National Fuel Gas Co (NFG) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the National Fuel Gas Company first-quarter fiscal year 2005 conference call. My name is Rachel, and I will be your coordinator for today.

At this time, all participants will be at a listen-only mode. And we will facilitate a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Ms. Margaret Suto. Please proceed, ma'm.

Thank you, Rachel. Good morning, everyone. Thank you for joining us today for our teleconference call regarding last evening's earnings release. Today's presenters are Phil Ackerman, Chairman President and Chief Executive of National Fuel Gas Company; Ron Tanski, 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 broadcasted, we remind you that today's teleconference discussion will contain forward-looking statements, as defined by the Private Securities Litigation Reform Act of 1995. Full results may differ materially. These statements speak only as of the date on which they are made. And you may refer to the Safe Harbor Statement beginning on page (technical difficulty) National Fuel Gas Company's Form 10-K for a listing of certain specific risk factors.

And with that, we will begin the discussion with Ron Tanski.

Thank you, Margaret. Good morning, everyone. Last night's earnings release was relatively straightforward from a financial reporting point of view. During our first quarter, we quietly went about our business and generated consolidated earnings totaling $50.4 million or 60 cents per share on a diluted basis.

We had no non-recurring items during the first quarter of fiscal 2005. And strong commodity pricing helped us achieve earnings at the high-end of our guidance range. Now that is not to say that we were not busy from an operating standpoint. As you know, in the utility segment, we are actively engaged in rate case filing in both our New York and Pennsylvania jurisdiction.

In Pennsylvania, we've had a number of settlement discussions with all parties. Since those discussions are subject to confidentiality provision, I am not at liberty to comment on their status. I will point out; however, that our original litigation schedule is still on track for cross-examination of the parties' cases is scheduled for next month. And new rates would go into effect on or about June 14th of this year.

In New York, we have likewise had a number of confidential settlement discussions, which I am similarly not at liberty to comment on. In New York, cross-examination according to our original litigation schedule was expected to start in 10 days. However, in order to accommodate further settlement discussions, all parties have agreed to extend the case schedule by 3 weeks. Now that means if we don't achieve a settlement, new rates may not go into effect until late August. If you recall our original schedule, we had projected that new rates would go into effect at the end of July or the beginning of August. I'll expect to have further news about these cases during next quarter's conference call.

With respect to earnings in the Utility segment in addition to the positive items noted in the earnings release, you can see from the back pages of the release that even though our first quarter was colder than it was last year, we still had a decline in throughput in each general customer category due to, we believe, continuing customer conservation efforts.

From closely watching uncollectibles and while receivables are currently a little bit higher than they were last year -- and we've made a higher provision for bad debts so far this year, we were not required to add an additional $2 million to our bad debt reserve like we did last year. The reduction in consumption per account and uncollectibles are just a couple of the major factors requiring us to seek rate relief in both states.

In our Pipeline and Storage segment in December, we were pleased to see FERC issue Order Number 2004-C, which clarified its Order 2004 Standards of Conduct. You may recall our Utility segment stopped making off-systems sales last September 22nd in order to not be considered an energy affiliate for purposes of those standards of conduct. But we were also concerned that we might incur some substantial reorganization costs if there was a possibility that FERC might consider our Utility to be an energy affiliate anyway if it engaged in vaguely defined financial or futures transactions or hedging -- while the new order clarified that a local distribution company does not become an energy affiliate just because it enters into hedging and futures transactions to help manage the price volatility of the gas that it buys for sale to its retail customers. So it appears that we won't have to incur those restructuring expenses.

On February 3rd, the Plied (ph) Corporation will be filing a compliance plan for approval by FERC in connection with supplies' request for a limited waiver of the new regulation. When and if FERC approves that compliance plan, Utility will have the flexibility to resume off-systems sales and become an energy affiliate without triggering the full extent of organizational restructuring that would be required by a literal application of the Order 2004 standard.

In the earnings release, we noted that we have expensed $1.7 million in connection with our Empire Millennium Pipeline Connector Project. We expect to be holding an open season before the end of March for the remaining 100 million cubic feet per day of uncommitted capacity. And we forecast that we will expense another $800,000 of preliminary expenses this year before we start to capitalize costs for the project. From an earning standpoint in this segment, there's really nothing to add to the details that are already included in the earnings release.

The comparative results for the other segments are also pretty well described in the earnings release, so I won't repeat the discussion again here. But before I turn it over to Jim Beck for his comments on the Exploration and Production segment, I did want to explain what appears to be a large variance between quarters in the corporate and all other categories. This category includes various operating companies associated with Landfill Gas, Domestic Power Generation, our corporate headquarters and other corporate assets, and some other minor operating companies that are all described in our Form 10-K.

