WILLIAMSVILLE, N.Y., Dec 12, 2007 (BUSINESS WIRE) -- The Board of Directors of National Fuel Gas Company (NYSE: NFG)
("National Fuel" or the "Company") yesterday sent a letter to New
Mountain Vantage Advisers, L.L.C. ("NMV" or "New Mountain") that
includes a detailed review of the Company's ongoing efforts that have
steadily enhanced shareholder value, provides the rationale behind
National Fuel's Appalachian strategy, discusses master limited
partnership ("MLP") considerations and its review of its additional
assets. This letter was sent in response to earlier correspondence
from New Mountain, which included suggestions for making fundamental
changes to the structure and strategy of the Company. The Company has
concluded, after thorough analysis, that New Mountain's proposals are
not in the best interests of its shareholders.
In its letter, the Company points out the rather peculiar
circumstances of a shareholder challenging the management of a company
that has not only maintained, but grown, shareholder value, whether
results are looked at over one, three, five or 10 years. Likewise, the
Company noted New Mountain's lack of real experience in managing
assets in the energy industry and lack of access to National Fuel's
proprietary information, and questioned the thoroughness of New
Mountain's analysis and the wisdom of its conclusions. In its letter
to New Mountain, the Company has summarized its long-term business
strategy, its pattern of creating and sustaining shareholder value and
its analysis of each of the propositions offered for changing the
structure of the Company. The following is a synopsis of each of those
items and, incorporated into this news release, the complete response,
as sent.
Ongoing Creation of Shareholder Value:
-- During the past fiscal year, and three, five and 10 years,
National Fuel shareholders have enjoyed total returns that far
exceed returns of the S&P 500 during those same time periods.
-- The Company anticipates continued success in fiscal 2008, with
earnings currently projected to be in the range of $2.50 to
$2.70 per diluted share.
National Fuel has developed and is executing a highly successful
exploration and production strategy for its assets in the Appalachian
basin. New Mountain has criticized the Company's pace for its
exploration and production activity in this region.
-- National Fuel's aggressive and knowledge-based, long-term
strategy for developing its Appalachian properties has yielded
results that validate management's approach. Additionally, the
Company - one of the most active drillers in its part of the
Appalachian Basin - has increased the number of wells it has
drilled in the region every year since 2004 and plans to
continue accelerating its Appalachian drilling activities.
-- New Mountain claims that an even greater increase in the pace
of drilling could add $1.1 billion in value. New Mountain's
claims are based on the work of its energy consultant
Schlumberger Data & Consulting Services ("Schlumberger"),
which utilized limited publicly available data and was, by its
own admission, a "50,000-foot view." The Company believes it
is extremely misleading to use a $1.1 billion figure, which,
although attractive on its face, is not adjusted to fully
reflect a real-world expected value once all of the risks
inherent in such a drilling program are taken into account.
-- The key difference between National Fuel's business strategies
and New Mountain's proposals is that the Company's plans are
based on thorough analysis of real data about its real assets.
National Fuel's strategy recognizes the complex and variable
geology of the Appalachian Basin and the need to incorporate
all available data (including data to come from wells not yet
drilled) in order to optimize the locations of future wells.
-- Drilling too many wells too rapidly would likely cause average
well recoveries to decline, lead to a delay in first
production and, significantly, reduce the net present value of
this asset, as compared to continuing National Fuel's strategy
of development at a knowledge-based pace.
The Company has completed a rigorous analysis of the prospect of
forming Master Limited Partnerships (MLPs) for certain of its business
segments. The Company and its top-tier financial advisor have
concluded that MLPs would not be beneficial to the structure of
National Fuel at this time.
-- New Mountain's proposals to restructure National Fuel by
financially engineering its Exploration and Production ("E&P")
assets, and/or its Pipeline and Storage ("P&S") assets into
MLPs are similarly founded on insufficient analysis of
unsubstantiated assumptions.
-- Historically, most publicly traded companies that form captive
MLPs pursue the MLP structure to: (i) achieve a more
attractive valuation than they are currently receiving in the
public market, (ii) capitalize on tax advantages, (iii) obtain
an alternative publicly traded currency with which to pursue
growth through acquisitions, and/or (iv) raise capital to fund
other projects at the parent level or to pay down debt. These
drivers are less applicable to National Fuel than to other
energy companies that have formed MLPs.
-- After a thorough analysis of real data, the tax attributes of
the underlying assets and the MLP-specific accounting issues,
the Company has concluded - with the concurrence of its
top-tier financial advisor, Morgan Stanley - that MLPs would
not constitute an attractive financial or strategic
alternative at this time and would, in fact, entail
significant cost and risk. Among other things, National Fuel's
low tax basis leads to a tax liability, which significantly
negates the potential value of an MLP.
There would be no significant incremental benefit to National
Fuel's shareholders from the disposition of the Company's Energy
Marketing, Timber and Landfill Gas assets as proposed by New Mountain.
