National Fuel Gas Co (NFG) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2007 National Fuel Gas Company earnings conference call. My name is [Tawanda,] and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. James Welch, Director, Investor Relations. Please proceed, sir.

Thank you. Good morning, everyone. Thank you for joining us on today's conference call for a discussion of last evening's earnings release.

With us on the call is Phil Ackerman, Chairman and Chief Executive Officer of National Fuel Gas Company; David Smith, President and Chief Operating Officer of National Fuel Gas Company; Ronald Tanski, Treasurer and Principal Financial Officer of National Fuel Gas Company; and Matt Cabell, 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, I remind you that today's teleconference discussion will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

While National Fuel's expectations, beliefs, and projections are made it 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 last evening's earnings release for a listing of certain specific risk factors.

With that, we'll begin with Phil Ackerman.

Thank you. Many of you will have noted the absence of the familiar voice of Margaret Suto who, after many years as our Director of Investor Relations, has returned to her land department roots. This time in Seneca Resources' local office where she is caught up in the frenzy of our rapidly expanding Appalachian drilling program.

I know many of you will miss her, but she is alive and well, and engaged in creating shareholder value as opposed to merely talking about it. Jim Welch, who you just heard, is a bright young man who we all agreed would benefit greatly from the broad exposure that the Investor Relations position gives. I know that he is a quick learner and that he will be responsive to your needs.

We have noted the flurry of MLP activity, and we obviously have a number of assets that qualify for MLP ownership. We have both legal and financial consultants helping us evaluate the actual suitability of our properties for conversion to MLP ownership. With respect to our midstream assets, we are paying particular attention to the implications of the extraordinary extent to which our pipeline and storage and gathering assets are physically intertwined with our LDC and our Appalachian E&P production and acreage.

We have long viewed the success of our system as being attributable to a significant degree to the integrated nature of those operations and their common ownership. While MLPs have a history of financial success, they have seldom separated the pieces of an integrated system, and their history is much shorter than that of National Fuel. So as you would expect, we are being careful in our approach.

On the E&P side on the other hand, our California production is not physically integrated. And the questions there are the ones commonly confronted such as future capital requirements, sustainability, and growth. Growth might come from development of our Appalachian acreage. But before we put our reputations and National Fuel's on the line, we will have to be convinced of the long-term sustainability of that business model.

To that end, of course, we have had already engaged Netherland & Sewell to evaluate our Appalachian acreage potential, as well as all of our existing reserves including California. Regarding the rest of the business, we had a very good third quarter, and as Dave, Matt, and Ron will tell you, things are moving forward. I'll now turn you over to David Smith.

Thank you, Phil, and good morning to everyone. The third quarter was indeed a very good quarter. In fact, a record quarter for National Fuel. All of our major segments reported improved earnings.

While we're certainly proud of the financial results we achieved, we're equally pleased with our progress on three major initiatives. One, the Empire Connector project. Two, the pursuit of a new rate design that will encourage incremental conservation. And three, the refocusing of our efforts in the E&P segment.

Starting with the Pipeline and Storage segment, as we indicated in last night's release, in late June we signed a long-term firm transportation with KeySpan. That agreement obligates us to construct the Empire Connector project. Construction is expected to commence next month. Our intention is to install at least 20 miles of pipe in 2007, and in addition, to complete numerous road bores and all of the necessary directional drilling. That will allow us to hit the ground running in 2008 when the remaining 50 some miles of pipe will be installed.

While it's possible some restoration work may spill over in 2009, the project is firmly on track for a November 1, 2008 in-service date. That dovetails with the anticipated in-service date of the Millennium pipeline, which as you know, has already commenced construction. We continue to estimate the cost of the Connector project at $177 million, and as of today, over two-thirds of that cost is effectively locked in. We do not expect any surprises.

We signed purchase order for the pipe and the turbo compressor units. We have final resolutions from all six county IDAs, providing sales and property tax relief and have actually closed on five of the six to date. Earlier this week, we signed a contract with our primary pipeline construction contractor for the entire 77-mile project.

Obviously, this is great news for National Fuel. Nearly three and half years of effort went into its development, and I applaud the many individuals, both inside and outside of the Company, who made the project a reality. Expansion of the Pipeline and Storage segment has been and will continue to be a major priority for National Fuel. Hopefully, the Empire Connector is the first of many such projects.