Included in our corporate assets are some corporate-owned life insurance policies that are designed to fund certain deferred compensation and retirement plans. The cash surrender value of these policies is updated on an ongoing basis. And the increases in value are recorded in the income statement.

Basically the updating entry last year was approximately $1 million higher than the updating entry this year. Performance at the operating companies on a collective basis was generally consistent between the quarters. Finally, our current earnings guidance range for our second quarter is between 78 and 88 cents per share. And there have been no major changes in our forecast assumptions that I laid out last quarter.

Now, I will turn it over to Jim Beck.

Well, thank you, Ron. And good morning, everyone. The first quarter was a very good quarter for Seneca. Financially, the high commodity prices helped Seneca achieve a 32-percent increase in earnings. Operationally, our 98-percent drilling success has helped us set the stage for the future. Our emphasis moving forward will be to expand our Exploration and Production drilling plans and activity. A review of the financial results is summarized in detail on pages 12 and 13 of yesterday's press release. In addition to that summary, I will provide you with a short overview of our activities.

Production for the quarter was 13.3 Bcfe. And we are on target to meet our 2005 forecast of 50 to 55 Bcfe. Revenues for the quarter increased 4.3 percent to 71.8 million. And Seneca's net increase income for the quarter increased to 13.9 million or 16 cents a share. This improvement in earnings was due to improved hedging, higher commodity prices and a reduction in interest expense of 1.3 million. Drilling proceeded ahead as planned with 44 gross wells, 42 net wells. As previously announced, our capital budget for 2005 has been increased from 93 million to approximately 112 million. Development activities associated with our drilling success in Canada and in the Gulf are the main reasons for this increase.

In the Gulf, Seneca successfully drilled two exploration wells. Our plans are to have over a 1,000,225 on production by March 2005 and East Cameron 213 well on production in fiscal 2006. Seneca's working interest in each of these wells is 100 percent. The rates used to drill these wells will be moving to Eugene Island 320 and Bradless (ph) 502 to continue our Gulf drilling program.

In Canada, the success of our third Sukunka well is energizing our activities. Because of the warm winter, we only drilled five wells in Alberta. But we did have a 100-percent success rate. Our second quarter drilling activity will include at least ten wells in Alberta and Saskatchewan.

In California, our emphasis has been on cost control and construction of our new scrubber, which will allow Seneca to burn waste gas to generate steam. This construction is ahead of schedule with completion expected this summer. Once we complete this new technology, it will allow Seneca to reduce its Midway Sunset steaming costs by nearly $1.40 per barrel. We are continuing our development drilling into Midway Sunset and North Lost Hills.

The only negative about our California operations was the heavy rains in Ventura County that caused a number of mudslides in our Sespian (ph) Ferndale Fields. The good news is that we did not have any oil spills and we only lost 14 days of production. Almost all of our wells are back on production.

One area of concern California is the continuation of the high basis differential for heavy sour crude. As we indicated last quarter, it increased the basis from $5.50 to between $12 and $13 per barrel. We had anticipated that this basis would start to decrease in 2005. So far, we have had no change. The impact on earnings will be discussed shortly in the hedging section.

Looking ahead to our expectations for the second quarter, we anticipate production to be between 12 and 14 Bcfe. The discovery in new wells mentioned in our press release will tend to mitigate the expected production clients from existing wells. We will drill about 40 wells this quarter.

Hedging for the remainder of 2005 can be summarized as follows -- as of January 24th, we have 12.8 Bcf of gas production hedged on an average price of $5.75 per Mcf and 2.1 million barrels of oil hedged on an average price of $30.46 per barrel. The earning sensitivity to price changes forecasted for 2005, assuming the static basis is as follows -- for each 25 cent change in the average gas price for the remainder of the year, earnings will change by 3 cents per share. For each dollar change in the average oil price for the remainder of the year, earnings will change by 1 cent per share.

However, as we have indicated, we have seen the basis stay high in California. Therefore, as we indicated in the first quarter, a better estimate of oil price impact on earnings for the remainder the year would be three-tenths of 1 cent for every dollar change in oil prices until the basis returns to normal. For fiscal 2005, we remain focused on living within cash flow and continuing to expand our activities mainly through drilling.