-- The Company has determined not to sell its core energy
marketing segment, holds its timber assets available for the
right opportunity, and is actively considering the future of
its small landfill gas business. Selling these assets at this
time would not result in a significant incremental benefit to
shareholders.
In its letter, the Company's Board of Directors states that
following a very detailed process in which the Board carefully
evaluated New Mountain's claims and proposals, it has concluded that,
although the Board "respects New Mountain's right as a shareholder to
express its opinions regarding National Fuel...after careful
consideration, the Board believes that the proposals that New Mountain
has put forth are flawed by inadequate analysis, and are not in the
best interests of all of National Fuel's shareholders at this time."
Although the Company disagrees with New Mountain's proposals, the
Board reiterated its ongoing commitment to acting in the best
interests of all shareholders. "Consistent with our track record of
delivering significant value to our shareholders, the Board and
management of National Fuel continually look to improve the Company's
performance and further drive growth."
National Fuel is an integrated energy company with $3.9 billion in
assets comprised of the following five operating segments: Utility,
Pipeline and Storage, Exploration and Production, Energy Marketing,
and Timber. Additional information about National Fuel is available on
its Internet Web site: www.nationalfuelgas.com or through its investor
information service at 1-800-334-2188.
Certain statements contained herein, including statements
regarding future financial and operating performance and condition, as
well as statements that are identified by the use of the words
"anticipates," "estimates," "expects," "forecasts," "intends,"
"plans," "predicts," "projects," "believes," "seeks," "will" and "may"
and similar expressions, are "forward-looking statements" as defined
by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve risks and uncertainties which could
cause actual results or outcomes to differ materially from those
expressed in the forward-looking statements. The Company's
expectations, beliefs and projections contained herein are expressed
in good faith and are believed to have a reasonable basis, but there
can be no assurance that such expectations, beliefs or projections
will result or be achieved or accomplished. In addition to other
factors, the following are important factors that could cause actual
results to differ materially from those discussed in the
forward-looking statements: changes in economic conditions, including
economic disruptions caused by terrorist activities, acts of war or
major accidents; changes in demographic patterns and weather
conditions, including the occurrence of severe weather such as
hurricanes; changes in the availability and/or price of natural gas or
oil and the effect of such changes on the accounting treatment of
derivative financial instruments or the valuation of the Company's
natural gas and oil reserves; uncertainty of oil and gas reserve
estimates; ability to successfully identify, drill for and produce
economically viable natural gas and oil reserves; significant changes
from expectations in the Company's actual production levels for
natural gas or oil; changes in the availability and/or price of
derivative financial instruments; changes in the price differentials
between various types of oil; inability to obtain new customers or
retain existing ones; significant changes in competitive factors
affecting the Company; changes in laws and regulations to which the
Company is subject, including changes in tax, environmental, safety
and employment laws and regulations; governmental/regulatory actions,
initiatives and proceedings, including those involving acquisitions,
financings, rate cases (which address, among other things, allowed
rates of return, rate design and retained gas), affiliate
relationships, industry structure, franchise renewal, and
environmental/safety requirements; unanticipated impacts of
restructuring initiatives in the natural gas and electric industries;
significant changes from expectations in actual capital expenditures
and operating expenses and unanticipated project delays or changes in
project costs or plans; the nature and projected profitability of
pending and potential projects and other investments, and the ability
to obtain necessary governmental approvals and permits; occurrences
affecting the Company's ability to obtain funds from operations, from
borrowings under our credit lines or other credit facilities or from
issuances of other short-term notes or debt or equity securities to
finance needed capital expenditures and other investments, including
any downgrades in the Company's credit ratings; ability to
successfully identify and finance acquisitions or other investments
and ability to operate and integrate existing and any subsequently
acquired business or properties; impairments under the SEC's full cost
ceiling test for natural gas and oil reserves; significant changes in
tax rates or policies or in rates of inflation or interest;
significant changes in the Company's relationship with its employees
or contractors and the potential adverse effects if labor disputes,
grievances or shortages were to occur; changes in accounting
principles or the application of such principles to the Company; the
cost and effects of legal and administrative claims against the
Company; changes in actuarial assumptions and the return on assets
with respect to the Company's retirement plan and post-retirement
benefit plans; increasing health care costs and the resulting effect
on health insurance premiums and on the obligation to provide
post-retirement benefits; or increasing costs of insurance, changes in
coverage and the ability to obtain insurance. The Company disclaims
any obligation to update any forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
IMPORTANT INFORMATION AND WHERE TO FIND IT
In connection with its 2008 Annual Meeting, National Fuel Gas
Company will be filing a proxy statement, WHITE proxy card and other
materials with the U.S. Securities and Exchange Commission ("SEC"). We
urge investors to read the Proxy Statement and these other materials
carefully when they become available, because they will contain
important information about National Fuel Gas Company and the matters
to be considered at its Annual Meeting. Investors may contact Morrow &
Co., LLC, National Fuel Gas Company's proxy advisor for the 2008
Annual Meeting, at (800) 252-1959 or by email at nfginfo@morrowco.com.
