National Fuel Gas Co (NFG) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2006 National Fuel Gas Company earnings conference call. My name is [Ann Marie] and I'll be your coordinator for today. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Ms. Margaret Suto, Director of Investor Relations. You may proceed, please.

Thank you, Ann Marie. Good morning, everyone. Thank you for joining us on today's teleconference call for a discussion on last evening's earnings release. On the call today we have Phil Ackerman, Chairman and Chief Executive Officer of National Fuel Gas Company; Dave Smith, President 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'll open the discussion for 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 1985. While 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 they are made, and you may refer to the Safe Harbor statement on Pages 55 and 56 of National Fuel Gas Company's Form 10-K for a listing of certain specific risk factors. With that, we will begin with Phil Ackerman.

Thank you, Margaret. This is one of those great quarters when is every segment is up year-over-year. There are no noteworthy, non-recurring items, and only a small, positive out-of-period adjustment. We are continuing to wear away our oil hedges, which have had a depressing effect on earnings. The monthly amount we have hedged for the balance of fiscal 2006 is 150,00 barrels per month, or about 50% of our average monthly production for the first quarter. For fiscal 2007, we have an average of 75,000 barrels per month hedged, and we have no oil hedged after December 2007.

There seems to me to have been an overreaction yesterday to the recognition that the weather has been warm this winter and that the gas prices are considerably below their highs. I would like you to keep three things in mind. First, a reduction in gas costs is good for gas utilities. Customers will be happier, irrational political responses will be less likely to occur, and demand destruction will be less, among other things. Second, gas and oil prices in the out years have not declined nearly as much as in the prompt months. Third, for companies like National Fuel, which are working our way through older hedge positions, we are likely to realize higher net prices for our production in 2007 and beyond than we did last quarter, as the drag of those hedges declines.

The share repurchase program authorized by the Board in December could not be commenced until after yesterday's earnings release. We expect actual share repurchases to begin next week. Our financial strength has continued to grow with the 7.5% increase in total comprehensive shareholder equity in the quarter. Also, we announced that effective February 1st, Dave Smith was elected President and COO of the parent company, National Fuel Gas Company. Dave has had a lot of experience in the regulated sides of our businesses, including a stints as the President of the utility and the pipeline. This will give him an opportunity to broaden his experience further. At the same time, Ron Tanski was given the additional responsibility as President of our utility. I remained Chairman and CEO of the parent.

At this point, I'm going to turn the microphone over to Dave for some further comments.

Thank you, Phil, and good morning to everyone. As Phil said, we've had a strong start to fiscal 2006 in all segments. In the utility segment, overall earnings were approximately $3.7 million; 1.8 in New York, and 1.9 in Pennsylvania when compared to the same quarter in 2005. In the New York jurisdiction, however, if you exclude the 2.6 million adjustment in our symmetrical sharing calculation, which is more fully explained in our release, quarter-over-quarter earnings in New York are actually down $800,000. Lower residential usage per count caused by conservation, and the installation of more efficient equipment, is one of the largest contributors to that decrease.

To help prevent rate-case filings in the future and to provide incentives for even greater customer efficiencies and conservation, we have been exploring a revenue decoupling mechanism with the New York commission that will make us economically indifferent to declining usage per count. We think this is right for New York and a win-win for the Company and for our customers. We will also be exploring this concept in Pennsylvania. In addition in anticipation of higher uncollectibles due to higher gas costs, we've increased the quarter-to-quarter contribution to the utility's segments reserve for doubtful accounts by 4.5 million, bringing the total reserve to approximately $31.5 million. While this may be somewhat conservative on our part given our historic bad debt write-offs, recent legislation in Pennsylvania that provides utilities with more collection tools, and the recently-implemented partial tracker in our New York jurisdiction, which allows us to recover increased bad debts resulting from increased gas costs, we're not inclined to surprise with you large adjustments later in the year.

Turning now to the pipeline and storage segment, the earnings of National Fuel Gas Supply Corporation and Empire State Pipeline were up approximately $3.6 million compared to the first quarter of 2005. The hurricanes in the Gulf last fall and the consequent supply disruptions caused many utilities, particularly in the pipeline-constrained Northeast, to re-evaluate the transportation and storage options, and National Fuel was able to meet their needs. Our strategic interconnects with TransCanada and Niagara and at Chippewa, provided alternative transportation routes for Canadian and mid-continent gas for shippers requiring gas supply for storage injection and market requirements. Largely as a result, pipeline and storage throughput increased by approximately 14.9 Bcfe on supply, and 6.9 Bcfe on Empire. Deliveries were made primarily to [LDC city gates] and the major pipelines serving the Northeast.

