National Fuel Gas Co (NFG) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter fiscal year 2004 National Fuel Gas Company earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to your host for today's call, Margaret Suto, Director of Investor Relations. Please proceed, ma'am.

Thank you. Good morning everyone. Thank you for joining us today for a discussion of last evening's earnings release. 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 Jim 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. While National Fuel's expectations, beliefs in 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 they are made, and you may refer to National Fuel Gas Company's Form 10-K on pages 60 and 61 of the 2003 annual report for a listing of certain specific risk factors.

And with that, we will begin the discussion with Joe Pawlowski.

Thank you, Margaret, and greetings and good morning from frigid, cold and snowy Buffalo, New York. This is great gas company weather. Although the first five days in January were 31 percent warmer than normal, since January 6th, it has been 26 percent colder than normal and 13 percent colder than last year. And for the first 28 days of January, it was 16 percent colder than normal, so it is a great start for our second fiscal quarter.

Hopefully everyone has seen our earnings release, but let me give you a brief summary and overview of earnings for the major segments. Earnings for our first fiscal quarter ended December 31st, 2003 on a GAAP basis were 60 cents per share compared to 47 cents per share for the prior year's first quarter. Excluding non-recurring items, our first-quarter earnings were 53 cents per share compared to last year's first quarter of 58 cents per share. There was one non-recurring item in the first quarter of fiscal '04, which results from new legislation in the Czech Republic that was approved in December 2003.

The new law lowered the corporate income tax rate with a tax rate reduction phased in over a three-year period. The tax rate in 2003 was 31 percent. It will be lowered to 28 percent in 2004, 26 percent in 2005, and in 2006, it will further decrease to 24 percent.

The accounting effect of this tax reduction is to lower the deferred income tax liability on the balance sheet since the tax timing differences that gave rise to the deferred income tax liability will reverse at the lower tax rates. This adjustment lowered income tax expenses this quarter by 5.2 million or 7 cents per share.

There were two non-recurring items in last year's first quarter. The first was the write-off of 8.3 million or 10 cents per share of goodwill in the Czech Republic, and the second item relates to the Company's adoption of accounting statement number 143, accounting for asset retirement obligations in the exploration and production segment.

Pages six and seven of the earnings release provides a reconciliation of earnings before non-recurring items for reported earnings in both dollars and earnings per share. I should point out that in the earnings guidance provided for the first quarter of fiscal 2004, we were anticipating a non-recurring transaction related to pension obligations. That transaction did not occur as was expected in the first quarter but did occur in January 2004, so it is a second quarter item.

Moving on, let's take a look at the earnings performance by major segment. Starting with utility, earnings this quarter were down 4 cents to 20 cents per share. 2 cents per share of the reduction in earnings relates to our Pennsylvania Division where weather this quarter was 13.7 percent warmer than last year. As you know, we do not have a weather normalization clause in Pennsylvania. However, in our New York Division, the weather normalization clause preserved 970,000 of margin and approximately 600,000 of after-tax earnings.

The remaining 2 cents per share reduction in earnings relates to three separate items. First, an increase in pension and postretirement expenses in our New York utility, and that amounted to about 2.6 million pretax. And as mentioned in the earnings release, the increase in benefit expense is a direct result of our latest rate settlement. And that settlement went into effect October 1st, 2003. The item the accrual of an additional $2 million of bad debt expense. We increased our reserve for uncollectibles given the high gas price environment and the impact of high gas prices on aged Accounts Receivable balance.

And three is the lower normalized sales volumes and lower transportation volumes that we are experiencing in our New York Division. And that amounted approximately 1.8 million after-tax of lost margin in quarter one. These items were partially offset by the absence this quarter of an earning sharing provision with customers. In last year's first quarter, a 5.5 million pretax earnings sharing provision was provided on the books.

In the pipeline and storage segment, earnings were flat with last year. While our supply corporation's pipeline earnings were down 2 cents per share compared to last year, our Empire Pipeline that we acquired in February of 2003 contributed 2 cents per share of earnings. The lower earnings reported in our supply corporation's pipeline were due to higher benefit costs of about 1 penny per share, and we also experienced lower efficiency gas revenues, which amounted to about a 1 penny per share.

Efficiency gas revenues produced 2 cents per share of earnings for the first quarter. The exploration and production segment, excluding non-recurring adjustments, contributed 13 cents per share this quarter, up 3 cents per share from the prior year. Jim Beck, who will speak next, has more details on this segment's performance and activities.