Investors may also obtain a free copy of the proxy statement and other
relevant documents when they become available as well as other
materials filed with the SEC concerning National Fuel Gas Company at
the SEC's website at http://www.sec.gov. Free copies of National Fuel
Gas Company's SEC filings are also available on National Fuel Gas
Company's website at http://www.nationalfuelgas.com. These materials
and other documents may also be obtained for free from: Secretary,
National Fuel Gas Company, 6363 Main Street, Williamsville, New York
14221, (716) 857-7000.
CERTAIN INFORMATION REGARDING PARTICIPANTS IN THE SOLICITATION
National Fuel Gas Company and its directors are, and certain of
its officers and employees may be deemed to be, participants in the
solicitation of proxies from National Fuel Gas Company's stockholders
with respect to the matters considered at National Fuel Gas Company's
2008 Annual Meeting. Information regarding these directors, and these
certain officers and employees, is included in the soliciting material
on Schedule 14A filed with the SEC on December 12, 2007 and on
National Fuel Gas Company's website at http://www.nationalfuelgas.com.
Security holders can also obtain information with respect to the
identity of the participants and potential participants in the
solicitation and a description of their direct or indirect interests,
by security holdings or otherwise, for free, by contacting: Secretary,
National Fuel Gas Company, 6363 Main Street, Williamsville, New York
14221, (716) 857-7000. More detailed information with respect to the
identity of the participants, and their direct or indirect interests,
by security holdings or otherwise, will be set forth in the proxy
statement and other materials to be filed with the SEC in connection
with National Fuel Gas Company's 2008 Annual Meeting.
The following is the letter, as sent to New Mountain, including
the required proxy solicitation information and language on
forward-looking statements.
IMPORTANT INFORMATION AND WHERE TO FIND IT
In connection with its 2008 Annual Meeting, National Fuel Gas
Company will be filing a proxy statement, WHITE proxy card and other
materials with the U.S. Securities and Exchange Commission ("SEC"). WE
URGE INVESTORS TO READ THE PROXY STATEMENT AND THESE OTHER MATERIALS
CAREFULLY WHEN THEY BECOME AVAILABLE, BECAUSE THEY WILL CONTAIN
IMPORTANT INFORMATION ABOUT NATIONAL FUEL GAS COMPANY AND THE MATTERS
TO BE CONSIDERED AT ITS ANNUAL MEETING. Investors may contact Morrow &
Co., LLC, National Fuel Gas Company's proxy advisor for the 2008
Annual Meeting, at (800) 252-1959 or by email at nfginfo@morrowco.com.
Investors may also obtain a free copy of the proxy statement and other
relevant documents when they become available as well as other
materials filed with the SEC concerning National Fuel Gas Company at
the SEC's website at http://www.sec.gov. Free copies of National Fuel
Gas Company's SEC filings are also available on National Fuel Gas
Company's website at http://www.nationalfuelgas.com. These materials
and other documents may also be obtained for free from: Secretary,
National Fuel Gas Company, 6363 Main Street, Williamsville, New York
14221, (716) 857-7000.
CERTAIN INFORMATION REGARDING PARTICIPANTS IN THE SOLICITATION
National Fuel Gas Company and its directors are, and certain of
its officers and employees may be deemed to be, participants in the
solicitation of proxies from National Fuel Gas Company's stockholders
with respect to the matters considered at National Fuel Gas Company's
2008 Annual Meeting. Information regarding these directors, and these
certain officers and employees, is included in the soliciting material
on Schedule 14A filed with the SEC on December 12, 2007 and on
National Fuel Gas Company's website at http://www.nationalfuelgas.com.