In the E&P segment, Matt and his team are doing a great job in refocusing Seneca. We've significantly stepped up the drilling program in the East. During the quarter, Seneca drilled a record 85 wells in Appalachia and is on pace to drill a similar number in the fourth quarter. With regard to Canada, we continue to believe the sale of our Canadian operation is appropriate, and Seneca personnel are working diligently on that process. In fact, we expect to close on the sale by the end of this fiscal year.

Matt will provide an update on all of Seneca's operations. Before turning the call over to Matt, I'd like to briefly address a couple other segments of our business. The first is our Timber segment. Typically, that segment contributes a steady $0.01 to $0.02 per share per quarter to consolidated earnings. But this quarter it posted a slight loss. The loss was mostly the result of lower volumes, which we're working to make up, lower unit prices for green and kiln-dried lumber, and additional operational costs related to disruptions as a result of the installation of a grade, sort, and stacking system that will make the operation more efficient in the future.

National Fuel Resources continued to execute its growth strategy by expanding its presence in the off-system markets of National Grid, NYSEC, and Rochester Gas & Electric. Their efforts are clearly paying off. Through June volumes are up about 15% over the prior year, and are on track to beat last year's record volume of 45.3 Bcf. I will now turn the call over to Matt for an update on Seneca's operations.

Thanks, Dave. Good morning. Let me start with an update on our Canadian divestiture. We received several competitive bids for the entire subsidiary. We hope to sign a purchase and sale agreement soon, and we are working to complete a sale by the end of the fiscal year. As expected, the indicative sale price is significantly higher than our current book value.

Moving on to our other results for the third quarter. Our production was 11.4 Bcfe, which is somewhat lower than originally forecast. Most of the shortfall is from Canada, where Sukunka was shut in for 31 days for plant maintenance and optimization. For all of Seneca, for the full fiscal year we expect to reach our guidance of at least 47 Bcfe, except as impacted by the sale of Canada.

In the Gulf of Mexico for the second quarter -- I'm sorry, for the third quarter, we have drilled the West Cameron 96B2 well to TD and encountered approximately 150 feet of net pay four zones. We're in the process of completing the thickest bay, which is over 100 feet net. Seneca has an 11% working interest.

Gulf of Mexico production was a bit low for the quarter due to poor reservoir performance from our Viosca Knoll properties. However, new production from our Vermilion 253 drilling and recompletion program brought July volumes back to forecast levels. The two new wells and three recompletions averaged 24 million cubic feet per day in July. Seneca has a 50% working interest.

Elsewhere in the Gulf, the Highland 24L development is moving forward. The pipelines are in, and the platform is scheduled to be installed later this month. First production is anticipated by the end of September.

In the West, another Midway Sunset steam generator was placed in operation in April. This brings the total number of steam generators in Midway Sunset to four, which combined are capable of generating in excess of 12,000 barrels of steam per day. We have also completed our fiscal year 2007 drilling program for Midway Sunset, drilling the last of our planned 51 producers and four injectors.

In the East, we drilled 85 upper Devonian wells in the quarter, putting us on pace to meet or exceed our 200-well goal for fiscal year 2007. In order to continue accelerating our development program, we have increased our East division staff to 44 employees as compared to 33 on October 1, 2006. Additionally, the Onondaga Stone Reef well is now producing 500,000 cubic feet per day. We will be ramping up production at this location sometime in the next several months.

Netherland Sewell is nearing completion of the 3P reserve study of our Appalachian properties. As a result of this work, we expect to book some proved undeveloped reserves, as well as quantifying our probable and possible reserves. In addition to the Appalachian study, Netherland Sewell is thoroughly reviewing our approved reserves for all U.S. divisions. Based on their work to date, we will be revising reserves in many areas, some up and some down.

At this point, I expect an overall downward revision of our U.S. reserves in the 5% to 9% range, with most of this reduction coming from California. At current pricing, this reserve revision will not lead to a ceiling test right now, but may cause an increase to our DD&A for the fourth quarter of 2007. With this thorough review and revision, we should greatly reduce the likelihood of repeated negative revisions like Seneca has reported over the past several years, making our finding costs, our DD&A, and ultimately our earnings more predictable in the future.

