National Fuel Gas Co (NFG) 2003 Q3 法說會逐字稿

Good morning and welcome to the third quarter earnings teleconference for the National Fuel Gas Company. All participants will be able to listen only until if question and answer session of the call. This conference is being recorded. If you have any objections, you may disconnect at this time. I would like to introduce Ms. Margaret Suto, Director of Investor Relations. Ms. Suto, you may begin.

Thank you, Missy. Good morning, everyone. Thank you for joining us on this early conference call for a discussion of last evening’s earnings release. Today's presenters are Philip C. Ackerman, Chairman, President, and Chief Executive Officer of National Fuel Gas Company, Joseph P. Pawlowski, Treasurer of National Fuel Gas Company, and James A. Beck, President of Seneca Resources Corporation. At the end of the prepared remarks, we will open the discussion to questions.

Also, since this call is being publicly broadcast, we remind you that today's teleconference discussion will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. All National Fuel's expectations, beliefs, and projections are made in good faith and are believed to have a reasonable basis, actual results may differ materially. These statements speak only as of the date on which date when they are made. You may refer to National Fuel and Gas 10K on pages 57 and 58 of the 2002 annual report for listing of certain specific risk factors. With that, we will begin with Phil Ackerman.

Phil, we're ready for you.

Mr. Ackerman, we are not hearing you at this time. Can you please check the mute button on your phone. Please stand by.

Please stand by. One moment, please. Please stand by. Please stand by. The conference will resume momentarily. Please stand by. Thank you for standing by. Mr. Ackerman, your line is live. You may begin.

Margaret, you want to start the introduction.

Yes. Had you not heard any of that on the call? I apologize to the listeners for that.

We've had some technical difficulties. We just got reconnected, Margaret. If you have already done that.

I have done the introduction. We are ready to begin with Phil, please.

Good morning. Thank you all for joining our early morning teleconference regarding our third quarter earnings. We are going to change the usual order of your presentation here. I think we had a good quarter. The quarter was in line with expectations, things that you have the right to expect. I believe there were no surprises and accordingly, I would like to talk a little bit more about the strategic view of what we've done so far this year. We've made four significant moves at National Fuel and I think this will prove to be one of the better and one of the more significant moves, one of the better and more significant years that we've had in the history of National Fuel.

First, the acquisition of the Empire pipeline for about $240 million. That was $180 million of cash and the assumption of $60 million in debt put some pressure on our balance sheet and rather than issue equity of stock price that we felt was purely depressed, we made the determination to sell a portion of our timber assets. That's a significant transaction, both in terms of the dollars but also significant in terms of the difficulty of undertaking land transfer of that magnitude, more than 70,000 acres. And we're just now on the verge of concluding that transaction. We expert to receive a lawyer transfer of $186 million tomorrow morning in that conclusion of that transaction and that will enable us to pay down the debt that was incurred in connection with the acquisition of Empire. We also, the first of June acquired [El Toro] landfill gas short hall pipeline systems for about $48 million and we just announced the sale of our southeast Saskatchewan oil properties for an amount that will be in the vicinity of $75 million U.S., which will both pay for the Toro acquisition and have some money left over to pay down additional debt to further take pressure off of our balance sheet.

In sum, these four transactions each of which would be significant in itself for national fuel have the result of improving our balance sheet, improving our earnings, improving our risk profile, giving a greater credibility to the value of our remaining timber and they've opened up a new growth opportunity with pipeline and storage to the east and with the landfill gas gathering.

With respect to Empire, I think that will prove to be particularly timely. The high gas prices and the near gas shortages of this past winter have caused the state utility commissions to re-recognize the role that LVCs have to play in the contracting for gas supply and for storage and for pipeline capacity. Empire opens up markets to the east. It'll be our gateway to the east and I think we'll be able to expand that system at a time when the expansion of pipeline and storage is particularly opportune. The fact that we sold a significant portion of our timber does not mean I am any less pleased with the timber operation per se. The fact that that sale will generate a gain in excess of $160 million seems to me gives credibility to the desirability of the timber business and we will continue to operate that as we have in the past, although not as large as it has been, obviously. We have sold one of our sawmills but we still have two left and I expect the timber business to be good to us in the future as well and we'll continue to try to expand that business.

