National Fuel Gas Company — Form 10-Q Summary
Business context and reporting period. This fiscal second-quarter 2019 filing covers the three and six months ended March 31, 2019. National Fuel is an integrated natural gas company, with five reporting segments: Exploration and Production, Pipeline and Storage, Gathering, Utility, and Energy Marketing. The filing is unaudited.
Financial performance and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $552.5 million, up 2.2% from $540.9 million | $1,042.8 million, up 8.6% from $960.6 million |
| Operating income | $153.4 million, down from $171.6 million | $315.0 million, down from $321.1 million |
| Net income | $90.6 million, down 1.4% from $91.8 million | $193.3 million, down 33.5% from $290.5 million |
| Diluted EPS | $1.04, versus $1.06 | $2.23, versus $3.37 |
| Operating margin | 27.8%, versus 31.7% | 30.2%, versus 33.4% |
| Operating cash flow | Not separately reported for the quarter | $340.8 million, versus $288.7 million |
| Capital expenditures (cash-flow statement) | Not separately reported for the quarter | $386.6 million, versus $261.7 million |
Six-month net income included far less benefit from deferred-tax remeasurement under the 2017 Tax Reform Act than in the prior year. Management said earnings excluding these remeasurements increased $4.8 million year over year. Six-month operating cash flow exceeded cash capital expenditures by approximately $45.7 million, before dividends and other financing and investing flows.
- Segment results, six months: Utility earnings rose to $61.2 million from $54.4 million; Gathering earnings fell to $26.9 million from $57.2 million; Exploration and Production earnings fell to $60.1 million from $133.2 million; Pipeline and Storage earnings fell to $42.9 million from $61.2 million; Energy Marketing earnings were $0.2 million versus $1.6 million.
- Balance sheet, March 31, 2019: Cash and temporary cash investments were $100.6 million; current assets were $506.3 million and current liabilities $433.0 million. Long-term debt, net, was $2.132 billion, with no current portion. Shareholders’ equity was $2.091 billion.
- Liquidity and cash: Cash, cash equivalents and restricted cash totaled $102.6 million, down from $233.0 million at September 30, 2018. The company had no short-term debt outstanding at quarter-end and reported a $750 million revolving credit facility through October 2023, with no borrowings under it. The facility’s debt-to-capitalization ratio was 0.50 against a 0.65 limit.
- Dividends: Declared dividends were $0.425 per share for the quarter and $0.85 per share for the six months, compared with $0.415 and $0.83, respectively, in the prior-year periods.
Material changes and management commentary
- Natural gas production increased 13.0 Bcf for the six months, to 91.2 Bcf, largely from new Appalachian wells; gas revenue after hedging increased $32.6 million. Oil production declined 200 Mbbl, partly reflecting the sale of Seneca’s Sespe properties in May 2018.
- Utility revenue increased, principally from retail gas sales and higher throughput; earnings also benefited from usage, the system modernization tracker and lower interest expense. Customer refunds related to tax-rate reductions partly offset the benefit.
- Pipeline and Storage earnings and revenue declined amid transportation contract terminations and lower demand charges. The company expects the terminated Empire contract to reduce transportation revenue by up to approximately $7.4 million for the remainder of fiscal 2019.
- Higher Gathering volumes supported revenue growth, but year-to-date earnings were substantially lower because the prior-year period included a large tax-remeasurement benefit.
- Operating cash flow increased year over year, mainly because of federal tax refunds received in fiscal 2019 compared with federal tax payments in the prior-year period. Capital expenditures were materially higher, primarily in Exploration and Production.
Outlook, risks and unusual items
- Management expected fiscal 2019 capital needs to be funded first with cash on hand and operating cash flow, while retaining the option to issue short- or long-term debt. Results remain exposed to commodity prices, production, project spending and seasonal utility and marketing demand; the filing cautions that six-month earnings should not be taken as a full-year forecast.
- Major project plans included Empire North, with 205,000 Dth/day of capacity, an estimated cost of approximately $145 million and a projected in-service date in the second half of fiscal 2020; Line N to Monaca, with a proposed in-service date as early as August 2019 and estimated cost of $24.3 million; and FM100, with approximately 330,000 Dth/day of capacity, a preliminary cost estimate of $280 million and a target date in late 2021.
- Northern Access remains affected by New York permitting litigation and development requirements. Although FERC approved the project and found the state had waived its opportunity to act on the water-quality certification, the expected in-service date was no earlier than fiscal 2022. Approximately $57.0 million had been spent; the preliminary cost estimate was $500 million, subject to updating as timing becomes clearer.
- The Empire rate-case settlement was implemented on an interim basis from January 1, 2019, remains subject to FERC approval, and is estimated to add approximately $4.6 million in annual revenue based on current contracts. Supply Corporation planned a Section 4 rate filing by July 31, 2019.
- The oil and gas full-cost ceiling exceeded the related book value by approximately $577.5 million at March 31, 2019. The filing’s specified price sensitivities still showed headroom and no impairment, but commodity prices, reserves and development costs could change the test.
- Recorded environmental cleanup costs for former manufactured gas plant sites were estimated at $7.3 million, expected to be recovered through rates over approximately three years. Other normal-course litigation and regulatory matters could affect earnings and cash flows, but possible losses could not be estimated. Climate and emissions regulation, project approvals, derivative-market rules, credit access and counterparty performance are among the identified risks.
- The company had $89.6 million of contractual commitments for hydraulic fracturing and fuel extending through fiscal 2021. It expected up to $5.0 million of additional retirement-plan contributions and $0.5–$1.0 million to VEBA trusts in the remainder of 2019.
Important facts for investors to verify
- How much of the year-over-year earnings decline reflects prior-year tax-remeasurement benefits, and how segment earnings perform absent those one-time effects.
- Whether Appalachian production growth and project execution translate into cash generation sufficient to fund the elevated capital program and dividends.
- Progress on transportation contract renewals, the expected fiscal 2019 revenue impact of the Empire contract termination, and FERC approval of the Empire settlement.
- Permitting, litigation, costs and timing for Northern Access, and milestones and capital requirements for Empire North, Line N to Monaca and FM100.
- Commodity-price and reserve sensitivities affecting the full-cost ceiling test, as well as liquidity, debt-covenant capacity and any need for additional borrowing.