Looking forward to 2008, we anticipate an increase in our U.S. production. As set out in last evening's release, our production guidance is 38 to 44 Bcfe, which compares to a projected 39 Bcfe for U.S. production in fiscal year 2007. While California production is expected to be flat from 2007 to 2008, we expect increases in both the East and the Gulf of Mexico.

Capital spending in the range of $151 million to $159 million will be split fairly evenly between the three divisions with the East getting a slightly larger share than the other two. Thank you, and I will now turn the call over to Ron.

Thank you, Matt. I will briefly cover some earnings items for the third and fourth quarter, touch on some of the assumptions built into the earnings guidance for fiscal 2008, and give an update on our New York rate case.

For the third quarter, except for the reversal of the reserve for preliminary Empire Connector project costs, consolidated earnings were in-line with our expectations. As Dave discussed, our signing of various contracts committing us to move forward with the Empire Connector allowed us to reverse the reserve for the $7.4 million of project costs that we had incurred through June. And we now have capitalized those project costs and will continue to capitalize our ongoing development costs.

We discussed all of the other period-to-period variances in last evening's earnings release, so I'll continue our practice of not repeating that information during the call. Looking ahead, assuming a fourth quarter with no unusual items, our earnings for the entire year are expected to fall in the range between $2.38 and $2.46 per diluted share. This guidance includes approximately 11.4 Bcf of production volumes, Bcfe of production volumes, and incorporates approximately three days of possible shut-ins of our Gulf of Mexico production due to hurricanes.

Now as we noted in the release, these earnings would be impacted by the sale of Seneca's Canadian properties. Our fiscal fourth-quarter estimates include production from Canada of just under two Bcfe. Our data room that we had set up for the sale process and the bidding ground rules required bidders to bid on the properties with an effective sale date of July 1. As Matt said, our goal is to complete a sale this quarter, and when that transaction is completed the net income from the Canadian operations for the quarter, and for the entire year for that matter, will be classified or reclassified as discontinued operations. We'll essentially go through the same reclassification between earnings from continuing operations and earnings from discontinued operations that we did when we sold the Czech Republic assets in 2005.

Looking forward to fiscal 2008, our preliminary estimate for consolidated earnings is in the range of $2.45 to $2.65 per share. The increase in earnings results primarily from increased commodity pricing at Seneca. And we also have made preliminary capital budgets for each of our segments for fiscal 2008. Those preliminary budgets include $59 million of capital spending for our Utility segment, $142 million in our Pipeline and Storage segment, between $151 million and $159 million in our Exploration and Production segment, and $1 million for the rest of the Company for an overall total in the range of $353 million to $361 million.

In the Pipeline and Storage segment, approximately $112 million out of the $142 million total is for the Empire Connector project. At the end of June, our balance sheet has an equity component of over 60%. In using the middle of our earnings guidance range for 2008, our preliminary forecast indicates that cash flow will be slightly negative by just under $30 million when considering our capital expenditure budget in the $357 million range.

The proceeding at the New York Public Service Commission is still on schedule for the Commission to render a decision in December on our request for a rate increase. The parties have cross-examined the witnesses in the case, and we are in the process of providing briefs to the administrative law judge. As we've discussed previously, we've incorporated a revenue decoupling mechanism and a conservation incentive program in our tariff design. While the staff of the Commission has proposed different designs for some of the components, the concept of decoupling and conservation incentives seem to have solid support.

As a matter of fact, last week, the Commission established a new Office of Energy Efficiency and Environment. It appears that the Commission is now more focused on encouraging conservation and reduced consumption as a method to achieve customer savings, rather than their previous effort to stimulate competition among a large number of marketing companies. This has always made perfect sense to us since the cost of natural gas makes up approximately two-thirds of a customer's annual bill.

The next major step in the case will be the receipt of a recommended decision by the administrative law judge. Based on the timing in previous cases, the recommended decision is expected in late September or early October. Now in previous cases, we've reached settlement with the parties and a settlement is still a possibility in this case, but it's a little too early to comment on the likelihood of settlement at this point.

