National Fuel Gas Company — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2012; comparative period is the three months ended December 31, 2011. Financial statements are unaudited. The company operates Utility, Pipeline and Storage, Exploration and Production, and Energy Marketing businesses.
Financial performance and position
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Operating revenue | $452.9 million | $432.4 million |
| Operating income | $131.2 million | $118.4 million |
| Net income available to common shareholders | $67.9 million | $60.7 million |
| Diluted earnings per share | $0.81 | $0.73 |
| Operating margin, approximate | 29.0% | 27.4% |
| Net margin, approximate | 15.0% | 14.0% |
| Cash provided by operating activities | $146.0 million | $95.7 million |
| Cash capital expenditures | $163.0 million | $249.1 million |
Cash from operations less cash capital expenditures was approximately negative $17.0 million. Cash and temporary investments were $61.0 million at December 31, down from $74.5 million at September 30, 2012. Total assets were $6.11 billion; shareholders’ equity was $2.02 billion.
Debt at quarter-end included $1.149 billion of long-term debt, $250.0 million current portion of long-term debt, and $238.0 million of notes payable and commercial paper: $1.637 billion in total, approximately $1.576 billion net of cash. Current assets of $394.4 million compared with current and accrued liabilities of $772.9 million. The filing states the company considers its liquidity adequate.
Material changes versus the prior comparable period
- Net income increased $7.2 million. Pipeline and Storage earnings rose $7.0 million and Utility earnings rose $3.5 million; Exploration and Production earnings fell $3.6 million.
- Pipeline and Storage benefited from new transportation capacity and higher tariff rates. Expansion projects supported a $7.6 million increase in transportation revenue; segment earnings increased to $16.9 million from $10.0 million.
- Utility earnings increased to $22.9 million from $19.4 million, reflecting lower operating costs, colder weather and lower income tax expense. New York’s weather normalization clause moderated weather effects.
- Exploration and Production revenue rose, supported by increased Appalachian gas production, but segment earnings declined to $26.7 million from $30.3 million. Higher depletion, operating and interest costs, and lower gas prices after hedging more than offset production growth and improved realized oil prices after hedging.
- Operating cash flow increased $50.3 million, principally reflecting timing of Utility gas-cost recovery and higher Pipeline and Storage cash receipts. Cash capital expenditures were lower than the prior-year quarter; total expenditures for long-lived assets, including capital-related payables, were $181.6 million versus $279.0 million.
- The comparative 2011 cash-flow statement was revised for non-cash capital expenditures embedded in accounts payable: operating cash flow increased and investing cash flow decreased by $16.4 million. Management said the prior-period errors were not material.
Outlook, commentary and risks
- Fiscal 2013 Exploration and Production capital spending is now estimated at $520 million, up from $485 million; Appalachian spending is estimated at $425 million and West Coast spending at $95 million. The company reported $109.0 million of Appalachian capital expenditures in the quarter, including $102.3 million for Marcellus development.
- The company expects to use operating cash flow and short- and long-term borrowings to fund projects, and expects to issue long-term debt in the near term to refinance $250 million of 5.25% notes maturing in March 2013 and reduce short-term borrowings.
- Northern Access expansion began initial service in November 2012 and reached full service January 16, 2013. Line N expansion projects also entered service. These projects are intended to transport Marcellus production; planned or developing projects remain subject to construction, permitting, shipper and market risks.
- Management cautioned that the quarter’s earnings are not predictive of full-year results because Utility and Energy Marketing are seasonal, with winter months typically contributing substantially to annual earnings.
- Oil and gas properties passed the full-cost ceiling test at December 31, with estimated headroom of about $7.3 million. Management’s sensitivity analysis indicated that lower reference commodity prices could produce an impairment; the filing reports no impairment charge for the quarter.
- Environmental cleanup liabilities were estimated at $16.3 million to $21.9 million; the recorded minimum was $16.3 million. The company expects recovery through rates over approximately 11 years. A Pennsylvania environmental penalty proposal related to Trout Run construction was described as not material; the company disputes many allegations.
- Other risks include commodity-price and production changes, hydraulic-fracturing regulation, project execution and financing, derivatives and counterparty exposure, pension funding, and environmental or regulatory developments. The company reported $14.1 million in net Level 3 crude-oil derivative liabilities, whose valuation depends in part on an unobservable location-price differential.
- Management reported disclosure controls were effective as of December 31, 2012; the filing states no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether fiscal 2013 capital-spending plans and major pipeline projects remain on schedule and within estimated costs.
- How the March 2013 debt maturity is refinanced, and whether short-term borrowings, interest expense or liquidity change materially.
- How natural-gas and oil prices, production volumes and hedge settlements affect Exploration and Production earnings and ceiling-test headroom.
- Whether Utility and Pipeline and Storage earnings and cash flows persist beyond the seasonally strong winter quarter.
- Developments in the IRS tax-method dispute, environmental remediation and other litigation or regulatory matters.