Just a note on Toro. The Toro pipelines acquired in June 2003 earned a penny per share this quarter and is performing in line with our expectations.

Regarding earnings guidance for the second fiscal quarter and for fiscal 2004, we expect earnings for the second quarter to be in the range of 75 the 85 cents per share, excluding non-recurring items. And as I mentioned earlier, the second quarter will include the onetime charge related to pension obligations that was recorded in January of 2004. The amount recorded for this item was 6.8 million after-tax or 8 cents a share. Including the impact of this non-recurring item, earnings for the quarter are expected to be in the range of 65 to 75 cents per share.

For fiscal year 2004, we expect earnings before and after non-recurring items to be in the range of $1.65 to $1.75 per share. Our utility rate settlement in our Pennsylvania jurisdiction was approved on December 23rd, 2003. A 3.5 million annual rate increase went into effect January 15th, 2004. An important part of the settlement is a pension cost tracker that allows the Company to defer to the balance sheet as a regulatory asset or liability, a difference between what is in revenues for pension expense and the amounts contributed to the pension plan. This is beneficial to both customers and the company.

Also on February 2, 2004, we have a 7.75 percent debenture coming due in the amount of $125 million. At this time, based on cash flow projections, we do not expect to refinance this amount with long-term debt. And lastly, our equity component, including short-term debt, was 44 percent as of December 31st, 2003, and that is up 100 basis points from September 30th.

And now I will turn it over to Jim Beck for his comments.

Thank you, Joe, and good morning everyone from Super Bowl city. Our emphasis during this quarter has been to ensure we are producing at the highest reasonable rate possible and to increase our hedge positions for 2004 and 2005. A review of the financial results is summarized in detail on pages 13 and 14 of yesterday's press release. In addition to that summary, we will provide you with a short overview of our activities by division.

Our commodity prices after hedging increased an average of 16 percent to $24.12 per barrel and $4.58 per Mcf. Production for the quarter was 15.6 Bcfe, and we are on target to meet our 2004 forecast of 57 to 62 Bcfe. Revenues for this quarter decreased 6.3 percent to 68.9 million. However, Seneca's net income for the quarter increased to 10.5 million or 13 cents per share. This was a 29 percent improvement over our 2003 results. This improvement in earnings was primarily due to a reduction in both lease operating expenses of 4.7 million and a DD&A expense of 3 million from last year's levels. Most of the lower costs are directly related to the sale of our oil properties in Canada.

Drilling proceeded ahead as planned with 60 gross wells or 55 net wells drilled during the quarter with a 97 percent success rate, and our capital budget for 2004 remains unchanged at 90 (technical difficulty).

In the Gulf, our transition is proceeding ahead. We did successfully drill one development well on Vermillion 252, and it is currently producing 600 barrels of oil per day and 1.35 billion cubic feet of gas per day. In addition, we are currently drilling our key exploratory well on Vermillion 27, and we anticipate this well will be at total depth before the end of the second quarter. We have a 50 percent working interest in that well.

In our East division, we are continuing our ongoing development drilling at Westline and exploratory drilling at our Woodchuck Hill prospect. The development wells we are drilling at Westline are all within the known field boundaries. However, new crude reserves are only added after the wells have been drilled. We expect to drill between 50 and 70 wells and Appalachia this year.

In Canada, activity remains strong in our shallow gas development program in Alberta and Saskatchewan. We drilled 21 wells with a 95 percent success rate. As we do in the East, new crude reserves for these wells are added only after the wells are successful. Our second-quarter drilling activity includes six exploratory wells. They are expected to reach total depths or be tested during the quarter. We will keep you advised on the results.

In California, our emphasis on cost control and hedging of gas used for steaming has provided positive results. 33 percent of the gas used for steaming was hedged until mid-2005 at an average price of $4.45 per Mcf. This is well below the current California border price and has allowed us to continue a full steaming program despite high natural gas prices. In addition, we have initiated a program of drilling steam-injection wells, and the preliminary results indicate that we are obtaining higher production rates from the surrounding producing wells while using less steam. We plan to expand the use of steam-injection wells this year.

Looking ahead to our expectations for the second quarter, we expect production to be between 14 and 16 Bcfe, and any decline in production we will see will probably be in the Gulf, and we will drill approximately 40 wells this quarter.

Lastly, with these high current commodity prices and increase hedging, what is the impact of price changes on Seneca's 2004 earnings? Currently for each $1.00 change in the average oil price for the remainder of 2004, earnings will change 1.5 cents per share, while for each 25 cent change in the average gas price for the rest of the year, earnings will change 3.5 cents per share. Now this is based on our budget pricing, which is an average basis adjusted price for the remainder of 2004 of $22.85 per barrel for oil and $5.19 per Mcf for gas.

