NFG

Business Context and Reporting Period

Company: National Fuel Gas Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: A diversified energy company operating in five segments: Utility, Pipeline and Storage, Exploration and Production, Energy Marketing, and Timber. The company is a large accelerated filer with 83,475,537 shares of common stock outstanding as of April 30, 2007.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Operating revenues decreased $78.8 million (8.9%) for the quarter and $285.3 million (17.8%) for the six months compared to the prior year. The decline was primarily driven by lower retail gas sales revenues due to the recovery of lower gas costs, partially offset by higher volumes in the Utility segment due to colder weather.
• Net Income: Net income decreased slightly by $0.1 million for the quarter and $3.0 million for the six months. The six-month decrease was largely due to lower earnings in the Pipeline and Storage and Exploration and Production segments, offset by higher earnings in Energy Marketing.
• Segment Performance:
  • Utility: Earnings increased $4.8 million (quarter) and $0.2 million (six months) due to colder weather and rate increases in Pennsylvania, offset by higher operating expenses in New York.
  • Pipeline and Storage: Earnings decreased $3.0 million (quarter) and $5.1 million (six months) primarily due to a FERC settlement reducing efficiency gas revenues.
  • Exploration and Production: Earnings decreased $6.0 million (quarter) and $2.8 million (six months). The prior year included a $5.1 million non-recurring deferred tax benefit.
  • Energy Marketing: Earnings increased $2.8 million (quarter) and $2.3 million (six months) due to higher margins and a reversal of a purchased gas expense accrual.
• Debt: Long-term debt decreased by approximately $96.7 million from the prior fiscal year-end due to the repayment of $22.8 million of Empire's secured debt in December 2006 and $96.3 million of unsecured notes in April 2007 (subsequent event).

Guidance, Outlook, and Risks

• Empire Connector Project: The company expects to make a final decision by May 31, 2007, on constructing the Empire Connector pipeline. Estimated costs have risen to $177 million. If built, service is targeted for November 2008.
• Rate Cases: A new rate case was filed in New York on January 29, 2007, requesting a $52.0 million annual revenue increase to address conservation impacts and uncollectibles. Rates could become effective in late December 2007.
• Share Repurchases: The company continues its program to repurchase up to 8 million shares. As of March 31, 2007, 3.72 million shares had been repurchased for $128.5 million.
• Environmental Contingencies: The company is a potentially responsible party for a former manufactured gas plant site in New York. Estimated clean-up costs range from $12.5 million to $16.1 million, with $12.5 million recorded as a liability.
• Accounting Changes: The company is assessing the impact of new accounting standards (FIN 48, SFAS 157, SFAS 158, SFAS 159) effective in fiscal 2008 and 2009. SFAS 158 adoption in Q4 2007 is expected to recognize a net pension liability of approximately $232.5 million.

Investor Verification Checklist

• Verify the final decision timeline and cost mitigation strategies for the Empire Connector project.
• Monitor the outcome of the New York rate case filed in January 2007 and its impact on future revenue.
• Review the status of negotiations with NYDEC regarding the $8.9 million proposed remedial action plan for the manufactured gas plant site.
• Assess the impact of the upcoming adoption of SFAS 158 on the balance sheet and regulatory asset recognition in Q4 2007.
• Track commodity price trends (oil and gas) and their effect on the Exploration and Production segment's hedging results.