National Fuel Gas Company — Q1 FY2016 Form 10-Q
Reporting period: Three months ended December 31, 2015. Amounts below are in U.S. dollars; financial statement figures are converted to millions unless otherwise noted. The quarter is seasonal, and management cautions that it should not be viewed as a forecast for the full fiscal year.
Financial performance and liquidity
| Metric | Q1 FY2016 | Prior-year quarter |
|---|---|---|
| Operating revenue | $375.2 million | $523.9 million |
| Operating income (loss) | $(305.9) million | $160.6 million |
| Net income (loss) available to common shareholders | $(189.1) million | $84.7 million |
| Diluted earnings (loss) per share | $(2.23) | $1.00 |
| Operating cash flow | $114.1 million | $189.1 million |
| Capital expenditures | $186.4 million | $244.9 million |
| Cash and temporary investments, Dec. 31 | $36.3 million | $43.9 million |
The quarter’s loss included a $435.5 million non-cash oil and gas property impairment charge ($252.6 million after tax). A related deferred tax benefit contributed to the reported tax benefit of approximately $144.4 million. Operating cash flow less capital expenditures was approximately negative $72.4 million, before other investing activity, including property-sale proceeds.
At December 31, long-term debt was $2.085 billion and short-term commercial paper was $31.4 million; no long-term debt matures within the next 12 months. The company reported total capitalization of $3.897 billion and a debt-to-capitalization ratio of 0.54 under its credit facility calculation. Current assets were $424.5 million and current liabilities were $411.1 million. The company had $750 million of multi-year revolving credit capacity and a separate $500 million 364-day facility, subject to terms and covenants. The company said its liquidity was adequate for known demands.
Common dividends declared were $0.395 per share, up from $0.385. No operating margin figure is stated in the supplied filing text.
Material changes versus the prior-year quarter
- Revenue fell about 28%, while earnings moved from a profit to a loss, principally because of the impairment and lower Exploration and Production results.
- Exploration and Production recorded a $237.1 million segment loss, versus $26.7 million of earnings. Lower commodity prices and pricing-related production curtailments reduced production revenue; gas production was 33.6 Bcf versus 43.6 Bcf, and oil production was 748,000 barrels versus 771,000 barrels.
- Utility earnings declined to $18.6 million from $22.6 million, mainly due to warmer weather. Buffalo and Erie degree days were respectively 25.6% and 27.4% warmer than normal. New York’s weather normalization clause partly mitigated the effect.
- Gathering earnings declined to $4.9 million from $11.6 million, largely reflecting lower Seneca production and gathered volumes. Pipeline and Storage earnings increased slightly to $21.3 million; Energy Marketing earnings fell to $1.2 million.
- Operating cash flow decreased $75.0 million year over year. Cash capital expenditures fell, while investing cash outflow was $191.6 million versus $246.2 million.
Outlook, management commentary, risks and unusual items
- Management expects significant additional full-cost ceiling-test impairments in each remaining quarter of FY2016, given low commodity prices and the expected effect of lower prices entering the 12-month average used in the test. January 2016 reference prices were $30.98/Bbl for Midway Sunset crude and $2.31/MMBtu for Henry Hub gas. The filing illustrates that specified lower-price sensitivities would have added $40.7 million to $169.3 million in after-tax impairment at December 31, depending on the scenario.
- FY2016 capital expenditure forecasts were reduced: Exploration and Production to approximately $175 million (net of a $105 million IOG reimbursement), Pipeline and Storage to $150 million, and Gathering to $90 million. The Northern Access 2016 pipeline project was delayed to a targeted November 2017 in-service date from late 2016.
- Seneca’s joint development agreement with IOG covers up to 80 Marcellus wells. IOG committed up to $231 million for the first 42 wells and may elect to fund up to an additional $211 million for the remaining 38. Seneca recorded $10.6 million cash and a $94.4 million receivable at quarter-end; the receivable was collected in January 2016.
- Impairments under the 1974 indenture restrict new incremental long-term unsecured debt issuance until at least the second quarter of FY2017; further impairments could extend the restriction through much of FY2017. Management does not anticipate needing additional long-term debt in FY2016 or FY2017 and expects to use operating cash and, if needed, short-term borrowing.
- Regulatory matters include Supply Corporation’s FERC settlement, with rate reductions of 2% effective November 2015 and a further 2% scheduled for November 2016. FERC initiated a Section 5 rate review of Empire in January 2016. The New York utility rate agreement remains in effect while discussions continue.
- Estimated environmental cleanup liabilities were $9.6 million, expected to be recovered through rates over approximately 12 years. Other ordinary-course litigation and regulatory matters could affect earnings or cash flows, but the company said it could not estimate possible losses or ranges.
- Key risks highlighted include commodity prices and further impairments, production and reserve uncertainty, access to credit and credit-rating changes, project timing and approvals, regulatory and environmental requirements, weather, and derivative-counterparty credit exposure.
Important facts for investors to verify
- Subsequent ceiling-test impairment amounts and the commodity-price assumptions used in each remaining FY2016 test.
- Actual FY2016 capital spending, including whether the revised forecasts and IOG funding proceeds are realized.
- Production trends, realized prices after hedging, and the pace of pricing-related curtailments.
- Available liquidity, short-term borrowing levels, covenant compliance, credit ratings, and the duration of the long-term debt issuance restriction.
- Progress, costs, shipper commitments and regulatory approvals for Northern Access 2016 and other pipeline projects, including Empire’s rate review.
- Developments in environmental, legal and regulatory exposures, and the continuing effect of warmer weather and utility rate mechanisms.