One final comment on revenue decoupling before we open the line for questions. In June, the staff of the Pennsylvania Commission issued a preliminary report in its generic demand side response proceeding that is rather inconclusive as respect to decoupling. We're hopeful that the report will generate more discussions and that Pennsylvania will ultimately join 10 other states that have already implemented revenue decoupling and 11 more where it is under active consideration. I'll now ask the operator to open the line for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Shneur Gershuni with UBS. Please proceed.

Hi. Good morning, guys. I guess I want to ask a big picture question. I was wondering if you can talk about mineral rights within Central Appalachia in terms of value and contrast it against Chesapeake's recent announcement that they're not pursuing an MLP, as well as EOG's intention to sell some reserves, as well, too, and sort of contrast it with your decision to sort of pursue the MLP opportunity?

I'm -- I'm sorry. You broke up pretty badly. I'm -- I missed most of that question. Could you try to repeat that, Shneur?

Sure. I was wondering if you can talk about mineral rights in Central Appalachia. You had mentioned in the past that you were not releasing data and so forth because you had tended to potentially acquire more mineral rights. And I guess as part of the discussion, if you can talk about EOG and Chesapeake's decision to sell reserves and Chesapeake's decision not to do a drop-down MLP against your decision to actually hire a consultant to look at an MLP opportunity?

Yes. I'm not -- I'm not sure what there is to say about that. You know, we think of Appalachia as being the heart of our whole system. We think we have an advantage as a result of having an integrated system with the production, the mineral rights, the surface rights, the pipeline and storage assets, and the LDC, all in that area.

I think some other people didn't view Appalachia as being core for whatever reason to the extent that people are considering selling their shallow Appalachian rights, we're going to be looking at buying those rights and activities. It comes down to a question of whether or not we think the price is right. But we're interested in expanding in that area.

The issue of an MLP with respect to Appalachia is something else that's on the table that we're considering. I mean, I meant to imply that we were looking at MLP's with respect to everything that is [MLP-able], if there is such a word. And, yes, we do have Netherland & Sewell evaluating our acreage and all of our reserves. I guess it's just a choice of different companies viewing different things as being core.

It's interesting you brought up Netherland & Sewell. Are you considering possibly having them review the probable and possible potential for the deep play in addition to just the shallow reserves?

At the moment, we have not retained them to do probables and possibles for anything deep.

Okay. If you don't mind me asking one last question, just with respect to the share buyback. I was curious if it takes a back seat now given all the growth opportunities that you have ahead, both on the MP side and on the pipeline side, or do you believe you have enough free cash flow generation to adequately fund both the buyback and the opportunities that lie ahead?

That depend on the magnitude of the opportunities that come along. For the moment, you will have noted that we did not buy back any significant number of shares during the quarter.

I did --

That had as much to do with some unusual buying, or what we thought was unusual buying in the market that tended to thwart our buyback strategy or tactics. You know, as Ron mentioned, we're sitting here with 60% equity on the balance sheet, which we think is sufficiently robust. And we expect we'll be getting significant proceeds from the sale of the Canadian properties. All in all, we think we're in very good shape financially.

If I can just ask one last question. Can you remind me what the book value was for the Canadian asset?

Yes. At the end of June, Shneur, the balance sheet was $117.3 million.

Perfect. Thank you, Ron.

Your next question comes from the line of Faisel Khan with Citigroup. Please proceed.

Good morning. I just wanted to make sure I understood something on the MLP. It's something you're looking at for the pipelines and for the gathering of processing assets. Is it also for some of your E&P assets, as well?

Yes.

Okay. And then on the New York PSC, the request for a rate decoupling, revenue recoupling, what sort of volume impact do you think you guys might have from a conservation effort at the utility?

Well, if we look at the -- I'm sorry, the winter before last where we were quite concerned about gas prices impacting most of our customers, and we encouraged them to conserve, we saw about an extra 2.5% to 3% reduction in usage, Faisel.

Okay.

Now, that was without any incentives in terms of rebates for appliance upgrades, et cetera. It's hard to say what those will incent the customers to do, but I would expect that it would still be in the 2.5% to 3% range.

Okay. Because I noticed in the quarter you had some benefit from higher per-customer consumption. So I assume that some of that consumption came back in the third quarter?

It -- it absolutely did, yes.