Security holders can also obtain information with respect to the
identity of the participants and potential participants in the
solicitation and a description of their direct or indirect interests,
by security holdings or otherwise, for free, by contacting: Secretary,
National Fuel Gas Company, 6363 Main Street, Williamsville, New York
14221, (716) 857-7000. More detailed information with respect to the
identity of the participants, and their direct or indirect interests,
by security holdings or otherwise, will be set forth in the proxy
statement and other materials to be filed with the SEC in connection
with National Fuel Gas Company's 2008 Annual Meeting.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein, including statements
regarding future financial and operating performance and condition, as
well as statements that are identified by the use of the words
"anticipates," "estimates," "expects," "forecasts," "intends,"
"plans," "predicts," "projects," "believes," "seeks," "will" and "may"
and similar expressions, are "forward-looking statements" as defined
by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve risks and uncertainties which could
cause actual results or outcomes to differ materially from those
expressed in the forward-looking statements. The Company's
expectations, beliefs and projections contained herein are expressed
in good faith and are believed to have a reasonable basis, but there
can be no assurance that such expectations, beliefs or projections
will result or be achieved or accomplished. In addition to other
factors, the following are important factors that could cause actual
results to differ materially from those discussed in the
forward-looking statements: changes in economic conditions, including
economic disruptions caused by terrorist activities, acts of war or
major accidents; changes in demographic patterns and weather
conditions, including the occurrence of severe weather such as
hurricanes; changes in the availability and/or price of natural gas or
oil and the effect of such changes on the accounting treatment of
derivative financial instruments or the valuation of the Company's
natural gas and oil reserves; uncertainty of oil and gas reserve
estimates; ability to successfully identify, drill for and produce
economically viable natural gas and oil reserves; significant changes
from expectations in the Company's actual production levels for
natural gas or oil; changes in the availability and/or price of
derivative financial instruments; changes in the price differentials
between various types of oil; inability to obtain new customers or
retain existing ones; significant changes in competitive factors
affecting the Company; changes in laws and regulations to which the
Company is subject, including changes in tax, environmental, safety
and employment laws and regulations; governmental/regulatory actions,
initiatives and proceedings, including those involving acquisitions,
financings, rate cases (which address, among other things, allowed
rates of return, rate design and retained gas), affiliate
relationships, industry structure, franchise renewal, and
environmental/safety requirements; unanticipated impacts of
restructuring initiatives in the natural gas and electric industries;
significant changes from expectations in actual capital expenditures
and operating expenses and unanticipated project delays or changes in
project costs or plans; the nature and projected profitability of
pending and potential projects and other investments, and the ability
to obtain necessary governmental approvals and permits; occurrences
affecting the Company's ability to obtain funds from operations, from
borrowings under our credit lines or other credit facilities or from
issuances of other short-term notes or debt or equity securities to
finance needed capital expenditures and other investments, including
any downgrades in the Company's credit ratings; ability to
successfully identify and finance acquisitions or other investments
and ability to operate and integrate existing and any subsequently
acquired business or properties; impairments under the SEC's full cost
ceiling test for natural gas and oil reserves; significant changes in
tax rates or policies or in rates of inflation or interest;
significant changes in the Company's relationship with its employees
or contractors and the potential adverse effects if labor disputes,
grievances or shortages were to occur; changes in accounting
principles or the application of such principles to the Company; the
cost and effects of legal and administrative claims against the
Company; changes in actuarial assumptions and the return on assets
with respect to the Company's retirement plan and post-retirement
benefit plans; increasing health care costs and the resulting effect
on health insurance premiums and on the obligation to provide
post-retirement benefits; or increasing costs of insurance, changes in
coverage and the ability to obtain insurance. The Company disclaims
any obligation to update any forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
December 11, 2007
New Mountain Vantage Advisers, L.L.C.
c/o New Mountain Capital L.L.C.
787 Seventh Avenue, 49th Floor
New York, NY 10019
Attention: Mr. David M. DiDomenico
Dear David:
The Board of Directors of National Fuel Gas Company ("National Fuel"
or the "Company") addresses in this letter the material business
issues raised in your letter dated September 11, 2007. The Board of
Directors is committed to enhancing value for all of National Fuel's
shareholders, and we take our fiduciary duties seriously. With the
help of our financial and legal advisors, we have been carefully
considering your suggestions, including several that were already
being evaluated by National Fuel prior to New Mountain's involvement.
In this letter, we will discuss topics including the ongoing creation
of shareholder value, our Appalachian strategy, master limited
partnership ("MLP") considerations and the additional asset review.
We are also filing today with the Securities and Exchange Commission
("SEC") a slide presentation as part of a Form 8-K Current Report
that addresses these matters.
SHAREHOLDER VALUE CREATION:
A TRACK RECORD OF OUTSTANDING RETURNS
As we have shared with the investment community for years, National
Fuel's corporate objective is to grow shareholder value through
timely investment in the energy industry, as an integrated company
with complementary business segments that over the long run result in
more consistent earnings and returns than those provided by a
specialized energy company. For over 100 years this strategy has
delivered an elite record of dividends complemented by exceptional
returns in the last ten years.
The financial community has recognized the sound and disciplined
leadership provided by the management and Board of National Fuel, as
demonstrated by our exceptional shareholder returns. Over the past
fiscal year, three years, five years and ten years, shareholders have
enjoyed overall total returns of 32%, 83%, 185% and 214%,
respectively, which far exceeded returns of the S&P 500 of 16%, 45%,
105% and 89% over those respective time periods. These outstanding
returns are due in part to our payments of dividends to shareholders
for 105 consecutive years, including dividends that have increased
annually for the last 37 years.
Generally, a dissident shareholder's primary argument would involve
excoriating the target company's management for either falling stock
prices or negative returns to shareholders. This proxy contest is
unusual because National Fuel's total returns to shareholders have
been excellent, both before and after New Mountain became a National
Fuel shareholder. The corollary to the usual underperformance
argument is that the board is not knowledgeable and needs an infusion
of expertise. Here, too, the argument would fail because of our
uniquely qualified Board members, with deep experience in pipelines,
gas utilities and exploration and production, particularly in
Appalachia.
