NFG

Business Context and Reporting Period

Company: National Fuel Gas Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2006
Business Overview: A diversified energy company operating in five reportable segments: Utility, Pipeline and Storage, Exploration and Production, Energy Marketing, and Timber. The Company is subject to regulation by various state and federal agencies, including the NYPSC, PaPUC, and FERC.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Operating revenues decreased $206.5 million (29%) year-over-year. This was primarily driven by a $142.8 million decrease in Utility segment revenues due to lower gas costs recovered in revenues and warmer weather reducing throughput. Energy Marketing revenues also dropped $62.2 million due to lower natural gas commodity prices.
• Earnings Decrease: Net income declined $2.9 million (5%) to $54.5 million. The decrease was caused by lower earnings in the Utility, Pipeline and Storage, Energy Marketing, and Timber segments.
• Segment Performance:
  • Exploration and Production: Earnings increased $3.3 million to $20.7 million, driven by higher crude oil revenues (hedged price increased $10.67/bbl) and increased Gulf Coast gas production.
  • Utility: Earnings decreased $4.6 million to $17.2 million, impacted by a $2.6 million symmetrical sharing adjustment in New York and lower usage margins.
  • Timber: Earnings fell $1.2 million to $0.2 million due to unfavorable weather conditions hindering log harvesting.
• Cash Flow: Operating cash flow improved significantly by $22.4 million to $43.0 million, largely due to the timing of gas cost recovery in the Utility segment.

Guidance, Outlook, and Risks

• Share Repurchases: The Company repurchased 1.18 million shares for $42.9 million during the quarter. As of December 31, 2006, 4.29 million shares remain available under the 8 million share authorization.
• Capital Projects:
  • Empire Connector: FERC granted a certificate of public convenience and necessity. The project is estimated to cost $152 million, with potential cost overruns of 10-20% due to labor inflation. Target in-service date is November 2008.
  • Pendleton Compression: Planned expansion to connect Supply Corporation to Empire; expected to launch regulatory approval in 2007.
• Regulatory Matters:
  • New York Rate Case: Filed January 29, 2007, requesting a $52.0 million annual revenue increase to offset conservation efforts and uncollectibles.
  • Pennsylvania Rate Case: Settlement approved; new rates effective January 1, 2007, increasing annual revenues by $14.3 million.
  • Supply Corporation FERC Complaint: An uncontested settlement regarding rates and retained gas is awaiting final FERC approval.
• Accounting Changes: The Company is assessing the impact of new FASB pronouncements (FIN 48, SFAS 157, SFAS 158). SFAS 158 adoption in fiscal 2007 is expected to recognize a net liability of approximately $220.8 million for pension and post-retirement plans, though a majority is expected to be recorded as a regulatory asset.
• Risks: Key risks include commodity price volatility, weather conditions affecting demand and timber harvesting, regulatory outcomes, and the ability to access capital markets.

Investor Verification Checklist

• Weather Normalization: Verify the impact of the Weather Normalization Clause (WNC) in New York on future earnings stability.
• Empire Connector Costs: Monitor for cost escalation updates on the Empire Connector project, as estimates could rise by up to 20%.
• Regulatory Settlements: Confirm the final approval of the Supply Corporation FERC settlement and the outcome of the New York rate case filed in January 2007.
• Commodity Hedging: Review the extent of hedging in the Exploration and Production segment, as earnings were significantly boosted by unhedged oil price increases.
• Pension Liability: Track the implementation of SFAS 158 in the fourth quarter of fiscal 2007 to understand the balance sheet impact of the $220.8 million pension liability.