National Fuel Gas Company — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2019; comparative period ended December 31, 2018. Financial statements are unaudited. National Fuel Gas is an integrated natural gas and energy company with Exploration and Production, Pipeline and Storage, Gathering, and Utility reporting segments.
Financial performance and position
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $444.2 million | $490.2 million |
| Operating income | $148.0 million | $161.7 million |
| Net income available to common stock | $86.6 million | $102.7 million |
| Diluted earnings per share | $1.00 | $1.18 |
| Operating cash flow | $167.7 million | $104.4 million |
| Cash capital expenditures | $198.5 million | $177.6 million |
Revenue declined 9.4% and net income declined 15.7% year over year. Operating margin was approximately 33.3%, versus 33.0%; net margin was approximately 19.5%, versus 20.9%. Cash flow from operations less cash capital expenditures was negative approximately $30.7 million. Total expenditures for long-lived assets, including non-cash expenditures, were $211.2 million.
- Segment earnings: Exploration and Production $24.0 million (down $14.2 million); Pipeline and Storage $18.1 million (down $7.0 million); Gathering $15.9 million (up $1.8 million); Utility $26.6 million (up $0.9 million). Corporate and All Other combined contributed $2.0 million.
- Balance sheet at December 31, 2019: Cash and temporary cash investments were $35.0 million; current assets were $430.7 million and current liabilities $546.5 million. Long-term debt was $2.134 billion and commercial paper outstanding was $139.8 million. The reported debt-to-capitalization ratio under the credit facility was 0.51.
- Dividends: $0.435 per common share declared, compared with $0.425 a year earlier.
Material changes versus prior year
- Lower Exploration and Production earnings reflected weaker natural gas prices after hedging, higher depletion and production costs, and prior-year hedge-related and tax benefits that did not recur. Higher Appalachian gas production partly offset these pressures.
- Pipeline and Storage earnings fell as revenue declined, including the effect of a transportation contract termination and nonrecurring prior-year revenue; higher taxes also weighed on results.
- Utility revenue declined with lower gas costs passed through to customers and slightly lower throughput amid warmer weather. Utility earnings nevertheless increased modestly, mainly due to regulatory adjustments and a system-modernization tracker.
- Gathering revenue and earnings rose with higher volumes associated with increased Seneca production. Consolidated operating cash flow increased, principally due to timing of gas-cost recovery and receivable collections, higher production receipts, and lower pension contributions.
Outlook, risks and other notable items
- Given low commodity prices, Seneca reduced its Appalachian development program from three rigs to two in January 2020 and intends to move to one rig in the second half of fiscal 2020. Management expects fiscal 2020 natural gas production to increase versus fiscal 2019 and forecasts Exploration and Production capital spending of $375–$410 million.
- Management anticipates oil and gas ceiling-test impairments in each of the remaining fiscal 2020 quarters if low prices persist. No impairment was recorded in this quarter; at December 31, the ceiling exceeded book value by about $59.1 million. The filing’s sensitivity analysis estimates a $186.2 million after-tax impairment for a $0.25/MMBtu gas-price decrease, and $222.4 million if gas prices fell by that amount and oil prices by $5/Bbl.
- Fiscal 2020 Gathering capital expenditures are expected to be $50–$60 million. The Empire North project is under construction, with approximately $74.5 million capitalized and an estimated $145 million cost; in-service is projected for the fourth quarter of fiscal 2020. FM100 has a preliminary $280 million estimate and a late-2021 target. Northern Access faces pending permit and court proceedings; service is not expected before fiscal 2022, and its preliminary $500 million estimate may be updated.
- Supply Corporation’s FERC rate increase was scheduled to take effect February 1, 2020, subject to refund. Final approved rates may require customer refunds with interest. New York’s CLCPA sets significant greenhouse-gas reduction and renewable-energy targets, which management says could affect the company’s costs, assets, permits and customer base.
- The company expects to fund fiscal 2020 capital needs with cash, operating cash flow and short-term debt, and may issue long-term debt as needed. It had a $750 million revolving facility through October 2023 and no borrowings under it at quarter-end. Management stated liquidity was adequate.
- Environmental remediation liabilities for former manufactured-gas-plant sites were estimated at $6.9 million, with expected recovery through rates over approximately three years. Other routine litigation and regulatory matters could affect earnings and cash flows, but management could not estimate possible losses. The company received $42.5 million of AMT credit refunds in January 2020.
Important facts for investors to verify
- Whether commodity prices and the quarterly ceiling test result in the anticipated impairments, and their effect on earnings, covenants and financing flexibility.
- Actual production, realized prices after hedging, drilling pace and fiscal 2020 Exploration and Production spending relative to management’s plans.
- Final Supply Corporation rate-case outcomes, including any refunds, and progress, costs and timing for Empire North, FM100 and Northern Access.
- Cash flow, working-capital requirements, short-term borrowing levels and any planned long-term debt issuance as capital spending continues.
- Effects of climate and environmental regulation, permitting decisions, and other legal or regulatory proceedings on project economics and operations.