At this point, I will turn it over to Bill.

Thank you, Jim. As you know, 2003 was a very active year for us with four major transactions buying and selling various assets. Now in the first quarter of 2004, we are seeing the results of those transactions. As the Empire Pipeline acquisition, the Toro landfield gas gathering system acquisition, and even the Southeast Saskatchewan oil sale, all contributed positively to earnings in this quarter.

The robust commodity prices that we are seeing remind why we remain in the exploration and production business. I am very pleased that our production quantities for the first quarter are, in fact, more than one-quarter of the highside afire forecast for volumes for the year. It seems to me that far too often we have started the year behind in terms of meeting our volumes, and it is very nice to build up a little cushion with the first quarter towards our overall annual results.

Further, the fact that we were able to drill 60 wells with only two dry holes, again is a very nice start to the year. With these robust commodity prices, the success to exploration and production seems to me to be to spend our capital dollars on successes as opposed to dry holes, and we are off to a great start there.

Overall as we face this cold frigid weather that Joe mentioned, our system is functioning very well. Our storages are right on track. As Joe mentioned, the first quarter was significantly warmer than normal, and even with the cold weather that we are experiencing now, it has brought us merely back to about normal, and our storages are right on track. With that, we look forward to having a robust second quarter given the current weather.

In the longer-term, this cold weather in the Northeast should combine with the experience of the blackout that we had in August to further reinforce the need for additional pipelines, storage and capacity to serve this market.

We are obviously situated in a very advantageous position geographically, but until all the interested parties come together -- whether they be LDCs, consumers, industrial customers, landowners, politicians you name it -- until all those parties come together, it will be very difficult to construct additional facilities. But with every additional day of cold weather, those parties seem to me to be coming closer and closer together, and we should be able to expand our pipeline and storage business accordingly. All-in-all, we remain on track, and indeed we are on the highside of the track that we had forecasted for 2004, and I am very pleased to be in that position.

With that, I would like to open it to questions.

(OPERATOR INSTRUCTIONS). Donato Eassey, Royalist Independent.

Good morning. Joe, you have mentioned that the refinancing was not going to be done with long-term debt. Do you have enough cash on hand to pay it off, or do we use a combination of cash and short-term debt?

Initially we are going to be using short-term debt, but we ought to be able to pay that down within the next twelve months or so.

When you look at the prospects for interest rates moving up, what is the target for floating versus fixed as you move into the balance of '04?

As we look at interest rates moving up, what is the target for --?

Floating debt versus fixed debt?

Oh, floating versus fixed. At least we've got the question now. At what point? We expect we will have about 7 percent floating average throughout the course of the year.

Okay. Thank you.

Jay Yanello, UBS.

Good morning. The hedging looks a little light in '05, the gas in particular. Can you give us some idea what you are thinking with hedging in '05. Is that something that might be accelerating near-term, or are you looking for higher prices? Just a little idea of what you're thinking about.

Yes. We are light in '05 in relation to where we would like to be. We have consistently said I think that we hope to be somewhere between two-thirds and three-quarters hedged as we go into a fiscal year. So we will be accelerating our hedging program through the remainder of fiscal '04, and we try to do that in a combination of opportunistically and regularly. We really don't try to gain the market too much, but rather build up our hedge position fairly evenly over the course of the year that precedes the year that we are going into. If I make myself clear there, we will try to do approximately the same amount each month that if suddenly prices run up to a level that we find irresistible, we will definitely load up.

Okay. And following up on some points you made I think on the last call, you were suggesting that you anticipated a decline in weather normalized usage per customer because of the higher prices. Are you, in fact, seeing that and to what degree?

Joe mentioned that we do have some decline in throughput. We are, in fact, seeing that. There is quite a significant difference in the use per degree day through different times of the winter. One example, you might be able to understand pretty clearly, if it gets cold enough, people's furnaces simply max out. They run 24 hours a day, and that is it. It does not matter if it gets any colder, they can't use any more gas.

At this point in the year, it is unrealistic to try to predict what the overall consumption will be for the year. There are simply too many variables. We are seeing some decline as we had expected, but it is just not reasonable to try to make a prediction at this point as to what the decline might be.

The other thing is -- there is some psychology to it -- as it gets colder, people seem to turn up their thermostats, too. They feel colder, and they go in there and crank them up a little bit, which acts in the opposite direction. There is a lot of noise in the data that you receive at this point, so we're really not trying to make a prediction about what our annual result will be.