As you know, we had a very successful 2007 fiscal year with record
earnings which were enhanced by the sale of our Canadian assets at a
favorable price. We expect to continue that success in fiscal 2008,
with earnings currently projected to be in the range of $2.50 to
$2.70 per diluted share. Our goal is to continue our longstanding
record of increasing our dividend and delivering outstanding returns
to our shareholders in 2008 and beyond.
APPALACHIAN EXPLORATION & PRODUCTION ("E&P") STRATEGY:
DRILLING RESULTS VALIDATE MANAGEMENT'S APPROACH
The pace of activity in Appalachia is the most significant issue
raised by the proposals of New Mountain Vantage Advisers, L.L.C.
("New Mountain"). National Fuel has an aggressive and well-planned
long-term strategy for developing its Appalachian properties, which
relies on our experience and proprietary knowledge of our acreage. A
significant modification to that plan, as suggested by New Mountain,
would not only result in no short-term bonanza for investors, but
ultimately would even erode the long-term value of the Company's
assets.
National Fuel has operated in the Appalachian Basin for decades and
fully appreciates that its Appalachian property is an attractive
asset within the Company's overall portfolio. Since the late 1970s,
when the deregulation of wellhead gas prices began, National Fuel has
tailored its drilling activity mostly to market commodity prices and
has continually explored new formations underlying its acreage in
Appalachia as consistently higher pricing and improvements in
technology have made those formations economic. At the recent
commodity price plateaus, National Fuel has increased its drilling
pace to a new high. Along with this increased activity, the Company
has maintained its focus on maximizing well performance by pursuing
development opportunities at an informed pace and in a manner
consistent with our knowledge of, and experience in, our acreage in
general and the relevant formations in particular.
-- The Company has increased the number of wells it has drilled
in Appalachia every year since 2004, drilling 233 Appalachian
wells in 2007, a 53% increase over the prior year.
-- In 2007 the Company also increased proved developed
Appalachian reserves by 20% and total proved Appalachian
reserves by 33% over the prior year.
-- Notwithstanding the significant increase in drilling activity,
the Company has improved its estimated ultimate recovery
("EUR") per well from 70 million cubic feet equivalent
("MMCFE") in 2006 to 97 MMCFE in 2007.
Our drilling results validate management's ability to plan and
execute, and prove that shareholder value is most effectively
maximized by an aggressive knowledge-based approach.
National Fuel is one of the most active drillers in Appalachia and the
single most active driller in our core area. At 25 wells per 100,000
acres, our 2007 Appalachian drilling pace exceeds the per-acre pace
of our competitors Equitable, Dominion, and Chesapeake and is close
to those of Range and Cabot. Moreover, within the four county area of
Pennsylvania where National Fuel is most active, we drilled almost
twice as many wells in 2007 as any of our competitors. Our experience
indicates that our drilling pace is appropriate, when considered
against the activity of our peers. An immediate increase to 600 wells
per year on our 940,000 acres, as proposed by New Mountain, would
exceed industry standards and greatly increase the risk of uneconomic
activity.
The key difference between National Fuel's business strategies and New
Mountain's proposals is that our plans are based on a thorough
analysis of real data on our real assets. For example, our
Appalachian drilling plans are based on our experience with the
extreme variability of the shallow producing horizons on our acreage.
Highly successful wells with EURs exceeding 300 MMCFE can have
adjacent offset wells that are sub economic. In northwestern
Pennsylvania, where our acreage is located, wells in one part of a
county can have average EURs that are twice the average EURs of wells
30 miles away in the same county. In other words, we believe that it
would be reckless to embark on a drilling program that failed to take
into account the complex stratigraphy of the actual geologic
formations to be drilled.
The completion of our reserve and prospective resource study by
Netherland, Sewell & Associates ("Netherland & Sewell") confirms our
long-held belief that, given the size and scope of our Appalachian
acreage, we own a very attractive asset, but one that must be
developed appropriately in order not to destroy shareholder value.
Because our acreage is in a part of the Appalachian Basin
characterized by complex stratigraphy, all available information must
be utilized in order to optimize the location of future wells rather
than the simpler, essentially arbitrary well location methodologies
that would be necessary to implement New Mountain's proposals.
Drilling too many wells too rapidly would likely cause average well
quality to decline, lead to a delay in first production and,
significantly, reduce the net present value of assets as compared to
continuing National Fuel's strategy of development at an informed
pace. We can continue to increase Appalachian drilling activity and
production, and enhance overall value, if we maintain our aggressive
and knowledge-based approach to the development of our acreage.