We closed the landfill gas gathering about the first of June. In the two months that we've operated that, there haven't been any significant surprises. It's been operated in accordance with our plan and we're busy identifying the upside associated with that and trying to implement those opportunities. The fact that we chose to sell our southeast Saskatchewan oil properties is not a sign that we are disenchanted with the product business. Oil and gas production has been part of National Fuel for the entire history of National Fuel. And as we've said for many years, we're striving for roughly a one third, one third, one third balance between utility, pipeline, and storage and non-regulated operations. We think that exploration and production is a logical offset or a logical hedge to the risks of the utility business and in spite of the fact that the utility has been a stable income producer, the fact is that there are risks associated with the utility business and I would see that, actually, as one of the challenges that we have for the year ahead.

I expect to have a good year in 2004 but the real concern is the impact of high gas prices and what that will do to our utility customers and what the reaction of the customers will be, reaction of the regulators and reaction of the politicians. Obviously, high prices are good for our production business but they do present challenges for the utilities. We will continue with our low risk drilling programs in the exploration area in production Jim Beck’s going to have some jails on what we've done so far this year. And we've come out with the earnings guidance. Joe's going to give you some additional details on the numbers behind our 2004 forecast but at this points I am very pleased with what we've done in 2003. I think we've set ourselves up for a good 2004 and for the years beyond that.

With that, I am going to turn that over to Joe.

Thank you, Phil. Good morning, everyone. Given the tight schedule this morning and since I believe the information provided in the earnings release for our third fiscal quarter is quite detailed, I don't think it is necessary to repeat that information. So this morning I’m going to provide you with a quick update of the utility rate activity in both our Pennsylvania and New York jurisdictions and then provide some very broad earnings assumptions by segments for fiscal year 2004.

Last quarter I mentioned we filed a rate case in our utilities Pennsylvania division and there's really not a lot to report there. The case is moving along on schedule. We have had a number of discussions with staff and other parties which is good because it keeps an active dialogue going with the various parties. The other parties have just filed their testimony and hearings on the rate case scheduled for September. We'll keep you posted on any new developments.

In the New York utility jurisdiction we have been actively engaged with discussions of the staff of the New York public Service Commission and other parties to extend the current settlement and our current settlement agreement expires on September 30, 2003. We have reached agreement with staff and others on the one year extension of the agreement through September 30, 2004. There are two major modifications to the agreement which I will mention this morning. First, the 50/50 sharing of earnings with customers when earnings exceed a stated return on equity will go to a 11% return on equity from the current 11.5%. Second quarter, we will record an additional $8 million of pension and post-retirement expense during the term of the agreement with no increase in revenues. And this essentially removes over earnings and in the current rate environment, especially with low interest rates, it is difficult to continue to over earn.

I want to emphasize that this settlement has been factored into our earnings guidance for fiscal 2004. An administrative law judge has been appointed. He will accept written comments supporting and opposing the terms of the settlement and then make his recommendation to the commission. The settlement extension is proposed to become effective October 1, 2003 and the text of the settlement agreement may be found on National Fuel’s web site.

Regarding earnings guidance for fiscal 2004, as you know, we provided an earnings range of $1.70 to $1.80 per share before the one time expected charge relating to pension obligation. So at this time I am going to provide some very broad earnings assumptions by segment of that fits that $1.70 to $1.80 earnings range.

So starting with utility. In the utilities New York division, expect to earn an overall return I suppose I should comment that for each of the regulated companies overall return represents operating income after tax. So, again, for the New York division, we expect to earn approximately a 8-1/4 return of average rate base of $683 million. In the Pennsylvania division we expect to earn an overall return of approximately 8.3% on an average rate base of approximately $247 million. At our pipeline segment, which comprises two companies and starting with National Fuel Gas Supply Corporation, we expect to earn an overall rate of return of approximately 11.8% on an average rate base of about $409 million. For the Empire state pipeline, we expect to earn a 9.5% overall return on an average rate base of about $122.5 million. For the exploration and production segment, James Beck will provide the forecast information for his company in a few minutes.

