National Fuel Gas Company — Form 10-Q Summary
Business context and period. Diversified natural-gas company operating exploration and production, gathering, pipeline and storage, and utility businesses, principally in western New York and Pennsylvania. This fiscal second-quarter filing covers the three and six months ended March 31, 2020; comparisons are with the corresponding 2019 periods. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $491.1 million, down from $552.5 million | $935.3 million, down from $1,042.8 million |
| Operating income (loss) | $(24.6) million, versus $153.4 million | $123.4 million, versus $315.0 million |
| Net income (loss) available to common shareholders | $(106.1) million, versus $90.6 million | $(19.5) million, versus $193.3 million |
| Diluted earnings (loss) per share | $(1.23), versus $1.04 | $(0.23), versus $2.23 |
| Cash provided by operating activities | $391.0 million for the six months, versus $340.8 million | |
| Cash used in investing activities | $391.3 million for the six months, including $395.5 million of capital expenditures |
- The quarter’s loss included a $177.8 million non-cash oil and gas property impairment charge ($129.3 million after tax) and a $56.8 million valuation allowance against certain deferred tax assets. Management expects further ceiling-test impairments in the remaining fiscal 2020 quarters and likely in fiscal Q1 2021.
- At March 31, 2020, cash and temporary cash investments were $111.7 million; cash, cash equivalents and restricted cash totaled $122.4 million. Long-term debt was $2.135 billion and short-term bank notes were $230 million; no commercial paper was outstanding.
- The company had a $750 million committed revolving credit facility through October 2023. Its facility-defined debt-to-capitalization ratio was 0.52, below the 0.65 limit. Management said liquidity was adequate for known demands, while warning that market disruption could constrain financing.
- Common dividends declared were $0.435 per share for the quarter and $0.87 per share for the six months, up from $0.425 and $0.85, respectively, in 2019.
Material changes versus the prior comparable periods
- Exploration and Production drove the deterioration: segment results were a $175.3 million loss for the quarter and a $151.3 million loss for the six months, versus profits of $21.9 million and $60.1 million. The impairment, deferred-tax valuation allowance, weaker realized commodity prices and higher depletion and operating costs outweighed increased production.
- Exploration and Production gas production rose 23% for the quarter to 56.1 Bcf, while the weighted-average gas price after hedging fell to $2.12/Mcf from $2.58. Six-month gas production rose to 110.9 Bcf; weighted-average price after hedging was $2.22/Mcf versus $2.60.
- Utility revenue declined $48.5 million for the quarter and $74.4 million for the six months, mainly reflecting lower gas costs passed through to customers and warmer weather. Utility earnings fell by $4.1 million and $3.2 million, respectively.
- Gathering earnings increased $7.2 million for the quarter and $9.0 million for the six months, supported by higher throughput. Pipeline and Storage quarterly earnings rose $4.3 million, but six-month earnings declined $2.7 million.
- Operating cash flow increased by $50.2 million for the six months, with timing of utility gas-cost recovery and receivable collections, and receipt of alternative minimum tax refunds, contributing to the increase.
Outlook, commentary and risks
- No formal consolidated earnings guidance is stated. Management expects fiscal 2020 natural-gas production to increase from fiscal 2019, despite reducing Appalachian development from three rigs to two in January and planning a one-rig program in the second half. Management also expects pandemic conditions to reduce second-half capital spending, though lower revenue or higher costs could increase borrowing needs.
- Low commodity prices are expected to cause additional ceiling-test impairments. Management’s sensitivity analysis estimated additional after-tax impairment of $235.4 million for a $0.25/MMBtu decline in gas prices, $39.2 million for a $5/Bbl oil-price decline, or $274.7 million for both declines, using March 31 assumptions.
- S&P downgraded the company to BBB- with a negative outlook during the quarter, raising short-term borrowing costs. Further downgrades or impairment-related indenture constraints could limit incremental long-term borrowing; management anticipated this could occur for a period beginning in fiscal 2021. Refinancing maturing debt is not precluded by those restrictions.
- COVID-19 risks include weaker demand, customer payment difficulties and higher bad-debt expense, possible supplier or construction delays, and tighter credit markets. Service disconnection moratoria applied in New York and Pennsylvania; regulatory recovery of related costs was uncertain. The company reported no material operational disruption to date and no discernible change in customer payment patterns.
- Pipeline projects include Empire North, estimated at $145 million with service targeted for late fiscal Q4 2020, and FM100, estimated at $280 million with a late-2021 target. Northern Access remains subject to permitting litigation and is not expected in service before fiscal 2022.
- Supply Corporation’s rate settlement was pending FERC approval at the filing date. Interim rates were estimated to raise annual revenue by about $35.5 million; a later rate phase was expected to add approximately $15 million annually.
- Other disclosed exposures include climate regulation, environmental compliance, derivative-counterparty and commodity risks, and a $76.2 million hydraulic-fracturing and completion-services commitment extending through May 2021. Environmental cleanup costs were estimated at $6.8 million, expected to be recovered through rates over about three years.
Important facts for investors to verify
- Whether subsequent commodity prices and reserve estimates produced the additional impairments management anticipated, and the resulting effect on earnings and debt covenants.
- Whether the deferred-tax valuation allowance changes as management reassesses the likelihood of realizing state tax assets.
- How COVID-19 affected utility collections, bad-debt expense, customer demand, project schedules, capital spending and access to financing after March 31.
- Final FERC action on Supply Corporation’s settlement, and the schedule, cost and commercial progress of Empire North, FM100 and Northern Access.
- Credit-rating developments, borrowing costs, covenant headroom and the company’s ability to refinance its $500 million notes due December 2021.