The desire by many LDCs to diversify transportation routes, a renewed emphasis on the importance of market area storage, and the upcoming Empire Connector all bode well for the continuing strong performance of this sector into the future. Regarding the Empire Connector, in the release we note that development costs in 2006 were lower than they were for the comparable quarter in 2005. That is not to suggest in any way that the project is off track; to the contrary, it was merely ordinary timing of construction planning expenditures. Everything is still progressing toward an anticipated in-service date in the fall of 2007. If for some reason the Downstream Millenium Pipeline Project slips until 2008, we'll need to revisit our timing as well.

Performance was up in the energy marketing segment on increased sales of about 2 Bcfe in volumes, and the timber segment on the strength of an increase in harvested volumes and sales. Detailed information on these segments is provide on pages 13 and 14 of the release. Thank you for your attention, and I'll turn the call over to Jim Beck to review the performance of the E&P segment. Jim?

Thank you, Dave, and good morning, everyone. First quarter was another very good quarter for Seneca. Financially, the high commodity prices helped Seneca achieve a 25% increase in earnings. Operationally, our 96% drilling success rate has helped us set the stage for the future. Our emphasis moving forward will be on organic growth through exploration and development drilling activity. A review of the financial results is summarized in details on pages 13, 17, and 18 of yesterday's earnings release. Production for the quarter was 11.2 Bcfe, and we are on target to meet our 2006 forecast of 46 to 51 Bcfe. The impact of Hurricane Rita still hangs over the Gulf production for all companies.

Seneca's fortunate that we now have re-established 87% of our pre-hurricane production rates from our existing platforms, and when the new production from High Island 37 A-5 is included, we are now at 106% of pre-hurricane production levels in the Gulf. Revenues for the quarter increased 14.3% to 82.1 million, and Seneca's net income for the quarter increased to 17.4 million, or $0.20 per share. This improvement in earnings was primarily due to higher commodity prices. Drilling proceeded as planned with 81 gross wells, 79 net wells, and as previously announced, our capital budget for 2006 has been increased from 113 million to approximately 150 to 55 million -- 150 to 155 million. Delays in development spending in 2005 caused by unusual weather in both Canada and the Gulf caused approximately 18 million to slip from our 2005 budget to fiscal 2006. In addition, 9 million of the increases is attributed to drilling costs that are expected to be higher than originally forecast, and the remaining 15 million is to cover drilling of new prospects.

In the Gulf, Seneca successfully completed two exploratory wells. As indicated in our earnings release, the High Island A37 A-5 well was placed on production, making 15.4 million cubic feet per day. Seneca's working interest in that well is 78%. In addition, we completed the East Cameron 213 B-1 well. It tested at a rate of 4 million cubic feet per day and is expected to be on production by March 1st of this year. Seneca's working interest in that well is 100%. While the offshore rig market is very tight and costs have been escalating, the current economics for drilling in the shallow shelf remains very good, and Seneca is continuing to work to maximize the value of our previously-announced royalty relief that begins October 1 of this year. To that end, Seneca's committed to a one-year contract on a [Todco] rig, the number 256. Currently, Seneca has over 240 days of activity already scheduled for that rig, which will be available around mid-2006.

Canada, like the U.S., has been experiencing an unusually warm winter. During the first quarter, we drove nine wells and had a 78% success rate. Our second quarter winter drilling activity will include at least ten wells in Alberta and Saskatchewan. However, the lack of cold weather and the potential early breakup may hinder some of this activity. In British Columbia, we're continuing our activity in the [Sukunka] area where [Talisman] is the operator, but we have no updates at this time. In California, the modification to the new scrubber has been completed, and Seneca is now burning waste gas to generate steam. The new technology will allow Seneca to reduce it's Midway-Sunset's steaming costs by about $1.50 per barrel. We are continuing our development drilling in the Midway-Sunset and [North Lost Hills] field, and a total of 33 wells were drilled in the first quarter.

The only negative news from our California operations was a major January storm that shut down every company's operation in the Midway-Sunset field for a week. The good news was that we did not have any damage, and all of our wells are back on production. In our east division, we are continuing our drilling activity with 39 wells and a100% success rate. Our goal for this year is to drill 120 wells. A new processing plant was also completed and placed online in December. This will facilitate increase in our production as the new wells will start production through the plant during the second quarter.