Our strategy of development at a knowledge-based pace surely presumes
increasing our activity when and where the opportunity arises. In
fact, we plan to increase our Appalachian drilling at a pace
consistent with controlling well quality, capital expenditure per
producing well and time to first production for each new well.
Specifically, we anticipate drilling 280 and 350 wells, respectively,
in the Appalachian shallow Devonian formations in fiscal years 2008
and 2009. Our strategy and development plan are based on our
proprietary data, our ongoing geologic work, and the extensive
knowledge and expertise of both our long-time and our newly added
Appalachian geologists and engineers. So long as we continue to
follow this strategic plan we are confident that we can continue to
enhance the value of our Appalachian properties.
We are also ready, willing and able to construct and operate
additional gathering, processing and transmission facilities as
necessary to bring new Appalachian production to market, within the
timing and other constraints of applicable laws, rules and
regulations. Design and construction of infrastructure is not
instant, it depends on when, where and how much gas is found, but we
are actively pursuing midstream opportunities in Appalachia and will
continue to do so.
We also plan to continue our exploration of the deeper Marcellus Shale
through our joint venture with EOG Resources ("EOG"), an industry
leader that has successfully explored, developed, and operated in
other shale formations, and continues to gain information from
operating in other shale formations. To that end, through the EOG
joint venture we are expecting to drill 18 wells, including ten
horizontal wells, in the Marcellus Shale formation in fiscal year
2008. By early 2008, we expect to have results for three vertical
wells and three horizontal wells on our acreage. Although National
Fuel intends to provide regular updates concerning its progress in
exploring and developing the Marcellus opportunity, it is a highly
competitive play and neither National Fuel nor EOG will be disclosing
technical or competitive details. While the Marcellus Shale may
present a significant opportunity for National Fuel, the play is
still in its early stages and its economic viability on our acreage
is not yet determined.
POTENTIAL VALUE CREATING ANALYSIS
MUST ACCOUNT FOR APPROPRIATE RISKS
The Board also believes it is important to address New Mountain's
claim that the model drilling program of its energy consultant
Schumberger Data & Consulting Services ("Schlumberger") suggests the
possibility of an additional $1.1 billion in value creation from
increasing the pace of activity in Appalachia. Although New Mountain
has refused to provide us with a copy of the report, as we understand
from what New Mountain has told us, this drilling program would
involve a very rapid increase in drilling pace in areas well outside
of National Fuel's "proved" reserves, and even beyond the areas
containing "probable" or "possible" reserves. As such, the Board
believes it is extremely misleading to use this $1.1 billion figure
which, although attractive on its face, is not adjusted to fully
reflect a real-world expected value once all of the risks(1) inherent
in such a program are taken into account.
-- Exploration and production companies, analysts, and
transaction brokers typically apply significant risk discount
factors to unproven reserves, and ascribe little or no value
to any potential beyond possible reserves.
-- New Mountain itself considers the $1.1 billion figure
"strategic and directional" only and not based on a proven
approach.
-- Schlumberger indicated that their study, upon which New
Mountain claims to have based its calculations, "was a 50,000
foot view" and "was nowhere near a reserves report."
-- We infer that New Mountain's starting point must have been
from a Schlumberger document that was based not just on our
acreage, but also on publicly available information about
production from the geographically extensive (and varied)
Appalachian Basin, and that New Mountain must then have
applied assumptions which are not applicable or realistic to
National Fuel's acreage on the fringe of the Appalachian
Basin.
In effect, New Mountain appears to have said little more than that, if
National Fuel were to continue with the strategy it has been pursuing
for at least four years, namely to drill more Appalachian wells, but
to do it much faster and with much better results per well, it would
make much more money. Simply urging a management team to go faster
and do better is not a strategy, it is at best cheerleading. Faster
and better is a worthy goal, but haste frequently makes waste and in
this business returns on capital erode quickly if well costs
increase, reserves per well decrease or the time between drilling and
production lengthens.
Given New Mountain's lack of appropriate risk analysis and both New
Mountain's and Schlumberger's own disclaimers concerning the
reliability and accuracy of the $1.1 billion figure, the use of that
number is, at the very least, misleading. Additionally, we reiterate
that, despite our requests, New Mountain has refused to disclose
either to us or to National Fuel's other shareholders the actual
Schlumberger report on which New Mountain's claims are based.
MASTER LIMITED PARTNERSHIP ("MLP") ASSESSMENT:
UNCLEAR BENEFITS WITH SIGNIFICANT COST AND RISK
New Mountain's proposals to restructure National Fuel by financially
engineering its Exploration and Production ("E&P") assets, and/or its
Pipeline and Storage ("P&S") assets, into MLPs are similarly founded
on insufficient analysis of incomplete data. After a thorough
analysis of real data, we have concluded - with the concurrence of
our top-tier financial advisor, Morgan Stanley - that MLPs are not an
attractive strategic or financial alternative for National Fuel at
this time.