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

Thank you, Jim and Ron. As you have heard, we had a very good solid quarter to start our fiscal year 2005. Earnings are up in all of the major segments. We are progressing with respect to drilling, rate cases and expansion of our Pipeline and Storage segment. We continue to improve our financial strength. And we achieved the numbers we said we would. In short, I think we delivered what you have a right to expect -- valid earnings as predicted with no surprises. I am pleased with the quarter and pleased with the performance of the national field team, as we work at progressing through 2005 and into the future years.

At this point, I am more interested in taking your questions than sitting here and patting ourselves on the back for a great quarter that we had. Operator, could you go to the question mode, please?

(OPERATOR INSTRUCTIONS). Jay Unello, UBS.

Good morning, everyone. Phil, any update on hedging? I think you're roughly -- if my quick calculations are correct -- 50 percent hedged in '05 -- 40 percent in fiscal '06. Any update on that -- the philosophy going forward? I know we have visited this a few times -- but just wondering if you are thinking of locking more in as we get -- further enter '05.

(Indiscernible) Excuse me?

If you really look at the numbers in the back of the sheet, we are actually at 65 percent hedged for the remainder of '05. But I will let Phil go on from there.

Yes, Jay, we are absolutely considering increasing our hedged position as we go forward, particularly with respect to '06 and '07. And I would not say that that signifies any kind of a change in our philosophy of looking to being between two-thirds and three-quarters hedged, as we go into each fiscal year. Yeah, prices are attractive. And Jim and I talked about taking additional hedges on a very regular basis.

And I am not going to let you look at our hedged position for '06 and assume some -- that represents some kind of percentage of our '06 production since we have not yet given any kind of guidance with respect to our '06 production. My silence with respect to that doesn't signify consent.

Okay. Thanks, Ron, I am actually out of the office. I didn't have all of the data in front of me. Any change on the prospects in the international arena? Is there any update there?

I wouldn't necessarily say that there was any update. I think the prospects continue to look better and better. You see the increase in the U.S. dollar denominated earnings from that segment because of the relative increase in the value of the crown versus the dollar. And as I have said before, the earnings streamed from that expressed in dollar terms becomes greater. The potential selling price of that in dollars should become greater as well. And then, the prospects for the sale become more attractive. I am still willing to sell that at the right price. And I think the price is increasing as we go along here.

Okay. And I guess my last question -- from Ron's comments, if I am reading them correctly, we have entered clearly a period of really cold weather here. Prices are high. As far as you're seeing right now, there has been up to this point no reason to further uptick the collections level -- would that be a fair statement?

Uptick the reserves for bad debts, you mean?

Yes, in other words -- we have now entered most recently a very cold period -- very high prices are being passed on. You think you might have to uptick it further as we go into the year? Or do you think you are okay at this level?

Well, it remains to be seen. We will have to see what the experience is. Actually, for the first 3 weeks of January, we were warmer than normal.

That is true.

And it remains to be seen whether we'll catch up. That is an issue that we obviously stay right on top of. And if need be, we will do what we have to keep the reserve in line and to keep the accountants happy.

Okay.

To beat that a little bit further to death, we are very comfortable with where we were as of December 31, 2004 versus December 31, 2003. There is no significant increase in our level of receivables within the Utility Company from 1 year to the next. We haven't yet finished another month and certainly will look at the level of receivables in our reserve for bad debts when we get to the end of March and see where we are.

But yes, we have just now entered into a few days of extraordinarily cold weather. But taking the first part of January as a whole, we don't see anything extraordinary.

Okay. Let me squeak one more out. As far as '06 production, when do you think we might start seeing some visibility on that? Is that a ways out before you might start penciling that in?

Oh, yes. As I said before, it's just so dependent on our success from the Gulf of Mexico and some of these other big wells. We're trying to get away from this lack of predictability. On the other hand, it's so pleasant to have successes like Sukunka and the couple of wells that Jim mentioned. Tough not to take advantage of those opportunities when we see them. But those kinds of wells can have a very significant impact on what we would expect our production to be beginning 9 months from now.

It is almost ridiculous to try to make a prediction. We can predict pretty well what we will do in the East and what we will do in California, but it's those wells at the margin that will make all the difference.

(OPERATOR INSTRUCTIONS). At this time, there are no further questions. I would like to turn the presentation back to Margaret Suto in the management team.

Well, thank you, Rachel. I guess we will conclude the call then. Obviously, we will be available to take any additional questions during the course of the day. A replay of this call will be available in about an hour, on both our website and by telephone. And both will run through the end of business next Friday, February 4th. Our website address is www.NationalFuelGas.com. The telephone replay number is 1-888-286-8010, using passcode 75979039. This concludes our call for the day. And thank you, everyone and goodbye.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your presentation and you may now disconnect. Have a wonderful day.