I realize that is not particularly satisfactory in terms of an analyst's desire for precision, but the fact is we cannot give you precision at this point in time, other than it is heading in the direction we thought it was going.

That is fair enough. Maybe a little more flavor on what's going on now. My guess is your biggest bills are going to be cut shortly, and that you are going to definitely require a higher reserve or your receivables will be growing. Any insights on what you're seeing now in this quarter we are in right now?

Well, yes. We are seeing very cold weather, very high consumption. Our biggest bills probably will be cut within the next couple of weeks or so anyway unless this weather continues. Obviously with the higher bills, you then have a potential for higher receivables and higher bad debts, and we need to monitor all those things accordingly. We have certainly had this experience before. It is not unique.

Is that in your guidance right now? Just what you expect based on this weather and everything, is that fully in your guidance to the degree you can assess here?

We are not going to change our guidance based on that.

Thank you.

(OPERATOR INSTRUCTIONS). Rebecca Followill, Howard Weil.

Good morning. Two questions for Jim. Nice quarter. It is nice to have the production actually beat numbers for a change. Congratulations.

On the Gulf Coast production, it is up pretty nice sequentially relative to the fourth quarter and even relative to the third quarter, same thing with Canada. Can you give us some more color on what is going on and then the trend for the rest of the year?

The second question is on operating expenses. You mentioned that it is almost all related to the sale of the Canadian oil properties. Can you just clarify are these trend rates a good run-rate for the rest of the year, like the 71 cents for production listing costs and the 35 cents for G&A?

Those are good questions. First, taking a look at the Gulf, we did bring on a number of new wells here in the first quarter. We had our High Island 8345 (ph) come on, and also during the quarter, we had to the well on Vermillion 252. So those both significantly improved our Gulf production.

Over time we're going to see some decline as we go along, so I would say that we are starting out very good as you said. We emphasize that as we moved along we wanted to start our the year in a solid position. But being in the Gulf, I envision we will see some declines going forward, but we are in good shape to make that target number.

In Canada, we are right on target for our expectations. The wells we are drilling are coming up in just about as we anticipated, so I think overall I don't expect any real significant improvement unless we see something very significant out of the exploratory drilling that we are doing up in Canada right now, and we will have a better handle on that by the end of the quarter.

Looking at operating expenses, you're right. We are significantly below what we had forecasted last quarter. I think what we had initially told everyone was G&A was going to be about 43 and LOE 93. As Joe said, we did not have the pension, $2 million or so in pension funding that we were going to have to do for last quarter, so I think that 43 is still a good number.

On the LOE side, we had two significant areas where we were below cost last quarter. The first was the steaming cost. Because of the hedging we have done for the steaming gas and the improved efficiency we have seen there, we have seen a significant reduction in our cost in California. So I think that 93 cents is going to be high.

But we also have some other charges offshore. We have over $1 million we are contesting on one block and LOE charge that we think are not appropriate, so those were not booked last quarter. They may come back, or we may be able to get rid of all those. I would guess the number is probably is going to be somewhere in the mid-80s going forward, but we really don't know at this point. Really after the second quarter, we will have a better handle where we are going to be, but it will be lower than our original forecasted number.

Great. Just back on the production on Canada, why the big increase relative to the fourth quarter and even relative to a year high in the gas production?

Those were a number -- we have been drilling a lot of development wells in Canada in our gas play in Alberta. That has been our primary emphasis, and we had a number of delays in 2003 in getting those wells on. So we have been bringing those wells on, and the way those wells decline, they come on very strong and drop-off fairly significantly in the first year, so we're getting the benefit of the plus production. We expect that trend to continue as we continue to drill in that area.

But during the second quarter, as we bring those wells on, we are going to hit the spring breakup where we have to stop drilling, and so we won't be able to replace those wells until we get into the summer drilling. So there will be a little slow down, and then you will see another pickup towards the end of the year.

Thank you so much.

Thank you, ladies and gentlemen. Ms. Suto, please proceed with your closing remarks.

Thank you, operator. We want to thank everyone for joining us today. We know it is a very busy earnings day, so we won't keep you any longer. We do have a replay available of this call on both our Website and by telephone, and they will run through the end of business next Friday, February 6. The Website address, of course, is www.nationalfuelgas.com. The telephone replay number is 1-888-286-8010, using passcode 80764944.

This concludes our conference for today. Thank you and goodbye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.