Historically, most publicly traded companies that form captive MLPs
pursue the MLP structure to: (i) achieve a more attractive valuation
than they are currently receiving in the public market, (ii)
capitalize on tax advantages, (iii) obtain an alternative publicly
traded currency with which to pursue growth through acquisitions,
and/or (iv) raise capital to fund other projects at the parent level
or to pay down debt. As discussed below, these drivers are less
applicable to National Fuel than to other energy companies that have
formed MLPs. With comprehensive assistance from Morgan Stanley, and
the Company's legal and tax advisor, Andrews Kurth, National Fuel has
undergone a rigorous review process to consider the potential impact
of forming one or more MLP(s) from a financial and strategic
perspective. In doing so, the Company performed a detailed analysis
of its California E&P operations as well as its P&S operations,
including the modeling of both operations in the form of MLPs. This
analysis took into account various asset contribution scenarios, the
tax attributes of the underlying assets (especially the low tax basis
of our P&S assets) and the MLP-specific accounting issues. This
intense review has led us to the conclusion that forming an MLP of
either the California E&P assets or the P&S business at this time
would not create additional shareholder value, and would in fact
entail significant cost and risk. Several factors contribute to this
conclusion:
-- After modeling both prospective MLPs, taking into account the
specific tax attributes of the businesses and a realistic
asset contribution schedule, neither MLP could be shown to
create additional value to NFG from either an earnings per
share accretion perspective or an after-tax net present value
perspective.
-- The relatively low tax basis of National Fuel's assets,
particularly its P&S assets, makes income taxes a significant
negative.
-- National Fuel is adequately capitalized, has access to the
public capital markets and does not require cash from MLP
equity issuances to pursue its growth opportunities,
especially those in Appalachia.
-- Additionally, National Fuel does not believe that it currently
requires an additional public currency to pursue growth
through acquisitions in the E&P and P&S sectors.
-- Because National Fuel currently trades at multiples in-line
with E&P MLPs, creating value arbitrage through a subsidiary
initial public offering seems unlikely because it would
require substantial expansion of the multiple at which
National Fuel's stock trades.
-- There are potential operational, regulatory and administrative
impediments to forming a P&S MLP given its integration with
National Fuel's other operations.
ADDITIONAL ASSET REVIEW:
BETTER FOR OUR SHAREHOLDERS TO KEEP AT THIS TIME
With the assistance of Morgan Stanley, National Fuel has also
undertaken a review of those assets that New Mountain views as "non-
core," including the energy marketing business, the timber assets,
and the landfill gas operations, to determine their strategic
relevance and value to the Company.
Energy Marketing
----------------------------------------------------------------------
The energy marketing business, which is carried out by National Fuel
Resources, Inc. ("NFR"), markets natural gas to industrial,
commercial, public authority and residential customers and also
offers competitively-priced energy and energy management services.
-- The complementary nature of NFR's business and other National
Fuel businesses contradicts New Mountain's claim that NFR is a
"non-core" asset.
-- While the Company's utility business segment earns its margin
on the delivery portion of a natural gas sale, NFR is able to
earn an incremental margin on the commodity side of the sale,
thus providing the Company's shareholders with the means to
earn an incremental margin that would not otherwise be
realized.
-- NFR is one of the largest marketers on the National Fuel
utility system, which maintains Company relationships with
retail utility customers that might otherwise be lost.
-- NFR also offers potential growth into markets beyond the
Company's core system, as evidenced by its expanding presence
in the contiguous utility markets to the east which are served
by National Grid, New York State Electric & Gas and Rochester
Gas & Electric.
-- As employees and officers transfer among National Fuel's
business segments, the Company benefits from having employees
and officers who have first-hand experience with a marketer in
our territory.
-- We do not believe that a sale of our energy marketing assets,
which consist principally of year-to-year contracts with
customers, could be accomplished at the multiples assumed by
New Mountain.
-- Finally, NFR has achieved consistent and strong financial
results with only modest capital investment and management
attention from the Company.
NFR is an important component of National Fuel and is
strategically aligned with the Company's commitment to participate in
all segments of the natural gas business. Because NFR is an integral
part of the overall success of National Fuel, we believe that selling
this asset is not in the best interests of our shareholders.
Timber
----------------------------------------------------------------------
Highland Forest Resources, Inc. and the Northeast Division of Seneca
Resources Corporation carry out National Fuel's timber segment
activities. This segment markets veneer logs, export logs, sawlogs
and green and kiln dry lumber from its timber holdings of more than
100,000 acres and nearly 400 million board feet in Pennsylvania and
New York. Our timber is located in the heart of the world's best
source of black cherry hardwood. Each year we typically harvest
timber at about the same rate the timber asset increases through
natural growth.
-- National Fuel continually reviews and carefully considers the
best use of its timber assets. In fact, in 2003, National Fuel
exchanged about half of its timber assets to acquire the Empire
State Pipeline in a tax-advantaged transaction.