Energy marketing, this segment is having a good year in fiscal '03 and we expect they will earn about 6 cents per share. Fiscal '04 earnings should be about the same as fiscal '03. Turning to the international segment, we expect this segment will produce a loss of approximately 2 cents per share. In the timber segment, earnings in this segment for 2004 will be down as a result of the sale of about 50% of our timber holdings, this segment is expected to earn about 5 cents per share in fiscal '04. And the last reporting segment, all other, and I will start with Toro which is included in all other, in Toro as you know is the new acquisition for National Fuel Gas for fiscal '04 we expect Toro will earn about 5 cents per share. The remaining activity in the all other segment including corporate is expected to have a 2 cent per share loss. So for this segment, total earnings for '04 should net to 3 cents per share.

Regarding capital expenditures for fiscal 2004, cap ex is expected to be approximately $170 million broken down by segments as follows; The utility 48 million; pipeline and storage, 30 million; exploration and production, 90 million; and all other 2 million of the total of $170 million. And just a reminder, the cap ex numbers do not include the cost of any acquisition. Regarding financing, there is a 7.75 debenture due February 2004 and that amounts to $125 million and then there’s [100 million 6.82%] medium term note due August 2004. At this time we do not expect to refinance these redemptions with long term debt, but will look closely at this during the fiscal year '04. Regarding common stock issuances for the various company stock plans, about one million shares will be issued during the year. We can assume one third quarter of that will be issued each quarter.

Finally to complete the broad earnings assumptions for fiscal 2004 we expect our effective income tax rate will be around 39 to 40%, composite of Czech Republic and U.S. and Canadian income taxes. I didn’t hear what Margaret said so I will state that the actual results by segment for fiscal 2004 may differ materially from the expectations provided today. The statements I made are forward-looking statements and are direct you to the footnote on the bottom of page 6 of the third quarter earnings release dated July 30, 2003, for a listing of certain risk factors.

Now, I will turn it over to Jim Beck for his comments. Jim.

Okay thank you, Joe. Good morning. Third quarter was marked by continued strong commodity prices working with the sale of our southeast Saskatchewan properties, completing the re-organization in our Houston and California offices and drilling of three offshore wells. We will provide you with a detailed view of our 2004 forecast.

[Some] of Seneca financial results on pages 14 and 15 in National Fuel's press release from yesterday. Year on year quarterly oil prices after hedging decreased an average of 4% to $21.16 per barrel. Gas prices after hedging increased 29% to $4.83 per MCF. Production was down 21% primarily due to the expected declines in the Gulf along with an outside operated pipeline leak which required us to shut in four of our key offshore blocks for up to ten days. As a result, year on year revenues decreased 10% to 75.8 million and Seneca's net income for the quarter 7.2 million or 9 cents per share excluding the non-recurring items. A decrease of 3 cents per share from the 2002 levels. We were required to take a 22.6 million after tax [sealing] test impairment on our Canadian properties primarily related to our oil properties. This is a non-cash charge that was primarily driven by bases adjusted oil pricing on last day of quarter and lower reserves.

Year to date expenses for cost of MCFE basis are in line with the 2003 guidance. Drilling proceeded ahead on -- as planned with 38 gross wells drilled during the quarter with a 100% success rate and capital budget for the year remains unchanged at 81.6 million. This has been an active quarter for Seneca. Before I cover the financials in more detail, I would like to take a few minutes to give you an explanation of our plans in Canada.

The sale of our southeast Sascatchewan properties was our main focus area for the quarter. When we acquired these properties in 2002 we were excited about the opportunity in the upside we saw in future development drilling. However, after drilling more than 107 wells with an 83% success rate we found our production was below expectations. We have reported in previous quarters that we had to reduce our proved develop reserves because of these drilling results. At the same time, results from our 2001 fire gas acquisition provided positive results. We have drilled 53 wells with a 88% success rate. It was at that point with our new Canadian management team in place that we made our decision to concentrate on gas exploration and development and to sell these properties for a loss. However, we felt that it was an opportune time to sell and we can now focus our Canadian activities on drilling for natural gas. Exact details will be reported after we close on September 30.

Looking at the rest of the company, in the Gulf our highland A345 well was successful and had 120 [inaudible] of net pay. We expect this well to be placed on production before the end of this year. We have three other blocks currently drilling and fourth block should have a well drilling within a month. We were awarded one of two blocks from the offshore lease in February and expect to be drilling on that before the end of 2003. All this activity is part of Seneca's plan to gradually transition out of the Gulf.

