National Fuel Gas Company — Form 10-Q Summary
Business context and reporting period: Unaudited results for the fiscal third quarter and nine months ended June 30, 2015; the comparable periods ended June 30, 2014. National Fuel is an integrated energy company with Exploration and Production, Pipeline and Storage, Gathering, Utility, and Energy Marketing segments, primarily operating in western New York and Pennsylvania, with oil production also in California.
Key financial results
| Metric | Three months ended June 30, 2015 | Nine months ended June 30, 2015 | Prior-year comparable period |
|---|---|---|---|
| Operating revenue | $339.8 million | $1,459.9 million | $440.1 million and $1,746.5 million |
| Operating income (loss) | $(489.2) million | $(284.3) million | $127.0 million and $467.7 million |
| Net income (loss) available to common shareholders | $(293.1) million | $(191.7) million | $64.5 million and $242.0 million |
| Basic earnings (loss) per share | $(3.47) | $(2.27) | $0.77 and $2.89 |
| Cash provided by operating activities | $712.6 million for nine months | $725.6 million for nine months | |
| Capital expenditures paid | $719.0 million for nine months | $609.4 million for nine months |
The quarter and year-to-date losses were principally driven by non-cash oil and gas property impairment charges: $588.7 million pretax ($339.8 million after tax) for the quarter and $709.1 million pretax ($409.3 million after tax) for nine months. The filing does not provide a clear consolidated operating-margin percentage; reported operating results were losses.
Balance sheet, debt and liquidity
- At June 30, 2015, cash and temporary cash investments were $310.0 million, versus $36.9 million at September 30, 2014.
- Long-term debt was $2.099 billion, up from $1.649 billion at September 30, 2014. No long-term debt was due within the following 12 months; short-term bank debt and commercial paper were zero at quarter-end.
- In June, the Company issued $450 million of 5.20% notes due July 2025, receiving $445.7 million net. Proceeds were for general corporate purposes, including reducing short-term debt. Dividends declared were $0.395 per share for the quarter and $1.165 for nine months.
- The Company had a $750 million committed credit facility extending to December 2019 and a $500 million commercial-paper program backed by that facility. Its facility-defined debt-to-capitalization ratio was 0.48, against a maximum of 0.65. Management said liquidity was adequate.
- Capital expenditures were substantial: nine-month expenditures for long-lived assets were $704.9 million, including $344.9 million directed to Marcellus development and significant pipeline and gathering-system investment.
Material changes versus the prior comparable periods
- Revenue declined 22.8% for the quarter and 16.4% for nine months, reflecting lower commodity prices, lower gas sales prices and volumes, and reduced Utility and Energy Marketing revenues. Lower purchased-gas expense partly offset the revenue declines.
- Exploration and Production swung to losses of $323.1 million for the quarter and $350.0 million for nine months, chiefly due to the impairments and lower realized oil and gas prices after hedging. The segment’s nine-month gas production rose, but lower prices more than offset volume growth.
- Other segments remained profitable. Nine-month earnings increased in Pipeline and Storage ($61.9 million), Gathering ($24.3 million), Utility ($66.6 million), and Energy Marketing ($7.7 million). Quarterly Gathering earnings declined, while Utility and Energy Marketing earnings increased.
- Operating cash flow decreased $13.0 million year over year, while capital expenditures paid increased $109.5 million. Cash rose largely with financing proceeds; long-term debt increased by $450 million gross.
Outlook, risks and contingencies
- Further impairments: Management expected significant additional full-cost ceiling-test impairments in the September and December 2015 quarters, based on low commodity prices and the expected roll-off of higher prices from the 12-month average used in the test. July 2015 reference prices were $53.08 per barrel for Midway Sunset crude and $2.78 per MMBtu for Henry Hub gas. The filing provides sensitivities illustrating potentially material additional charges if test prices declined.
- Financing constraint: Existing indenture covenants barred additional long-term unsecured borrowing for a nine-month period beginning October 2015 following impairments. Management warned that further impairments could extend the restriction on incremental long-term debt, while noting the Company expected to retain access to credit facilities and could refinance maturing debt.
- Operations and investment: The Company continued Marcellus development and pipeline/gathering expansion. Projects depend on construction progress, shipper demand, permits and regulatory approvals; hydraulic-fracturing restrictions could raise costs or constrain operations.
- Regulatory matters: New York utility rates were extended at least through September 30, 2015, with settlement-extension discussions underway. Supply Corporation was required to make a FERC general rate filing by January 1, 2016, though discussions could lead to an extension of its rate settlement.
- Contingencies: Estimated remaining environmental cleanup costs were $13.7 million, expected to be recovered through rates over approximately 12 years. The Company reported other ordinary-course litigation and regulatory matters for which potential losses could not be estimated. Remaining operating-lease commitments were approximately $51.5 million.
- Other exposures: Risks include commodity-price and production variability, derivative-counterparty and credit-market exposure, regulatory and environmental changes, and weather. The Company noted possible increased compliance costs from derivatives regulation and greenhouse-gas measures.
Important facts for investors to verify
- Whether subsequent commodity prices and reserve revisions led to the forecast additional ceiling-test impairments, and their effects on earnings, equity and borrowing capacity.
- Actual production, realized prices after hedging, hedge settlements and cash receipts compared with the assumptions underlying the impairment test and cash-flow outlook.
- Progress, capital needs, approvals and contracted utilization for major pipeline and gathering projects, including Northern Access 2016 and Clermont.
- Compliance with debt covenants, access to commercial-paper and bank markets, and the effect of any credit-rating changes while incremental unsecured debt issuance is restricted.
- Outcomes of New York and FERC rate proceedings, environmental remediation, and other litigation or regulatory matters.