-- While the timber asset has become valuable, it is a byproduct
of our landholdings that support our Appalachian E&P, our P&S
and our Utility operations. National Fuel owns the oil and gas
rights underlying 90% of our timber acreage. Ownership of
surface rights and private roads certainly facilitates
drilling, gathering, processing and transporting gas on this
acreage.
-- Depending on what kind of greenhouse gas legislation becomes
law, an asset that absorbs substantial quantities of carbon
dioxide may turn out to be useful in a carbon credit trading
system.
-- This segment occupies a very small portion of management's
time and the Company's capital, while contributing positively
to net income.
-- Consequently, the Company has no current plans to sell the
timber asset but remains alert to advantageous opportunities.
Landfill Gas
----------------------------------------------------------------------
Horizon LFG, Inc. ("Horizon") is National Fuel's landfill gas business
that owns and operates short-distance landfill gas pipeline companies
that purchase, process, transport and resell landfill gas to
customers in six states.
Landfill gas is recognized as a renewable, "green" energy that has
environmental and economic benefits. Its use reduces greenhouse gas
emissions, improves local air quality, reduces landfill odors,
maintains jobs, saves money compared to traditional energy supplies,
conserves non-renewable resources and increases energy security by
relying on a locally available fuel source. Again, depending on the
form greenhouse gas legislation takes, the value of this asset could
be further enhanced under a carbon credit trading system.
Horizon is an attractive, yet small, component of National Fuel's
overall asset base. This segment contributes positively to net income
and requires a very small portion of management's time and the
Company's capital - the balance sheet value of its net plant is only
about 50 cents per share. The Company is currently in the process of
determining whether to add to its asset position or to sell these
assets. Once a conclusion is reached, it will be publicly disclosed
to all shareholders.
To summarize the additional asset review, even assuming New Mountain
is correct that the energy marketing, timber and landfill gas assets
could be sold for the prices that New Mountain assumes, New
Mountain's proposals would result in no significant incremental
benefit to National Fuel's shareholders. The Company has determined
(1) not to sell its core energy marketing segment, (2) to hold its
timber assets available for the right opportunity, and (3) to
actively consider the future of its small landfill gas business.
CONCLUSIONS
Consistent with our track record of delivering significant value to
our shareholders, the Board and management of National Fuel
continually look to improve the Company's performance and further
drive growth. National Fuel maintains an active investor relations
function, including regular meetings with shareholders. To that end,
management has met and spoken with New Mountain frequently to gain an
understanding of New Mountain's perspective and ideas about National
Fuel's business. In addition to regular correspondence and telephone
conversations during 2007, senior management has met personally with
New Mountain three times. New Mountain was also permitted to address
the Company's full Board and shareholders at the 2007 Annual Meeting
of Shareholders.
Management has done its best to educate New Mountain and other
shareholders about National Fuel's business and the real
opportunities and risks of different strategies for the Company's
future.
We appreciate that New Mountain could not have had access to our
proprietary well data, or known the details of our tax basis in
various properties. But we are troubled at New Mountain's continuing
refusal to share with us the Schlumberger data, persisting to claim
the potential for a billion dollar opportunity while ignoring the
well data we have been disclosing since New Mountain first met with
management, and claiming selected MLP data as comparable while
discarding relevant examples.
The Board respects New Mountain's right as a shareholder to express
its opinions regarding National Fuel, and we will continue to keep an
open mind. However, after careful consideration, the Board believes
that the proposals that New Mountain has set forth are flawed by
inadequate analysis, and are not in the best interests of all of
National Fuel's shareholders at this time.
Respectfully,
NATIONAL FUEL GAS COMPANY
Board of Directors
By: /s/ P. C. Ackerman
_______________________
P. C. Ackerman
Chairman and CEO
(1) New Mountain's argument for greatly accelerating National
Fuel's Appalachian activity relies on estimates for "potential" gas
resources, which is a category that ranks below "proved," "probable,"
and "possible" reserves on the likelihood scale. By rule, the SEC
permits only "proved" reserves (as defined in Regulation S-X) in
documents filed with the SEC, and information about other reserves or
resources is prohibited in companies' documents filed with the SEC.
While some E&P companies, including National Fuel's, make informal
disclosures of probable reserves, potential reserves and/or potential
resources, it is important to make the distinction between potential
resources and reserves. Because the terms "proved reserves," "probable
reserves" and "potential reserves" are defined by the Society of
Petroleum Engineers, companies generally do not refer to their
"potential" resources as "reserves" since that would be inherently
misleading. Informal disclosures of "probable reserves," "potential
reserves" and "potential" resources merely supplement the
SEC-compliant disclosure filings and cannot themselves be relied upon
to draw meaningful conclusions.
SOURCE: National Fuel Gas Company
For National Fuel Gas Company
Analysts:
James C. Welch, 716-857-6987
Media:
Julie C. Cox, 716-857-7079