Okay. On the E & P segment, I was looking at the growth wells in process of drilling. You've got that table in the back of your -- in the back of your press release. When I'm looking at wells in process or beginning, those are wells that have not started drilling yet, or are they -- they're waiting -- you're waiting for a rig on those, or how does that work?

If it says they're in progress, then they've been spud but are not finished.

Okay. And then when it says commenced, it means that those are -- I'm trying to figure out the difference between in process and commenced?

Well --

Oh, well there may have been some carryover from previous quarters, Faisel.

I see.

In terms of a well waiting on a frac or a well waiting on a pipeline. So we're just trying to give you an indication of what the actual activity, beginning and ending was during the quarter. But there's always wells that -- depending on completion timing flop over from quarter-to-quarter.

Okay. And then on the timber business, the -- if I look at the nine months in terms of the volume that dropped off, kind of -- I guess you have a 28 million feet of total timber in '06 versus 24 million for this year, if I'm looking at it right. Is that a function of what's been happening with the housing market, or is that something else?

In our case it's something else. It's a function of weather-related activities and blowdowns and so on. The timber business is somewhat weather sensitive. You know, if the snow gets really deep, you can't get out and cut the trees. If it rains a lot, you don't get your way through the mud to cut the trees. And so on. But as Dave mentioned, we're working to make up the volumes.

Yes. The prices for the logs may be, or for the lumber, may be more related to what's happening in the housing market.

Okay. But overall, it looks like this is more of a temporary phenomenon, that those volumes should revert back to normal in the long run?

Yes. In fact, they may revert back to normal by the end of this quarter.

Okay. Great. Thanks, guys.

Your next question comes from the line of Carl Kirst with Credit Suisse .

Hey, good morning, everybody. Just a couple of clarifying questions if I could on the E&P front. Matt, unfortunately I missed in your prepared comment the breakdown by area for the CapEx.

Yes. You mean for 2008?

Yes, sorry.

Yes. It's -- it's pretty even between the three divisions, but a little more in the East than the other two. And I -- I think that's actually broken out in the -- in the release.

I apologize then. I'll hunt that down.

We've got that on page 23 of the release, Carl.

Great. Thank you. Couple other questions, actually on that page 23 -- ah, there is the capital investment. I was actually looking at the DD&A rate. Does that DD&A rate, as we're looking at it in 2008, does that already take into account the expected reserve revision down in California which is going to impact the DD&A, or would that be on top of what we're seeing here?

No. No, Carl, yes, that does reflect the -- an assumption of a reserve revision by the end this quarter, fourth quarter. And it also reflects the potential sale of Canada and how that would affect our overall DD&A rate, as well.

Okay. Great, thank you. And, Matt, can you -- can you talk about -- I understand California is two-thirds of your proved reserves here roughly. You know, in as much as we might be looking at a 5% to 9% net reduction in approved reserves, it would seem to indicate something like a 10%-plus possibility, reduction in California. Is there any one specific variable that is -- that is driving that that you can talk about at this point?

Well, I -- you know, it's a number of things, Carl. But I guess I would say probably one that has a significant impact is simply the assumed recovery rate from some of our major reservoirs. And if you think about this, if you're looking at a reservoir that has a 75% -- if you're assuming a 75% recovery factor and you adjust that to 70%, that's -- what's that, a 7% change in your -- in your overall recovery.

Sure, sure. And then lastly, if I could, with respect to the run rate in the East, obviously, 200 wells targeted for this fiscal year. Looks like with the second half of the year, though, at 85 a quarter, that's a fairly robust run rate here, annualized in the 340 range. I mean, is that something that can be maintained, or should we be looking at more sort of a slower 200, 250, 300, 350-type movement up?

Well, our target for 2008 is 250. Actually, I think we expressed it in the release as a range. 250 is the middle of that range. What you have to keep in mind is that weather has a big impact on our ability to get those wells drilled. So the third quarter was very good for us in terms of the weather. It's been very dry. We've been able to keep four rigs running continuously. Winter months are much more restrictive and we'll always have a significant slowdown in the winter relative to the summer.

And in the Spring, the roads get posted where you can't move the rigs from location to location. So that will slow it down.

Great. Appreciate the added color, thanks, guys.

Your next question comes from the line of Becca Followill with Pickering Energy Partners Please proceed.