On shore activity remains positive. We're maintaining our active drilling program in Canada and Pennsylvania and in California we are concentrating on reducing expenses. Thus we closed our Santa Paula office and had a reduction in staff there. Our Houston office we had a 18% reduction in staff as well and we are currently centralizing our computing hard aware in Houston in order to reduce expenses.

Looking forward our expectations in the fourth quarter production should be between 16 and 18 BCFE. This year's hurricane season has already required us to shut in our Gulf production twice and anticipate one more shut down before October. This coupled with our lower production in Canada has caused us to revise our production forecast for the fourth quarter to be lower.

Looking ahead to fiscal '04 this is a breakdown of our expected results Production in the range of 57 to 62 BCFE after the sale of our southeast Saskatchewan properties with production composed of 55% gas, 45% oil. Capital spending will be approximately $90 million, this is higher than our 2003 forecast and does not include any major offshore development that may occur. Pricing that was used was nimex (ph.) based on our prices as of June 30. The basis adjusted average price for 2004 are follows; Gas, $5.19 per MCF, oil $23.58 per barrel.

Next I will review our expense breakdown in dollars per MCFE. We are keenly aware that as our production decreases, our unit cost per MCFE will increase and we will be making every effort to bring down our expenses to be in line with production. We have made some head way already but we will continue to be working to reduce expenses further.

In addition, we will be providing ranges on these numbers for 2004 which will be impacted by the close of the Canadian sale. The EDNA will be in the range of $1.45 to $1.65 per MCFE. This represents increase of 2003 and primarily due to increase in the Canadian and Gulf EDNA. As we transition out of the Gulf, EDNA will increase as we plug and abandon new wells and platforms. In addition the MMS has implemented a new rule that requires all unused facilities must be removed in one year. In Canada, according to the accounting methodology we are not Allowed to allocate a large enough proportion of the full cost pool to the sale of our southeast Saskatchewan properties. There fore the full cost pool on the remaining player assets is proportionately higher resulting in a disproportionately higher Canadian EDNA.

Looking at GNA, GNA will be in the range of 35-45 cents per MCFE this represents an increase over our 2003 results. Some of the increased expenses relating to it are follows; 4 cents per MCFE is due to pension expenses, 3 cents for legal expenses, 2 cents for the Canadian exchange rate change that we've seen and 2 cents for GNA exploration expenses in Canada. LOE including taxes in the range of 85 to 95 cents per MCFE. This is in the range of our current year to date actuals. Any improvement that we expected to see from the southeast Saskatchewan sale is offset by higher costs in California due to expected increases in gas and electric prices.

Based on our average prices taking a look at our hedging that we will be providing, hedging for 2004 after the sale is as follows; 10.5 BCFE for 35% of the gas production is hedged at $4.25 per MCFE and 2.6 million barrels or 61% of the oil production is hedged at $26.04 per barrel. These prices you have are based on nimex pricing as of July 15. Earnings sensitivity to change after our sale of our Canadian properties are as follows; For each 25 cent change in the average gas price per year earnings will change by 6 cents a share for each $1.00 change in the average oil price for the year, earnings will change by 3 cents per share.

For fiscal 2004 we have two key focus areas, first, is one to live within cash flow. Second is to go back to our successful ways and grow Seneca via the drill bit through our exploration program. This includes the goal of adding new reserves California to 150% of production, same goal we had in 1992 when we began our original growth program in Seneca. Our exploration teams are in place with our Houston operations having the same instruct structure as it did in 1992. Our Calgary teams in place with their successful programs ready to expand into 2004 and our New York exploration program we are ready to kick off our first three wells. We are excited about the opportunities for reserve growth for 2004. At this point I will turn it to Missy and we are ready for questions and answers.

Thank you, sir. At this time, we are ready to begin the formal question and answer session. If you would like to ask a question, please press star and then one. You will be announced prior to asking your question. To withdraw your question, you may press star and then two. Once again if you would like to ask a question, please press star and then one. Our first question today is from David Maccarone (ph.) of Goldman Sachs. You may ask your question.

Thanks. Jim, I was hoping you could just review again what the outlook in terms of prices was for fiscal '04. I think you said gas at 5.19 and oil at 23.58. What does that exact represent?