Looking ahead to our expectations for the second quarter, we anticipate product will be between 11 and 13 Bcfe. The discovery mentioned in the earnings release, the East Cameron well I discussed earlier, and the return of the Gulf production supports this expected increase in production from our first quarter results. We expect to drill approximately 50 wells this quarter. Hedging for the nine months of fiscal 2006 can be summarized as follows. For your information, the forward prices as of February 3rd were used for the caller prices to calculate the average prices of the gas hedges.

For the remaining nine months, we have 11.8 Bcfe of gas hedged at an average price of $7.50 per Mcfe; this is a 32% increase in price over last year at this time. And we have 1.35 people million barrels of oil production hedged at an average price of $35.33 per barrel, and this is a 16% increase in price over last year at this time. For fiscal 2006, we remain focussed on living within cash flow and continuing to expand our activity through the drill bit. So at this point, I'll turn it over to Ron.

Thank you, Jim, and good morning, everyone. As has been our practice over the last few years, we have tried to get as much detail and explanation in our earnings release in an effort to answer as many of your questions as possible before the call. I hope we are achieving that goal. You'll notice that this quarter we have redesigned some of the segment earnings details at pages 12 through 15 of the release. The exploration and production segment on page 13 also includes some extra detail in order that you can reconcile to the non-GAAP per Mcfe performance statistics on page 17 of the release.

Our consolidated earnings for the quarter were $57.4 million, or $0.67 per share on a diluted basis. Dave and Jim covered most of the high points from an operational point of view, so I'll quickly summarize the factors that caused an earnings increase this quarter compared to the first quarter of fiscal 2005. In the Utility segment, last year's rate settlements were in effect for the full quarter, and higher base right rates in each jurisdiction helped to offset a decrease in residential and commercial sales volumes. On the top of page 19, can you see that industrial sales and transportation volumes somewhat offset the lower residential throughput, but those services are at a lower margin and don't provide a complete offset to the loss of residential volumes. Higher pension, OPEB, and bad debt costs were the primary contributors to higher O&M expenses in this segment.

The higher bad debt expense in New York was offset by the increased revenues provided by the merchant function charge that was incorporated in the last rate case. Dave mentioned that our reserve for bad debts in the Utility segment at the end of December totaled $31.5 million. This compares to just $15.1 million in the reserve last year. Our ongoing bad debt allowance accrual is running at approximately 2% of segment revenues. With the current high commodity costs we're doing more than just increasing our bad debt reserve to make sure we have a firm grip on our receivables. Participation by our customers in our balanced billing program is up by almost 22,000 customers, compared to last year.

Finally, the days receivables outstanding at the end of December was just over 32 days across our system, roughly the same as it has been the previous two Decembers. Dave also noted the adjustment to one of our symmetrical sharing calculations that caused a $2.6 million earnings pickup in this segment. It was that adjustment that caused us to exceed the high end of the Company's guidance range for consolidated earnings. Dave mentioned the reasons for the increased throughput in our pipeline and storage segment; I will just note that the O&M expenses were lower than last year's quarter because of decreased development expenditures for the Empire Connector project, lower brine disposal costs from storage wells, and some decreased worker's compensation insurance charges.

Looking forward to the second quarter, our earnings guidance is in the range of $0.93 to $1.03 per diluted share. That's a wide range, but the warmer-than-normal weather we have experienced during January has negatively affected earnings in our Pennsylvania utility jurisdiction, where we don't have a weather normalization clause, and it has also negatively affected our field's drilling and production activities in Seneca's East division, as well as hampering timber harvesting operations. We have recently returned to normal temperatures and feel the activities in the Timber segment and Exploration and Production segment are returning to normal and we're hoping to catch up during the rest of the quarter.

We're also confirming the earnings guidance range for the entire fiscal year of $2.30 to $2.50 per share. I'll refer everyone to the caution in our release that this is still our base-case guidance and incorporates the September 13th NYMEX futures settlement prices that are shown on page 20 of the release. Our sensitivity table on that same page was designed to give you a tool to approximate our earnings as commodity prices fluctuate. By the way, that table is current as of yesterday as stated on page 20. The reference to a February 2005 date on page 5 of the release was an error. Since approximately 47% of our remaining projected production for the fiscal year is unhedged, changes in commodity prices from those built into our forecast will have a direct effect on our earnings.

While the table is designed for the remaining nine months of the fiscal year, you could get a pretty good approximation of quarterly earnings sensitivity by dividing the numbers in the table by three. In other words, for every dollar changed in gas prices from the September 13th NYMEX strip, consolidated earnings for the quarter would fluctuate by $0.032 per share, and for every dollar change in oil prices, consolidated earnings for the quarter would change by $0.003 per share. I'll end by echoing the comments of the previous speakers. We're pleased by the good results for the quarter that were in-line with our guidance. We had no major surprises, and we expect to remain on track for the rest of the year. At this point, Ann Marie will open the teleconference for questions.

