Business Context and Reporting Period
Company: National Fuel Gas Company
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2002
Overview: National Fuel Gas Company is a diversified energy holding company operating six reportable segments: Utility, Pipeline and Storage, Exploration and Production, International, Energy Marketing, and Timber. The Company serves approximately 732,000 customers in western New York and northwestern Pennsylvania through its Utility segment and operates interstate pipelines and storage facilities. It also engages in oil and gas exploration in the U.S. and Canada, international energy projects in the Czech Republic, and timber operations.
Key Financial Metrics
| Metric | 2002 | 2001 | 2000 |
|---|---|---|---|
| Operating Revenues | $1,464.5 million | $2,059.8 million | $1,412.4 million |
| Net Income Available for Common Stock | $117.7 million | $65.5 million | $127.2 million |
| Diluted Earnings Per Share | $1.46 | $0.82 | $1.61 |
| Operating Cash Flow | $345.6 million | $414.0 million | $238.2 million |
| Capital Expenditures | $232.4 million | $292.7 million | $269.4 million |
| Total Assets | $3,401.3 million | $3,445.2 million | $3,251.0 million |
| Long-Term Debt (Net of Current) | $1,145.3 million | $1,046.7 million | $953.6 million |
| Shareholders' Equity | $1,006.9 million | $1,002.7 million | $987.4 million |
Material Changes vs. Prior Period
- Revenue Decline: Operating revenues decreased by $595.3 million (29%) compared to 2001. This was primarily driven by a $414.8 million decrease in retail gas sales revenues due to significantly lower purchased gas costs (which are passed through to customers) and warmer weather reducing consumption volumes.
- Earnings Recovery: Net income increased by $52.2 million (80%) compared to 2001. The 2001 results were depressed by a $104.0 million non-cash impairment of oil and gas assets. The 2002 results included a $9.9 million non-cash impairment related to the Independence Pipeline investment.
- Segment Performance:
- Utility: Earnings decreased $11.2 million due to warmer weather and lower normalized usage, partially offset by lower operation and maintenance expenses.
- Exploration & Production: Earnings improved significantly from a loss of $32.3 million in 2001 to $26.9 million in 2002, excluding the prior year's impairment. However, revenues declined due to lower commodity prices.
- International: Incurred a net loss of $4.4 million, worsening from a $3.0 million loss in 2001, due to higher operation and maintenance expenses on European power projects.
- Reserves: Proved natural gas reserves decreased from 322 Bcf to 258 Bcf, and oil reserves decreased from 115,328 Mbbl to 99,717 Mbbl, attributed to production, limited offshore drilling, and uneconomic development programs.
Guidance, Outlook, and Risks
- Acquisition Activity: In October 2002, the Company announced an agreement to acquire the Empire State Pipeline from Duke Energy Corporation for $180 million in cash plus $60 million in assumed debt. Completion is anticipated in early 2003, subject to regulatory approval.
- Capital Expenditures: Estimated capital expenditures for 2003 are projected at $174.6 million, excluding the Empire acquisition. The Company intends to live within cash flow and pay down debt in the Exploration and Production segment.
- Regulatory Risks:
- FERC Investigation: The Federal Energy Regulatory Commission (FERC) instituted an investigation into Supply Corporation regarding potential violations of regulations concerning information sharing with marketing affiliates. The Company believes the resolution will not materially affect operations.
- Rate Matters: The Company is subject to rate settlements in New York and Pennsylvania. A "Comprehensive Joint Proposal" was approved in New York effective May 2002, modifying transportation services and unbundling costs.
- Market Risks: The Company uses derivative instruments (swaps, collars, options) to manage commodity price risk. At September 30, 2002, the Company had net unrealized losses on derivatives recorded in accumulated other comprehensive income. The Company faces exposure to currency fluctuations regarding its Czech Republic and Canadian operations.
- Legal Proceedings: A class action lawsuit regarding alleged underpayment of royalties is pending in New York State Supreme Court. The Company believes the outcome will not be material to consolidated financial condition.
Investor Verification Checklist
- Impairment Charges: Verify the impact of the $9.9 million Independence Pipeline impairment and the prior year's $104.0 million oil and gas impairment on normalized earnings.
- Empire Acquisition: Monitor the regulatory approval status and financing terms for the $240 million Empire State Pipeline acquisition.
- Commodity Hedging: Review the fair value of outstanding derivative instruments and the Company's exposure to natural gas and crude oil price volatility.
- Reserve Estimates: Assess the sustainability of production given the significant decline in proved reserves and the strategic shift from offshore to onshore drilling.
- Regulatory Outcomes: Track the FERC investigation into Supply Corporation and the finalization of the New York rate settlement refund provisions.