National Fuel Gas Company — Form 10-Q Summary
Business context and reporting period
For the three months ended December 31, 2013 (the first quarter of fiscal 2014), National Fuel Gas reported five segments: Utility, Pipeline and Storage, Exploration and Production, Energy Marketing, and Gathering. The quarter is seasonally important for heating-related businesses; management cautioned that interim earnings are not a prediction of full-year results.
Key financial results
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Operating revenue | $550.1 million | $452.9 million |
| Operating income | $160.6 million | $131.2 million |
| Net income | $82.3 million | $67.9 million |
| Diluted earnings per share | $0.97 | $0.81 |
| Operating margin | 29.2% | 29.0% |
| Net margin | 15.0% | 15.0% |
| Cash from operating activities | $176.7 million | $146.0 million |
| Cash capital expenditures | $194.9 million | $163.0 million |
Revenue rose 21.5% and net income rose 21.1% year over year. Operating cash flow less cash capital expenditures was negative $18.2 million. The company declared dividends of $0.375 per share, versus $0.365 a year earlier.
At December 31, 2013, cash was $23.9 million, current assets were $409.5 million and current liabilities were $324.3 million (a current ratio of approximately 1.26). Long-term debt was $1.649 billion, with no maturities due in the next 12 months and no short-term borrowings outstanding at quarter-end. The debt-to-capitalization ratio under the committed credit facility was 0.42; the facility limit is 0.65.
Material changes and segment performance
- Exploration and Production: Earnings increased $4.4 million to $31.1 million. Appalachian gas production grew 64% to 32.1 Bcf, principally from Marcellus development. Lower gas prices after hedging and higher depletion and production costs partly offset volume growth.
- Gathering: Earnings increased $4.2 million to $6.1 million as gathered volume rose 14.2 Bcf, led by Trout Run and other systems serving Seneca production.
- Pipeline and Storage: Earnings increased $2.2 million to $19.1 million, mainly from new expansion-project transportation contracts and lower operating expenses.
- Utility: Earnings increased $1.3 million to $24.2 million. Colder weather increased throughput, while New York’s weather-normalization clause moderated the earnings benefit.
- Energy Marketing: Earnings increased $1.1 million to $1.6 million. The quarter included $25.5 million of newly recorded unbilled revenue and related costs, adding $1.3 million to margin; management said prior-period omission was immaterial.
Total capital expenditures were $194.9 million in the cash flow statement; management’s long-lived-asset expenditure measure, which includes accrued capital items, was $166.5 million, compared with $181.6 million a year earlier. About $99.1 million was spent on Marcellus development during the quarter. The company reported 1,239 Bcf of Appalachian proved developed and undeveloped gas reserves at September 30, 2013, up from 925 Bcf a year earlier.
Outlook, risks, contingencies, and unusual items
- No specific consolidated earnings guidance was provided. Management expected to use operating cash flow first to fund projects and to use short-term borrowing as needed during fiscal 2014. Results remain exposed to commodity prices, production, weather, and project execution.
- Pipeline and gathering investments include planned projects with estimated costs of $33.6 million for Mercer Expansion, $76 million for Westside Expansion and Modernization, $67 million for Northern Access 2015, and $45 million for the Tuscarora Lateral. These projects depend on approvals, construction, customer commitments, and other conditions. The Clermont gathering system’s initial buildout estimate was $130–$230 million.
- The oil and gas full-cost ceiling exceeded book value by $166.9 million at quarter-end. Management’s sensitivity analysis indicated that a $1/MMBtu decrease in the gas price used in the test could result in book value exceeding the ceiling by approximately $134.4 million; combined lower gas and oil prices could produce an approximately $173.8 million excess and an impairment charge.
- A New York rate settlement filed in December proposed keeping customer rates at current levels for at least two years, retroactive to October 1, 2013, and setting a 9.1% allowed return for ratemaking. Approval remained pending, with one consumer advocate opposed; a $7.5 million refund provision was recorded.
- Environmental cleanup liabilities were estimated at $14.7 million, including $13.3 million for a former manufactured-gas-plant site; recovery through rates was expected. Other ordinary-course litigation and regulatory matters could affect earnings or cash flow, but losses could not be estimated clearly.
- The company noted potential additional costs or operating restrictions from hydraulic-fracturing and environmental regulation, derivative-market reforms, commodity-price and basis changes, counterparty credit exposure, and pension funding assumptions. It expected $5–$15 million of additional retirement-plan contributions and $0–$10 million for other post-retirement benefit accounts during the remainder of fiscal 2014; higher contributions may be required.
Most important facts for investors to verify
- Whether the NYPSC approved the proposed rate settlement and how its earnings-sharing provisions affect Utility results.
- Whether Marcellus production growth and planned pipeline and gathering projects meet expected schedules, costs, and returns.
- How commodity prices and hedge settlements affect the full-cost ceiling cushion and impairment risk.
- Whether operating cash flow can support the investment program, dividends, and expected pension funding without materially higher borrowing.
- The final treatment of environmental obligations and any material developments in regulatory or other proceedings.