OPERATOR INSTRUCTIONS]. Your first question comes from [Shaneeya Gushuni] with UBS Securities. Please proceed.

Good morning, guys. Congratulations on a great quarter. I also wanted to let you know, Ron, we definitely appreciate the full disclosure that keeps changing and so forth. That's it. I just had a couple of small questions here, just in the pipeline segment, the benefit that you saw from the transportation as a result from the hurricane, is that something -- a trend that you see going forward over the next couple of quarters? And,in addition to that, also, if could you talk about the trending of the O&M expenses as well, too. Is that something you expect to see continuing throughout the balance of the year?

This is Dave. Yes, I expect that in terms -- there were some immediate impact, some immediate positive resulting from the hurricane. Transportation storage revenues were up about in the general range of $2 million. I'd ballpark, the hurricane impact, the immediate impact, at being about $1 million of that or so.

But I think more importantly in the long-term, everybody is now looking at diversifying their transportation routes. And I think that's probably more important for us than the immediate game gain we had with respect to the rerouting of gas due to the hurricane and the supply disruptions. In the O&M, we have pretty much -- that's pretty much stayed on track over the last four or five years, and we would continue to keep a it at that level.

Yes, the particular changes quarter-over-quarter, Shaneeya, with respect to the worker's compensation insurance charges, those can fluctuate, and depending on the field activity in the storage fields, I wouldn't say it's a trend. But with the redesign of our disclosures, we'll be able to see what the O&M expenses are from quarter-to-quarter here on out, and we'll be able to talk more about them as we go on.

That's great. If you don't mind if I have two more questions. If I can just switch to Seneca for a second and talk about the cost. LOE really shot up on the -- even from the fourth quarter and so forth, and I realize that a lot of that's going to be Katrina-Rita related and whatnot. I want to see how that's going to trend for the rest of the year; as volumes pick up should we expect that to come down a little bit, as well as the 3 million in savings in California, as well, too, what is your sense on what the LOE will be for the balance of the year for the next three quarters?

Now that's a good question. Most of that increase was related to the high cost of gas associated with our steaming operation. And so with the scrubber coming on in January, we would expect that to come down significantly, and that's where you will see that savings through the rest of the year. But most of the that increase in LOE was related to the steaming costs in California. We did have some related to the hurricanes in the Gulf. A lot of that is going to be covered by insurance, but I think there was about $0.5 million there that was not. So you will so that LOE cost coming down as we go forward.

Okay. Just one last question, if you don't mind. You mentioned that accounts receivable data tracking was of 32 days, has the aging at all changed in terms of days outstanding, in terms of the -- has anything moved forward from what we saw in the analyst day presentation of how much debt is sitting in the greater-than-120 days, versus 90 to 119? Has there been any improvement there at all?

Well, without -- we could get into a whole discussion regarding where those numbers are moving, especially with the high gas costs we're seeing. I guess, I'd just repeat -- we think we have got a pretty good handle, and why don't we leave it for our March analyst presentation, where we could spend a lot more time going over all the details and have more charts to be able to show you.

Okay, that's great. Thank you very much for your help with all the questions.

Thank you, sir. And your next question will come from Sebastian Iannariello with Citigroup. Please proceed.

Hi, good morning. The first question on the utility side. You mentioned you were exploring the revenue -- the coupling mechanisms in both the New York and Pennsylvania jurisdictions in addition to other regulatory incentives. In order to get those in place, do you have to wait until the current stipulations expires in Pennsylvania, I believe it's May this year, and New York in August of '07?

You were breaking up a little bit, but I think the question was would we have to wait until -- we have to wait until a specific point in time to have a revenue decoupling mechanism put in place. And I think, generally, the answer to that is no, if we're able to negotiate it and work it out with the commission in terms of the elements of that kind of plan. Whether or not -- I mean, that's a very high priority. We'll be working on that over the next three, four, five months, and hopefully we'll have it in place by next winter heating season.

Okay, great. And then on -- as we look at conservation and some of the mild weather we have soon in the Northeast, can you give us a sense for what a 1% decline or some sense of sensitivity to a decline in volumes, what kind of effect that would have on your earnings?

