on see most of the reserve ads. The key there I think is we will probably see a flattening of the reserves, there probably will be a slight decline this year going forward but until we get through the whole year and see what the reserve decisions might be, it's very difficult to quantify. We've got a number of key wells drilling, we've got the three offshore wells to add significant reserves. We have the seconds to count the well in Canada, which should be down in the next three months. Which, again, could have a significant impact. So, we have a number of -- of key wells that will dramatically drive reserve replacement fining costs. So, to say anything now is a little premature.

And you wouldn't see the type of negative revisions that we saw in the prior year in -- in this fiscal year?

There may be some revisions --

Uh-huh.

But it won't be near as dramatic as we saw last year.

Okay, we'll -- we'll leave it as a flattening and I appreciate the -- the insights and the additional flavor. Just a final question, maybe for Phil, just kind of talking about the quarter and record earnings, but could you just kind of share with us your thoughts relative to the growth prospects of the -- of the company going -- going forward? You now -- you now, you know, have the empire pipeline, I mean you're looking at, you know, down production but yet just would appreciate some of the comments and look forward to EGA and I'm sure we'll have a greater chance to chat, but if you can add some flavor relative to the growth prospects of the company, in not only the second half of '03, but if you could extend that into '04, I won't ask for an earnings estimate, but perhaps just to add color to us.

Well, the increase in the earnings through the second half of '03 is going to be a challenge. You know, we get into the summer months and the gas business just isn't as good in the summer as it is in the winter. I'm very optimistic in general with respect to the pipeline and storage business. And historically, in particularly through the '70s and '80s, the growth in pipeline and storage was very good for us. We've consistently had good returns in that arena and it was frustrating through the '90s with the restructuring of the gas business.

The uncertainty about the role of the LDCs and marketers in the business to try to get any pipeline projects done. People were unwilling to sign up for long-term contracts. The combination, though, of our acquisition of the empire pipeline, which points often in different directions, for us more to the east as opposed to the expansion of our pipeline business to the south and to Pennsylvania, coupled with the cold winner that we had in the high gas prices seems to me to just set the table for another surge of expansion in the pipeline and storage area for us in particular. But for the pipeline and storage business in general, as well.

You know, we've been trying to get more and more gas through the same physical facilities for years now and -- and we're going to need -- there's a as a nation, to build more pipelines and more storage to accommodate the needs of the populous. That's -- that's clearly going to work for us. I'm optimistic about -- about natural gas in general and -- and in particular with respect to the expiration and production area. I think we are in an era of higher prices. I think $5 gases is not likely to be sustained for the long-term. But I don't think we're going to see $1 gas and $1.5 gas again. So that the expiration business is going to grow.

I think the question of what our reserve picture is going to be at the end of the year is -- is way premature at this point in time. I mean we're just now engaged in the serious part of our exploration program and that's going to tell -- tell the tale with the drilling offshore and the drilling of the. [ INDISCERNIBLE ] Well. Any one of those things could be significant to us. And likely will be.

I thank you. I look forward to the continued updates and appreciate your reflections. Thanks, Phil.

Thank you. And the next question comes from Doug Christopher with Crowell Wheaton.

Hi, good morning. Just one question, just regarding the receivables and you might have addressed it earlier, can you just address that increase there and it is relatively, you know, larger that it -- than I've seen it in the past and -- and also how you might expect that po work its way down over the next few months.

Well, receivables at March 31 represent, you know, I think as we mentioned earlier, some of all of our segments and certainly the receivables in the ENP segment are up and again, Jim and his folks look at the credit worthness of the folks we sell the gas to, so, we don't have significant concerns there and as Phil mentioned earlier in the marketing segment, we also have a real keen eye toward acquiring customers at a good credit history. It's just when you get into the utility where we provide service during the winter that you tend to build receivables that have some aging to them but we have had, where the majority -- in New York, a very good relationship on the recovering of those receivables and we are currently starting discussions with the staff of the New York Public Service Commission and the collection of some of the receivables that perhaps will be old or -- or final build will be part of those discussions for recovery in fiscal '04.

Okay. Now, so, if you're looking at that increases, the majority of it, would you say more than 50%? Is it from the utility? Or can you break it down by maybe percentage of your businesses?

I think the majority of it certainly is in the utility.

Thanks.

And -- and while this may be high right now, the fluctuation of our receivables is not unprecedented. We had large receivables two years ago when gas prices ran up.

Sure.

I can't think of the exact time period before that, but we certainly had eras of high gas prices previously. It's a fact of utility life that the commissions are used to and are great people are used to and our financial people are used to and we have not had a significant loss with respect to receivables.

Right.

Ever. In the utility operation. That's something that we can manage and have managed and one of the things that is very important to us is the funding. The dollars at flow from the federal government and I think because of the high gas prices that we've experienced and the cold weather we've had nationally there is going to be substantial money coming again from the federal government to help people who have challenges in meeting their utility bills to help them pay those bills and that will be a significant factor for us in the recovery. It's a -- it's an area that we're alert to but not especially concerned about.

Thank you.

Thank you. At this time, I show no further questions and would like to turn the conference back over to Miss Margaret Suto.

Thank you, operator. I guess we will conclude the call. We thank everyone for joining us today and look forward to seeing you next week at the AGA. The financial forum replay of this call will be available in our website in about one hour. The telephone replay will be available after 1:00 today. Both will run through the end of business on Friday, May 2. The telephone replay number is 1-888-562-2892. That concludes our call for today. Thank you and goodbye.

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