NFG

Business Context and Reporting Period

Company: National Fuel Gas Company
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended March 31, 2006
Business Overview: The Company operates in five reportable segments: Utility, Pipeline and Storage, Exploration and Production, Energy Marketing, and Timber. The Company ceased reporting an International segment following the sale of its Czech Republic operations (U.E.) in July 2005, which are now classified as discontinued operations.

Key Financial Metrics

Note: Q1 2005 figures exclude discontinued operations which were reclassified. Q1 2005 Net Income including discontinued operations was $70,683.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 21.1% for the quarter and 29.6% for the six months ended March 31, 2006, compared to the prior year. This was driven primarily by higher commodity prices in the Exploration and Production and Energy Marketing segments, and rate increases in the Utility segment.
• Earnings Increase: Net income from continuing operations rose 22.8% for the quarter and 25.0% for the six-month period. The Exploration and Production segment contributed significantly to this growth due to higher oil and gas prices and a $5.1 million deferred income tax benefit.
• Discontinued Operations: The prior year included income from discontinued operations (Czech Republic business) of $6.7 million for the quarter and $12.3 million for the six months. No such income was recorded in 2006.
• Utility Segment: Despite warmer weather reducing gas volumes, revenues increased due to the recovery of higher purchased gas costs and rate case settlements in New York and Pennsylvania.
• Share Repurchases: The Company initiated a share repurchase program in December 2005, repurchasing 825,250 shares during the quarter ended March 31, 2006, for approximately $22.6 million.

Guidance, Outlook, and Risks

• Capital Projects: The Company is pursuing the Empire Connector project to expand pipeline capacity, with a targeted in-service date of November 2007. Costs incurred to date are approximately $5.2 million.
• Regulatory Matters:
  • FERC Complaint: On April 7, 2006, regulators filed a complaint alleging Supply Corporation's rates are unjust and unreasonable, potentially seeking disgorgement of profits. The Company intends to vigorously oppose this.
  • PUHCA Repeal: The Public Utility Holding Company Act of 1935 was repealed effective February 8, 2006, reducing regulatory burdens on securities issuance and acquisitions.
• Environmental Liabilities: Estimated remaining clean-up costs for former manufactured gas plant sites are $3.9 million.
• Market Risks: Earnings are sensitive to weather conditions (degree days), commodity price volatility (oil and gas), and regulatory changes. The Company uses derivative instruments to hedge price risks.
• Insurance: Due to increased premiums following Hurricanes Katrina and Rita, the Company has determined it is not economical to fully insure Gulf of Mexico properties against named windstorms.

Investor Verification Checklist

• Deferred Tax Benefit: Verify the sustainability of the $5.1 million deferred income tax benefit recorded in the Exploration and Production segment, which was based on revised forecasts of future taxable income.
• FERC Litigation: Monitor the status of the FERC complaint regarding Supply Corporation's fuel and loss retention rates, as a negative outcome could require profit disgorgement.
• Commodity Hedging: Review the effectiveness of hedging strategies in the Exploration and Production and Energy Marketing segments given the volatility in oil and gas prices.
• Capital Expenditure Execution: Track progress and cost overruns on the Empire Connector project and the proposed Tuscarora Extension.
• Weather Normalization: Assess the impact of the Weather Normalization Clause (WNC) in the New York jurisdiction on future earnings stability.