Well, I guess very roughly, Sebastian, for -- it depends on what is causing the reduction. If it's just a weather -- warmer-than-normal weather -- in New York, as you know, we have our weather normalization clause, which basically offsets any decrease throughput due to weather. For -- in the Pennsylvania jurisdiction, where we don't have that -- a weather normalization clause, we do have a sensitivity that is kind of based on old data at normal historical prices.

And rather than having it at a 1% number, I believe we have it for a 10% warmer-than-normal -- or I'm sorry, a 5% warmer-than-normal. And very roughly, a 5% warmer-than-normal winter during an entire heating season would cause a $0.02 per share decrease in earnings. And, again,that's a rough number that we have had based on gas prices that haven't been as high as we have seen lately.

Okay, that's fair. Thanks. On the stock repurchase timeline, I guess if you're going to be starting down in the next week, should we assume that gets done over the next year, over the next couple of years? How should we look at that timeline?

Sure. We were not looking at an accelerated repurchase program. So given the normal constraints, 25% of the average daily trading volume over the last four-week period, we calculate that it would take up to ten months to a year to accomplish the $8 million -- or the 8 million share repurchase.

Okay. Great. And last one on the EMP side. DDNA seemed to be higher than we were expecting. Can you guys just give us a little bit of color as to what you're seeing there?

Yes, it was right on where we had forecasted the DDNA. The key thing, probably, is that having not gotten all of the wells completed by the end of the year, we didn't have a lot of reserve adds as of the end of the first quarter, which would impact the DDNA rate. But as we finished completing and putting these new wells on line, that will help bring that number down. So it's really a matter of timing there.

Okay, great. All right, thanks a lot.

Thank you, sir. [OPERATOR INSTRUCTIONS]. Your next question comes from Mike Heim with A.G. Edwards. You may proceed, please.

Thanks. And maybe a stupid question to ask, but you talk about the scrubber coming online and you also talk about using waste gas. I didn't realize, are those two connected?

Yes. We cannot burn waste gas because it contains CO2 and H2S until we had a scrubber to clean the exhaust.

I see.

And so there was a delay there because we had an opacity problem. You could see just a little tinge of blue in the smoke, and so we had to go in and put in electrostatic scrubber in on top of the rest of the chemical scrubber to clean up all of the exhaust to meet the California Air Quality Management District's requirements. So that is now going on, so that will allow us to burn waste gas, which is very low Btu gas, contains all of these pollutants, to generate our steam.

Okay. The press release says "resumed operations December 7th," and I think you might have mentioned January. Is there a reason why the operation's been going on and off?

Well, we started it at that time and it takes a little while to get it tweeked. So we were having to do a number of getting the computers to calibrate exactly how much we can burn and in what mixture to make sure we meet all the requirements. So it really didn't become effective until January because we were doing a lot of testing. And so it will be on and we will start seeing the benefits this quarter.

Also, Jim, you talk about increased use of gas, going from 1,400 Mcfe a day to 1,800. Is that just a function of drilling more wells? Is there some other reason for that.

Yes. It's a function of the number of wells to steam, and as we drill more and more of these programs, we can continue the steam. It's a function of getting the operations more effective, being able to access more of the waste gas, because we're burning -- we're actually burning more gas --waste gas, than we can generate within our area. So we are talking with other companies around us to burn their waste waste gas, also, at little or no charge us to. So we're ramping all of this up with more wells and then more gas coming in.

Okay. Can you tell me when the High Island came on?

That came on, I believe, about first week of January, somewhere around the 10th or so.

Okay. And maybe one question for Ron. As you give quarterly guidance, the third quarter guidance you that gave, is that also based on the September 13th strip that you are using for annual guidance?

Yes. We talked about that a lot here, how often we ought to change the guidance based on commodity price -- or commodity prices. And we determined that it's a lot easier for us to know where the starting point is, and that's why we designed the sensitivity table. Now, the sensitivity table may change from quarter-to-quarter, obviously, as we had actual results from month-to-month, but we will continue to maintain the September 13th pricing throughout the rest of the year.

Okay. Fair enough. Thank you.

Thank you, sir. And there are no further questions at this time.

All right, then we will conclude our call. We want to thank everyone for taking the time to be with us today. A replay of this call will be available in about one hour on both our website and by telephone, and both will run through the end of business on Thursday, February 16. Our website address is www.nationalfuelgas.com. The telephone replay number is 1-888-286-8010 using pass code 46826595. This concludes our conference for today. Thank you and goodbye.

Once again, ladies and gentlemen, thank you so much for your participation in today's conference. This does conclude the presentation and you may now disconnect. Have a great day.