Business Context and Reporting Period
Company: National Fuel Gas Company
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended June 30, 2007
Business Overview: A diversified energy company operating in five segments: Utility, Pipeline and Storage, Exploration and Production, Energy Marketing, and Timber.
Key Financial Metrics
| Metric (Nine Months Ended June 30) | 2007 (in thousands) | 2006 (in thousands) |
|---|---|---|
| Operating Revenues | $1,779,541 | $2,017,189 |
| Operating Income | $337,793 | $257,631 |
| Net Income Available for Common Stock | $179,765 | $136,123 |
| Diluted Earnings Per Share | $2.11 | $1.58 |
| Net Cash Provided by Operating Activities | $404,552 | $409,914 |
| Capital Expenditures | $(206,509) | $(218,658) |
| Long-Term Debt (Net of Current Portion) | $799,000 | $1,095,675 |
| Cash and Temporary Cash Investments | $62,530 | $69,611 |
Material Changes vs. Prior Period
- Net Income Increase: Net income rose $43.6 million (32%) for the nine months ended June 30, 2007, compared to the prior year. This increase is primarily driven by the non-recurrence of a $62.4 million pre-tax impairment charge ($39.5 million after-tax) related to Canadian oil and gas assets in the Exploration and Production segment recorded in 2006.
- Revenue Decline: Consolidated operating revenues decreased $237.6 million (12%) year-over-year. The Utility segment saw a $153.3 million decrease in revenues due to lower retail gas sales driven by the recovery of lower gas costs, despite higher sales volumes.
- Debt Reduction: Long-term debt decreased significantly by approximately $296.7 million. The Company redeemed $96.3 million of 6.5% unsecured notes in April 2007 and repaid $22.8 million of Empire's secured debt in December 2006.
- Segment Performance:
- Exploration and Production: Earnings increased $36.8 million, largely due to the absence of the prior year's impairment charge and higher crude oil prices.
- Utility: Earnings increased $3.1 million, aided by a base rate increase in Pennsylvania and increased usage per account.
- Timber: Earnings decreased $2.2 million due to lower margins from lumber and log sales caused by unfavorable weather conditions limiting harvesting.
Guidance, Outlook, and Risks
- Empire Connector Project: In June 2007, the Company signed a firm transportation service agreement with KeySpan Gas East Corporation, obligating the construction of the Empire Connector project. Total cost is estimated at $177 million, with construction planned to begin in fall 2007 and completion by November 1, 2008.
- Rate Cases: The Utility segment commenced a rate case in New York on January 29, 2007, requesting a $52.0 million annual revenue increase to address decreased revenues from conservation and uncollectibles. A rate increase of $14.3 million in Pennsylvania became effective January 1, 2007.
- Share Repurchases: The Company continues its share repurchase program (authorized for up to 8 million shares). Through June 30, 2007, it had repurchased 3.72 million shares for $128.5 million.
- Environmental Contingencies: The Company is involved in a dispute with the NYDEC regarding a former manufactured gas plant site. Estimated clean-up costs range from $12.3 million to $16.0 million; the minimum liability has been recorded. The Company appealed the NYDEC's Record of Decision in July 2007.
- Accounting Changes: The Company is evaluating the impact of new accounting standards (SFAS 157, 158, 159, and FIN 48) which will be adopted in fiscal 2008 or 2009. SFAS 158 adoption in Q4 2007 is expected to recognize a net liability of approximately $232.5 million for pension and post-retirement plans on the balance sheet.
Investor Verification Checklist
- Impairment Recurrence: Verify the stability of the full-cost ceiling test for Canadian oil and gas assets to ensure no future impairment charges similar to the 2006 event.
- Empire Connector Financing: Confirm the funding sources for the $177 million Empire Connector project and monitor construction timelines against the November 2008 target.
- Rate Case Outcomes: Track the resolution of the New York rate case filed in January 2007, specifically the approval of the $52.0 million revenue increase and the revenue decoupling mechanism.
- Environmental Liability: Monitor the appeal of the NYDEC Record of Decision regarding the former manufactured gas plant site to assess potential cost increases beyond the $12.3 million recorded liability.
- Timber Weather Impact: Assess the impact of weather conditions on the Timber segment's harvesting capabilities and revenue recovery in the second half of the fiscal year.