Hi, guys. On the reserve revision and the audit by Netherland Sewell, I thought your reserves were audited before? Is that correct? Don't you have an annual audit?

Yes, they were audited by a different firm. Ralph E. Davis did the reserve work in the past.

Okay. So are you going to change auditors going forward?

Yes, we are.

Okay. On a permanent basis. And in looking at the review for possible MLP candidates in California, how would -- how does the writing down those reserves factor into your decision, or to MLP or not MLP, and I thought that the backlog of reserve life there of PUDs was about three years. How did that play into a decision of whether or not to MLP those assets?

Well, the long life is certainly a good thing for the MLP model. In terms of the reserve revision, we'll work with whatever our current view of the reserves -- however that stands at the time that we're modeling and working up the MLP.

Okay. And then lastly, on the decision to look at an MLP, why now? What's changed in your mind? What's the process that you go through, and what is the time frame for making a decision one way or the other?

Depending on the area and one of the significant changes on the pipeline side was the court decision that affirmed the FERC's tax treatment of MLP's, and that was, obviously, a big plus that caused us to renew our interest in MLP's. And MLP's are something we've been aware of and considering for sometime.

And you just see all of the -- the financial success that MLP's are having, that encourage us to examine them more closely now. You know, the time frame is we're going to make a decision when we're comfortable that we have the information that we need to make a logical decision. I mean, one of those things will be kind of final numbers from Netherland & Sewell on the E&P side.

And on the pipeline side to -- there's a lot of legal issues that we're wrestling with that seem to be significantly matters of first impression because of the significant integration of our system as compared to most of the pipeline MLPs that you've seen in the past.

Just because you're so integrated with the LDC and it's such a primary customer? Is that --

Yes. Well, it's not just that, but that's a big piece of it. But also the intertwining of the pipeline system with the E&P assets in the East, as well. And also operationally, we've had the same individuals working on both the pipeline system and the LDC system in a lot of different ways over the years and -- and now.

Would you consider doing multiple MLP's?

Yes. There's -- sure. There's no reason to, for instance, do -- and I don't know that anybody has, to do a single MLP that would contemplate both pipeline assets and E&P assets, for instance. I think you just confuse the market with something like that probably.

Okay. Thank you.

Your next question comes from the line of Mike Heim with A.G. Edwards. Please proceed.

Thanks, good morning. I couldn't quite tell by the wording of your comments on the non-proved. Have you made the decision to release that data, or is that still something that you're thinking about?

Still thinking about it.

Okay. Is there any update on the Forest County well to talk about?

Yes. In fact, I mentioned that in the comments. It's currently producing at 500,000 cubic feet per day. And we expect to ramp that up sometime in the next several months.

Okay. Sorry, I missed that. Finally, Ron, when you talked about negative net cash flow of $30 million, I assume that doesn't include any proceeds from Canada? Can you, first, confirm that and, second, talk about how you prioritize things with any cash received from the Canada sale?

You're absolutely right. That does not include any cash from Canada. And the -- again, depending on the timing, immediate use of cash this time of year goes to inventory for storage gas for the -- on the regulated side.

After that, it would get allocated in the E&P segment toward the drilling programs there. And then, after that, I guess, as Phil mentioned, we still view share buybacks as a viable alternative for the use of the cash.

Okay. Thank you.

Your next question comes from the line of Monica Verma with Gilford Securities. Please proceed.

Hello. I was just wondering if you guys could give us a little bit of color on the gathering system for the Appalachian area? Any lags between the well completion and actual flow, or any difficulties or competitive advantages that you guys have seen?

I guess the -- the first comment would be that upgrading the gathering system is certainly part of the challenge in growing our Appalachian production. So it's something we're constantly looking at and constantly working on. Does that answer your question?

Yes. I guess I'm just wondering about lags between actually hooking up the wells and completion of the wells. And then any sort of cost infrastructures that you guys have built in there in portions of your CapEx that get devoted to that?

That -- people are hesitating here over the answer in part because it varies so much by small areas. And we have areas that are market constrained. There's essentially no outlet at the present time beyond the local municipality and the customers that the LDC has there. And we find significant constraints on the weekend, say, but not during the week. There are other areas where the gas flows into major pipelines, and there's essentially no constraints.

