National Fuel Gas Company — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2014; comparisons are with the three months ended December 31, 2013, unless noted. National Fuel is an integrated natural gas and oil company with five reporting segments: Exploration and Production, Pipeline and Storage, Gathering, Utility, and Energy Marketing. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Operating revenue | $523.9 million | $550.1 million | Down $26.2 million (4.8%) |
| Operating income | $160.6 million | $160.6 million | Essentially flat |
| Net income | $84.7 million | $82.3 million | Up $2.5 million (3.0%) |
| Diluted EPS | $1.00 | $0.97 | Up $0.03 |
| Operating margin | 30.6% | 29.2% | Up 1.4 percentage points |
| Net margin | 16.2% | 15.0% | Up 1.2 percentage points |
| Operating cash flow | $189.1 million | $176.7 million | Up $12.4 million |
| Capital expenditures paid | $244.9 million | $194.9 million | Up $50.0 million |
Operating cash flow less cash capital expenditures was negative $55.8 million, compared with negative $18.2 million in the prior-year quarter. Cash and temporary investments were $43.9 million at December 31, 2014, versus $36.9 million at September 30, 2014. The company reported $1.649 billion of long-term debt and $172.9 million of commercial paper/notes payable, with no long-term debt maturing in the following 12 months. The $750 million committed revolving facility runs through December 5, 2019; no borrowings were outstanding under it at quarter-end. The reported debt-to-capitalization ratio under the facility was 0.41 against a 0.65 limit.
Comprehensive income was $211.2 million, versus $79.4 million. The increase primarily reflected derivative-related other comprehensive income, including large unrealized hedge gains; this did not translate into comparable net-income growth.
Material changes and segment performance
- Exploration and Production: Earnings fell $4.4 million to $26.7 million. Higher Appalachian gas production supported revenue, but lower realized gas and oil prices after hedging, higher depletion and production costs, and reduced other revenue weighed on earnings. Gas production rose to 43.6 Bcf from 32.8 Bcf; oil production increased to 771 thousand barrels from 715 thousand.
- Pipeline and Storage: Earnings rose $1.6 million to $20.8 million, helped by transportation revenue and the Mercer Expansion Project, which entered service in November 2014. Transportation throughput declined 4.6 Bcf, largely due to warmer weather; fixed-variable rate design limited the revenue effect.
- Gathering: Earnings increased $5.5 million to $11.6 million as gathered volume rose 13.9 Bcf to 44.9 Bcf, mainly from Marcellus activity on the Trout Run and Clermont systems.
- Utility: Earnings decreased $1.6 million to $22.6 million, primarily due to costs associated with replacing legacy mainframe systems. Retail throughput was lower, largely reflecting warmer weather; New York’s weather-normalization clause mitigated weather effects.
- Energy Marketing: Earnings rose $1.2 million to $2.8 million on improved average margin per Mcf. Revenue fell partly because the prior-year quarter included four months of activity following a change to unbilled revenue accounting, versus three months in the current quarter; management said the change had an immaterial margin impact.
Outlook, management commentary, risks and contingencies
- Management reduced fiscal 2015 Exploration and Production capital spending estimates from approximately $650 million to $550 million and lowered expected production from 180–220 Bcfe to 155–190 Bcfe, citing continued low natural gas and crude oil prices and planned production curtailments.
- Fiscal 2015 Gathering capital spending was reduced from approximately $175 million to $150 million. Management expects to use operating cash flow and short- and long-term borrowing to fund capital needs, with funding dependent in part on commodity prices and production.
- The oil and gas full-cost ceiling exceeded carrying value by approximately $118.7 million at December 31, 2014. Management warned that lower prices could cause an impairment in 2015. At the quarter-end test, a $1/MMBtu reduction in the gas price assumption would have resulted in a $363.5 million impairment; simultaneous reductions of $1/MMBtu in gas and $5/barrel in oil would have resulted in approximately $405.0 million. January 2015 reference prices were materially lower than the 12-month averages used in the test.
- Major planned pipeline and gathering investments include Westside Expansion and Modernization, Northern Access 2015 and 2016, the Tuscarora Lateral, and Clermont system development. Projects remain subject to regulatory approvals, execution, cost and demand risks.
- Environmental cleanup liabilities were estimated at $14.2 million, with recovery expected through rates over approximately 13 years. Other ordinary-course litigation and regulatory matters could affect earnings or cash flow, but management could not estimate possible losses; it did not expect them to materially change liquidity or materially adversely affect financial condition.
- Other risks include commodity-price and reserve-estimate volatility, potential hydraulic-fracturing restrictions, environmental and climate regulation, derivatives-market regulation and counterparty credit exposure. The company had $13.5 million in collateral deposits for exchange-traded futures at quarter-end. Management stated that disclosure controls were effective and that risk factors had not materially changed from the 2014 Form 10-K.
Most important facts for investors to verify
- Whether lower commodity prices trigger a ceiling-test impairment, and the effect on earnings, assets and debt covenants.
- Whether revised production and capital-spending plans are achieved, and the resulting operating cash flow and borrowing requirements.
- Progress, costs, regulatory approvals and shipper commitments for major pipeline and gathering projects.
- How much of the $295.7 million of pretax hedge gains in accumulated other comprehensive income is realized and reclassified; management expected $173.7 million pretax over the next 12 months as underlying sales occur.
- Changes in commercial paper usage, available liquidity, covenant headroom and counterparty exposure as capital spending and market conditions evolve.
- Whether reported earnings trends persist after considering weather, price movements, prior-period accounting timing, and segment-specific cost changes.