Those are the nimex prices as of June 30 that we were using and those are the basis adjusted average prices for the year.

David Maccarone; for un-hedged production.

for un-hedged production.

if we got basically if you got $1.00 less than that it is four times the 6 cents on the gas side.

Right.

Okay. And I was wondering if you could comment on the year to date [EMP] cap ex which seems light relative to budget. Are you going to spend the rest of that during the fourth quarter?

Yes, the drilling activity picked up in the third quarter and a lot of those bills did not hit in the third quarter and a lot of wells that we are doing are turn key don't get paid until the well is down and finished. You will see a fairly significant increase in overall drilling. We are actively drilling in Canada right now, have one in running there and we have one in New York and the offshore activity and the offshore is really where you are going to see the pickup in the capital spending for the next quarter.

Okay. And then in Appalachia what accounts for the strength and the production particularly this quarter.

We've seen we've been drilling a lot of wells up there and you've seen we've drilled close to 60 wells. What you are seeing is the impact of all this drilling. We have a very good success rate. The wells have been coming on at expected values, if not a little bit better. So you are now starting to see the benefit of all of that starting to increase our production there.

Okay. And can you just maybe provide us some guidance on how much production from what region you expect out of the 57 to 62 BCFE.

Okay. For the Gulf estimating for 2004 about 38% of the production, from the Gulf 10% from east, 35% from west and the 17% from Canada.

Okay. And then maybe this question for Phil. Going to the issue of one third, one third, one third, how are you measuring that, whether it is net income, operating income or EBITDA can make a difference, where are we as you look ahead to '04 and where do you want to be in two to three years? Where -- do you see that mix at one third, one third, one third in two to three years?

the one third, one third, one third is always been a general guidance, nothing that we've measured down to the last 1/10 of 1% or anything like that. We thought that by having one third, one third, one third mix of that assets, that overtime the earnings ought to be similarly one third, one third, one third. Obviously in times of high commodity prices we would expect to have a disproportionate contribution from the non-regulated side, from the production. In times of lower commodity prices, the pipeline and storage arena might generate a larger proportion of our net income. So it’s tended to look more to net assets as opposed to the net income. And we are not necessarily going to take any substantial steps over the next three to four years to try to rebalance toward that number. It's -- those are just figures that we're headed toward over time and tend to look at for an internal compass. We are not slavishly addicted to achieving those results precisely . It is a desire to have a balance within National Fuel.

What I am trying to understand how do you measure that? Net income will give you a much lower number than will EBITDA, you know, the two extremes.

Well, we measure the one third, one third, one third by net assets.

Okay.

and the net income -- the contributions from the different segments will tend to be disproportionate at different periods of time because of different pricing structures.

Okay. That's it for me. Thanks.

Okay.

Once again, if you would like to ask a question at this time, please press star and then one. One moment, please. Our next question from Peter Hark(ph.) of Talon (ph.) Capital. You may ask your question.

Good morning, just a quick question on the pension charge that you are going to take for '04. That you indicated I guess would be about 10 cents. What did the return and discount assumptions you are making to arrive at that? Hello?

Yes, hello. We heard the question and I think you’re catching us flat footed with those particular questions.

I'm sorry. I was actually referring to I guess you pre-announced earnings a few days ago.

Yeah.

When you made the Canadian sale and suggested that earnings would on a GAAP basis would be slightly lower than the operating number due to the pension charge that you might take.

That's right, we absolutely did that and we just don't happen to have that actuarial calculations at our fingertips. It is not a secret.

I will follow up with Margaret. Thank you very much.

Those actuarial assumptions are a little bit contained and there's a whole bunch of assumptions that go into that estimate.

I will follow up off line. Thank you very much.

At this time we are showing there are no further questions.

Okay, operator. You've polled everybody and we are all set?

Yes.

Okay, I know everyone has busy schedule today. Many companies reporting. We will conclude our call. We would like to thank everyone for taking the time to join us. A replay of this call will be available in about one hour on both our web site and by telephone. And both will run through the end of business on Thursday, August 7. Our web site address is www .nationalfuel Gas .com. 1-800-964-3639. That concludes our conference for today. Thank you and good-bye.