There are areas where we're drilling wells that get hooked up quite quickly because they're close to facilities or other areas where we're looking to see the results of the drilling of a number of wells before the decision is made as to what -- what size of facilities need to be installed to get you to the transmission system.

It's part of the complexity of ramping up our drilling program in our part of Appalachia. There's no single answer that can be given beyond what Matt said. It's something we have to think about all the time. It's part of the CapEx of Seneca.

To some extent it's part of the CapEx of the Supply company, as supply takes advantage of the expanding volumes not only of Seneca but of other producers within the area.

Yes, Monica. Look, down the road we have -- we now have Duane Wassum who's focused on meeting not only with Seneca, but with most of the Appalachian producers and developing and looking to develop a gathering for Seneca and other producers in Appalachia, and in keeping an eye in particular on the potential for the shale development in the area. So it's -- from his perspective, it's a longer term plan really.

Okay. Great. That's that helps a lot.

(OPERATOR INSTRUCTIONS) Your next question is a follow-up from the line of Shneur Gershuni.

Hi, guys. Just one quick follow-up. I was wondering if you could give us some guidance with respect to timing for the Millennium pipeline, in terms of when we'll actually see the revenues hit? It sounds to me based on your schedule, it sounds more like an '09 event than an '08 event. Is that correct?

Yes, it will be fiscal '09, but with an in-service date of November 1 of '08.

Right.

Right. So but fiscal '09, though?

Right.

Okay. Perfect. That's all I was asking.

Your next question is a follow-up from the line of Faisel Khan with Citigroup. Please proceed.

Yes. Just a couple of questions. I remember you guys had a couple of open seasons outstanding on your pipeline storage assets. Can you comment a little bit about what's going on with those?

I -- are you probably talking about the Clarington to Leidy open season that we've had?

That's right.

And now in fact there's a meeting today -- there's a couple of alternative pipelines we're looking at. Different sizes, different markets. I think you know we had a very, very positive response to that open season.

Okay.

And -- and right now they're just kind of looking as to whether or not to follow-up with particular large customers, looking at different potential models as to how to model it. But we're very, very positive on that. And I just can't give you any more details at this time because we're still developing them ourselves and looking at a variety of alternatives with respect to that potential project.

Okay. One -- a couple follow-ups on the MLP strategy. From your guys' perspective, what are the tax consequences from your point of view on putting some of these assets into an MLP? Do you feel like your tax basis is pretty high on some of these assets, or how do you feel about that?

Our tax basis is pretty low. As I understand the most common process of MLP formation is that from the Company's point of view the taxes are deferred, that we would have a book impact of taxes. But the cash impact of the taxes would occur some years down the road.

Okay. And in looking at some of your California assets to be put into an MLP, what would be the base decline rate of those assets in the long run?

That's one of those things we want to be very sure about, and part of the Netherland Sewell study.

And just to be clear, you know, we have been investigating this concept of the MLP. But we haven't determined specific assets that would be included.

Okay.

So we're really not there to answer the question you're asking.

Okay. Fair enough. Thanks, guys.

Your next question comes from the line of Mike Weinstein with Zimmer Lucas. Please proceed.

Hi. I was wondering if you could just briefly update us on the progress and status of the stock buyback program? Thanks.

We did -- we mentioned that earlier, Michael. We did not buy any shares during this past quarter just because of trading activity and volatility in the share prices. It has always been our goal not to have our buyback be, let's say, an artificial stimulus to the share price and the trading. So we did not buy any shares back.

Where are you right now -- I know you were planning on buying 8 million shares? What are we up to now?

We've purchased 3.7 million or so to date.

You still have an 8 million share goal?

We still have an 8 million share authorization and goal.

And goal with no time frame, though?

That's right.

Okay. Great. Thank you.

And at this time, there are no further questions in the queue. I would now like to turn the call back over to Mr. James Welch for the closing remarks.

Thank you very much. At this time, we'll conclude our call for today. We'd like to thank everyone once again for taking the time to be with 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 close of business on Friday, August 10. Our web site address is www.nationalfuelgas.com. The telephone replay number is 1-888-286-8010, using pass code 27159393. This concludes our conference for today. Thank you, and good-bye.

Ladies and gentlemen, that concludes the presentation. You may now disconnect. And have a great day.