Business context and reporting period
National Fuel Gas Company filed this unaudited Form 10-Q for the quarter and six months ended March 31, 2014, the second quarter of fiscal 2014. Its five reportable segments are Utility, Pipeline and Storage, Exploration and Production, Energy Marketing, and Gathering.
Financial performance and position
Amounts below are in millions of dollars, except per-share data. Comparisons are with the corresponding 2013 periods.
| Metric | Three months | Six months |
|---|---|---|
| Operating revenue | $756.2 vs. $597.8 | $1,306.3 vs. $1,050.7 |
| Operating income | $180.1 vs. $163.0 | $340.7 vs. $294.2 |
| Net income | $95.2 vs. $85.7 | $177.5 vs. $153.7 |
| Diluted EPS | $1.12 vs. $1.02 | $2.09 vs. $1.83 |
| Operating cash flow | Not provided for the quarter | $503.2 vs. $366.9 |
| Capital expenditures paid | Not provided for the quarter | $367.4 vs. $339.7 |
For the six months, operating margin was approximately 26.1% of revenue, compared with 28.0% a year earlier; net margin was approximately 13.6%, compared with 14.6%. These calculated ratios reflect the faster growth of revenue, including purchased-gas-related activity, than earnings. Operating cash flow less capital expenditures was approximately $135.8 million.
At March 31, 2014, cash and temporary investments were $150.9 million; current assets were $626.9 million and current liabilities $513.1 million. Long-term debt was $1.649 billion, with no current portion, bank notes, or commercial paper outstanding. The company reported $750 million available under its committed credit facility, $335 million in revocable uncommitted bank lines, and a 0.42 debt-to-capitalization ratio under its credit agreement, below the 0.65 covenant limit. Dividends declared were $0.375 per share for the quarter and $0.75 for six months.
Material changes versus prior comparable periods
- Quarterly net income increased $9.5 million; six-month net income increased $23.8 million.
- Pipeline and Storage and Gathering led segment improvement: six-month earnings increased $6.8 million and $8.4 million, respectively. Utility earnings rose $2.4 million for six months, with colder Pennsylvania weather a major factor.
- Exploration and Production earnings rose $1.1 million for six months, but fell $3.3 million in the quarter. Higher production lifted revenue, while lower realized prices after hedging, higher production and depletion costs, and a $3.3 million six-month accrual for plugging and abandonment costs weighed on earnings.
- Operating cash flow rose $136.4 million, primarily on higher receipts from Appalachian natural-gas production and pipeline transportation, and life-insurance proceeds. Capital expenditures paid rose $27.7 million.
- Energy Marketing began recording unbilled revenue and related gas costs in fiscal 2014. This increased six-month revenue by $33.7 million and margin by $0.9 million; management said the prior-period omission was immaterial.
Outlook, management commentary, risks and unusual items
- The filing provides no specific full-year earnings guidance and cautions that seasonal winter-period results are not a reliable prediction of full-year earnings. Management expects to use operating cash flow first and short-term borrowing as needed to fund fiscal 2014 capital needs.
- Six-month expenditures for long-lived assets were $395.6 million, including $276.3 million in Exploration and Production and $48.3 million in Gathering. Marcellus development accounted for approximately $231.7 million of capital spending. Management described ongoing pipeline and gathering projects to serve Appalachian production, with stated project costs, schedules, and regulatory approvals subject to execution risk.
- The oil-and-gas full-cost ceiling exceeded the relevant book value by approximately $204 million at March 31. Management’s sensitivity analysis indicated that a $1/MMBtu decline in the gas price used in the test alone could result in an impairment; combined gas and oil price declines specified in the filing could also trigger one.
- New York’s utility-rate settlement, approved by the NYPSC in May 2014 after quarter-end, generally holds customer rates at existing levels for at least two years, establishes earnings sharing, and authorizes $8.2 million of additional annual pipeline-replacement spending. The balance sheet included a $7.5 million refund provision.
- Other notable items included a $3.6 million life-insurance death-benefit gain, a $2.8 million deferred tax benefit from a New York corporate tax-rate reduction, and deferred tax expense associated with remeasurement of state taxes. The company also recorded $14.1 million of estimated remaining environmental cleanup costs, expected to be recovered through rates.
- Key risks include natural-gas and oil prices and differentials, reserve estimates and potential ceiling-test impairment, production and project execution, permits and environmental rules including hydraulic fracturing, weather, rate regulation, derivatives and counterparty credit, financing access, and pension funding. The company said risk factors had not materially changed from its 2013 Form 10-K.
Important facts for investors to verify
- Whether production growth and new pipeline and gathering capacity translate into sustained earnings and cash generation after higher operating, transportation, and depletion costs.
- The assumptions behind commodity-price hedges and the full-cost ceiling test, including impairment sensitivity and the timing of hedge gains or losses recognized in earnings.
- Actual capital spending, project costs, in-service dates, customer commitments, and required regulatory approvals relative to management’s disclosed plans.
- The final financial effects of the New York rate settlement and earnings-sharing mechanism, as well as any subsequent refund or rate developments.
- Cash conversion and seasonal working-capital movements, along with short-term borrowing needs, credit availability, and compliance with debt covenants.
- Potential changes in environmental remediation costs, pension contributions, and the outcomes of outstanding regulatory, tax, and legal matters.