National Fuel Gas Company — FY2010 Form 10-K
Business context and reporting period. Fiscal year ended September 30, 2010 (includes the fourth quarter). National Fuel is a diversified energy company operating regulated gas distribution and pipeline/storage businesses, oil and gas exploration and production, and energy marketing. Its utility served approximately 728,700 customers. The filing reports annual results; the quarterly data show fourth-quarter net income of $38.4 million, or $0.47 per basic share.
Financial results and liquidity
| Metric | FY2010 | FY2009 |
|---|---|---|
| Operating revenue | $1,760.5 million | $2,051.5 million |
| Operating income | $440.5 million | $227.6 million |
| Income from continuing operations | $219.1 million | $103.5 million |
| Net income available to common shareholders | $225.9 million | $100.7 million |
| Diluted earnings per share | $2.73 | $1.25 |
| Cash from operating activities | $459.7 million | $611.8 million |
| Capital expenditures | $455.8 million | $313.6 million |
- Revenue fell 14.2%; operating margin increased to approximately 25.0% from 11.1%, while net margin rose to approximately 12.8% from 4.9%.
- FY2010 operating cash flow less capital expenditures was approximately $3.9 million. Cash and temporary cash investments were $395.2 million at year-end.
- Total long-term debt was $1.249 billion, including $200 million classified as current and due November 2010. No bank short-term borrowings or commercial paper were outstanding at year-end. The company expected to repay or refinance the maturity using cash and/or short-term borrowing.
- Current assets were $775.4 million and current liabilities $524.3 million. The company reported a 0.42 debt-to-capitalization ratio under its credit facility and $300 million of committed credit capacity through September 2013.
- Common dividends declared were $1.36 per share, up from $1.32.
Material changes versus the prior year
- Net income increased $125.2 million. The primary driver was the non-recurrence of the prior-year $182.8 million pre-tax oil and gas property impairment ($108.2 million after tax). FY2010 results therefore benefit substantially from a comparison with an unusually impaired 2009.
- Exploration and Production earnings improved to $112.5 million from a $10.2 million loss, helped by the absence of the impairment, higher Appalachian/Marcellus production, and higher oil prices. Gas production rose to 30.3 Bcf from 22.3 Bcf; oil production declined to 3.22 million barrels from 3.37 million.
- Pipeline and Storage earnings decreased to $36.7 million from $47.4 million, primarily due to lower throughput and higher operating, property-tax, interest, and depreciation costs. Transportation volumes fell 50.8 Bcf.
- Utility earnings increased to $62.5 million from $58.7 million despite lower reported revenue, which largely reflected lower pass-through gas costs and warmer weather. Energy Marketing earnings rose to $8.8 million from $7.2 million.
- Operating cash flow decreased $152.1 million, mainly because the Utility refunded prior over-recovered gas costs to customers and paid more interest.
Outlook, commentary, risks and unusual items
- Management’s growth focus is Marcellus Shale development and related gathering and transmission infrastructure. FY2010 Marcellus development spending was $332.4 million; the company controlled about 745,000 net acres in the play and reported Appalachian proved gas reserves of 331 Bcf.
- Estimated capital expenditures were $673 million for FY2011, $789 million for FY2012, and $1.015 billion for FY2013. The company expected to drill 100–130 gross Marcellus wells in FY2011. Funding was expected from operating cash, short-term debt, and potentially long-term debt later in FY2011 or FY2012. These are project and spending estimates, not earnings guidance.
- Pipeline projects include the Tioga County Extension (estimated cost $46 million; targeted service September 2011), Northern Access (estimated $60 million; targeted late 2012), and W2E Overbeck-to-Leidy (estimated $260 million; initial service expected in 2013). Timelines, costs, approvals, and contracted capacity remain execution considerations.
- The company sold its landfill-gas operations for $38.0 million, recognizing a $6.3 million after-tax gain, and sold its sawmill and related assets for approximately $15.8 million. Management described these sales as part of a shift toward core businesses.
- Oil and gas prices, reserve estimates, drilling success and costs, pipeline capacity and project approvals, and potential regulation of hydraulic fracturing are significant risks. The New York horizontal-fracturing moratorium was not expected to materially affect the company’s plans, which were concentrated in Pennsylvania.
- Environmental cleanup liabilities were estimated at $17.3–$21.5 million, with the minimum recorded and recovery through rates expected. A newly received NYDEC notice concerned former industrial sites; the company could not yet estimate any liability. Other routine litigation and regulatory matters were not expected to materially impair financial condition, although individual resolutions could affect period earnings or cash flow.
- Pension funding is a cash commitment: FY2010 contributions were $22.2 million, with $40–$45 million anticipated for FY2011; post-retirement benefit contributions were $25.5 million in FY2010, with $25–$30 million anticipated for FY2011.
- The oil and gas ceiling-test cushion was approximately $269.6 million at year-end, but the filing’s sensitivity analysis shows it narrows materially under lower commodity prices. Reserve disclosures also used new SEC pricing rules; management said the adoption impact could not practicably be estimated.
Important facts for investors to verify
- How much of the earnings increase reflects recurring operating performance versus the absence of the 2009 impairment and the 2010 asset-sale gain.
- Actual Marcellus drilling, production, realized prices after hedging, capital efficiency, reserve conversions, and delivery against the five-year PUD development commitment.
- Progress on pipeline permits, construction budgets, customer commitments, and expected in-service dates, particularly amid lower Niagara-related throughput.
- Funding and refinancing of the $200 million November 2010 maturity and the planned rise in capital spending; verify subsequent borrowing, liquidity, and credit-rating developments.
- Commodity-price exposure, hedge effectiveness and collateral needs, reserve-ceiling sensitivity, and any changes in hydraulic-fracturing or environmental regulation.
- The status and eventual cost of environmental matters, the NYPSC appeal over cleanup-cost recovery, and the disputed $2 million Ivanhoe acquisition escrow.
Audit and controls: PwC issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of September 30, 2010.