National Fuel Gas Company — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2011; comparisons are with the periods ended June 30, 2010. The company operates Utility, Pipeline and Storage, Exploration and Production, and Energy Marketing businesses. Unless otherwise stated, amounts below are in millions of dollars.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Operating revenue | $381.0 vs. $352.0; up 8.2% | $1,492.8 vs. $1,474.1; up 1.3% |
| Operating income | $94.8 vs. $89.2 | $366.0 vs. $366.5 |
| Net income | $46.9 vs. $42.6; up 10.1% | $221.0 vs. $187.5; up 17.9% |
| Diluted EPS | $0.56 vs. $0.51 | $2.64 vs. $2.27 |
| Operating margin | 24.9% vs. 25.3% | 24.5% vs. 24.9% |
| Operating cash flow | Not provided for the quarter | $536.3 vs. $419.9 |
| Capital expenditures (cash flow statement) | Not provided for the quarter | $583.7 vs. $327.5 |
- Nine-month net income included a $50.9 million pretax ($31.4 million after-tax) gain from selling the Seneca Energy and Model City investments. Excluding that after-tax gain, earnings were approximately $189.6 million; reported growth therefore substantially reflects the disposal.
- Quarterly results improved primarily on higher Exploration and Production and All Other earnings. For nine months, Exploration and Production earnings increased $8.4 million, while Pipeline and Storage earnings fell $6.0 million. All Other earnings included the investment-sale gain.
- Exploration and Production revenue rose on sharply higher Appalachian gas output, partly offset by lower realized gas prices after hedging and reduced Gulf of Mexico production following the offshore-property sale. Nine-month gas production rose to 37.7 Bcf from 22.0 Bcf, principally due to Marcellus development.
- Pipeline and Storage revenue and earnings weakened amid lower transportation rates/contracts, higher operating costs, and greater depreciation. Utility earnings were nearly flat year over year for the nine-month period; Energy Marketing earnings rose modestly.
Balance sheet, debt and liquidity
- At June 30, 2011, cash and temporary cash investments were $184.7 million, down from $397.2 million at September 30, 2010. Current assets were $520.8 million and current liabilities $513.3 million, a current ratio of approximately 1.01.
- Total long-term debt, including the current portion, was $1.049 billion, down from $1.249 billion at September 30, 2010 after repayment of $200 million of 7.5% notes. The $150 million current portion comprised 6.70% notes due November 2011. No short-term bank debt or commercial paper was outstanding at quarter-end.
- The company had a $300 million committed credit facility supporting its commercial paper program, plus $385 million of revocable uncommitted bank lines. The committed facility runs through September 2013; the company reported a 0.36 debt-to-capitalization ratio against a 0.65 covenant ceiling.
- Operating cash flow exceeded capital expenditures, but investing cash flow also included $59.4 million from investment sales and $69.4 million from oil and gas property sales. Financing used $200 million for debt reduction and $85.2 million for dividends. Cash declined by $212.5 million over the nine months.
- Quarterly dividends were $0.355 per share; nine-month dividends were $1.045 per share. Shareholders’ equity was $1.851 billion at June 30, 2011.
Outlook, material developments and risks
- Management’s stated focus is developing Marcellus Shale properties and expanding Appalachian gathering, transmission and storage infrastructure. The company reported approximately 745,000 net Marcellus acres and spent $433.5 million on Marcellus development during the nine months.
- Key pipeline projects included the $62 million Northern Access expansion, the $20 million Line N expansion, the approximately $7.6 million Lamont Phase II project, and the approximately $49 million Tioga County Extension. Service dates and regulatory approvals vary; several projects were under construction or awaiting approvals. Management expected to fund projects with operating cash, short-term debt and potentially long-term debt, with long-term financing possibly needed in late fiscal 2011 or fiscal 2012.
- No specific full-year earnings guidance is provided. Management cautioned that nine-month results should not be viewed as a full-year forecast because Utility and Energy Marketing earnings are seasonal and winter heating months normally contribute substantially.
- The Gulf of Mexico offshore properties were sold in April 2011; proceeds were recorded as a reduction of capitalized oil and gas costs, with no gain or loss recognized. The company also sold its Sprayberry property for $7.7 million, likewise reducing capitalized costs without a gain or loss.
- Oil and gas properties passed the June 30 full-cost ceiling test, with the ceiling approximately $289 million above book value. Management’s sensitivity analysis showed the cushion would fall to about $116 million if both gas and oil prices used in the test declined by $1/MMBtu and $5/barrel, respectively; a further price decline could expose the company to a noncash impairment.
- Commodity price and derivative risks remain relevant. Level 3 crude-oil swaps had a net fair-value liability of $50.5 million; hedging collateral deposits totaled $38.0 million. Counterparty credit, collateral requirements, basis-price changes and implementation of Dodd-Frank derivative rules could affect costs and liquidity.
- Management cited potential hydraulic-fracturing regulation, permitting delays, environmental rules and climate-related requirements as risks to drilling and project costs. New York’s moratorium ended in July 2011, but state recommendations remained subject to public comment.
- Estimated environmental cleanup costs were $17.2 million to $21.4 million; the $17.2 million minimum was accrued, and the company expected recovery through utility rates. Other ordinary-course litigation and regulatory matters were not expected to materially harm financial condition, though outcomes could affect results in the period resolved.
- The IRS was reviewing fiscal 2010 and 2011 under its Compliance Assurance Process. The company was disputing local IRS examiners’ proposed disallowance of most of a prior accounting-method change for certain utility capitalized costs.
- Retirement and other post-retirement benefit contributions totaled $58.9 million in the first nine months. Management expected an additional $8.0–$9.0 million contribution to the retirement plan and $1.0–$6.5 million to other post-retirement trusts during the rest of fiscal 2011, subject to actuarial factors.
Important facts for investors to verify
- How much of reported nine-month earnings growth is sustainable after removing the $31.4 million after-tax investment-sale gain, and how Marcellus production, realized prices and hedges affect future earnings.
- Project execution, FERC approvals, contracted capacity, construction spending and in-service timing for the pipeline expansions; also verify the company’s expected funding mix and refinancing of the $150 million November 2011 maturity.
- Cash generation relative to the rapidly increased capital program, and the effect of derivative collateral calls, commodity prices and price differentials on liquidity.
- Potential full-cost ceiling impairment if oil and gas prices weaken, as well as the measurement sensitivity and settlement exposure of Level 3 crude-oil swaps.
- Developments in hydraulic-fracturing and environmental regulation, the IRS accounting-method dispute, environmental remediation costs and pension funding assumptions.
- The filing’s capital-spending disclosures: MD&A states expenditures for long-lived assets of $549.7 million, while its segment table totals $594.7 million and the cash flow statement reports $583.7 million of capital expenditures. Reconcile the differing scope and figures against the full filing.