National Fuel Gas Company — Form 10-Q Summary
Business context and period. Diversified energy company with Utility, Pipeline and Storage, Exploration and Production, and Energy Marketing segments. This unaudited filing covers the three and nine months ended June 30, 2010, the company’s fiscal third quarter and year-to-date period. Results are seasonal, particularly in utility and energy marketing.
Financial performance and liquidity
| Metric | Three months ended June 30, 2010 | Nine months ended June 30, 2010 |
|---|---|---|
| Operating revenue | $354.1 million, down 3.5% year over year | $1,482.5 million, down 16.7% |
| Operating income and margin | $89.1 million; 25.2% (prior year 23.8%) | $367.8 million; 24.8% (prior year 8.9%) |
| Net income | $42.6 million, versus $42.9 million | $187.5 million, versus $73.7 million |
| Diluted EPS | $0.51, versus $0.53 | $2.27, versus $0.92 |
| Operating cash flow | $419.9 million year to date, down from $514.2 million | |
| Capital expenditures | $327.5 million cash outflow year to date; reported long-lived asset expenditures were $342.0 million |
At June 30, cash and temporary investments were $458.8 million. Long-term debt was $1.249 billion, including $200 million classified as current and due November 2010; the company expected to refinance it with cash and/or short-term borrowing. The credit-agreement debt-to-capitalization ratio was 0.42 against a 0.65 limit. No short-term bank or commercial-paper debt was outstanding.
Segment net income for the quarter was $6.0 million Utility, $7.2 million Pipeline and Storage, $27.9 million Exploration and Production, and $1.4 million Energy Marketing. Year-to-date segment results were $62.3 million, $30.0 million, $85.0 million, and $8.5 million, respectively.
Material changes versus prior comparable periods
- Quarterly net income decreased $0.3 million; lower Pipeline and Storage and Corporate results were partly offset by gains in other segments.
- Nine-month net income increased $113.8 million, principally because the prior-year period included a $182.8 million pretax ($108.2 million after-tax) oil and gas property impairment that did not recur. Thus, the year-to-date earnings comparison is not solely indicative of underlying operating improvement.
- Year-to-date revenue fell mainly because lower gas commodity costs were passed through to Utility customers, reducing reported sales revenue, and because Energy Marketing gas prices were lower. Utility throughput was also affected by warmer weather.
- Exploration and Production benefited from higher oil prices and increased Appalachian/Marcellus gas production. Total gas production rose to 22.0 Bcf from 16.2 Bcf year to date; oil production edged down to 2.43 million barrels from 2.50 million.
- Pipeline and Storage year-to-date earnings fell $11.5 million, with transportation throughput down 51.1 Bcf amid shippers’ use of lower-priced routes, alongside higher operating, tax, and interest costs.
- Operating cash flow decreased $94.3 million, mainly due to the timing of Utility gas-cost refunds and higher long-term-debt interest payments. Capital spending increased substantially, especially in Exploration and Production.
Outlook, management commentary, risks and contingencies
- No specific earnings guidance was provided. Management expected to fund near-term capital spending primarily with cash on hand and operating cash flow, with short-term borrowing as a subsequent source; it did not expect long-term financing for capital needs before 2011.
- Fiscal 2011 capital expenditure estimates were $460 million for Exploration and Production and $128 million for Pipeline and Storage. Pipeline spending was reduced from $227 million after the West-to-East project’s expected first in-service date shifted from late 2012 to late 2013; Exploration and Production spending was reduced from $488 million, mainly due to lower planned Appalachian drilling.
- Marcellus development remains a major investment priority: the company reported about 738,000 net acres and spent $217.6 million on Marcellus development in the nine-month period, including $71.8 million for approximately 18,000 additional net acres. Planned pipeline expansions depend on approvals, customer commitments, construction and market development.
- The June 30 full-cost ceiling exceeded oil and gas property book value by about $231 million. Management’s sensitivity analysis showed remaining cushions of about $168 million if gas prices were $1/MMBtu lower, $183 million if oil prices were $5/barrel lower, and $120 million if both declines occurred. Commodity-price declines could nevertheless trigger a non-cash impairment.
- Management cited potential hydraulic-fracturing regulation, permitting delays or drilling restrictions as risks. New York had a moratorium on hydraulic fracturing of new horizontal Marcellus wells; the company said its limited New York acreage made the expected impact insignificant.
- Environmental cleanup liabilities were estimated at $17.5 million to $21.7 million, with the $17.5 million minimum accrued; the company expects recovery through rates. Other ordinary-course legal and regulatory matters could affect earnings or cash flows when resolved, but were not expected to materially harm financial condition.
- A $2 million Ivanhoe acquisition amount remained in escrow while the parties negotiated entitlement. A New York rate-order appeal concerning environmental cost recovery was pending before the state Court of Appeals.
- On July 16, 2010, the company agreed to sell its Pennsylvania sawmill and specified timber-related assets. Closing was expected in September; anticipated proceeds were about $15 million, with the buyer assuming about $7 million of timber-contract obligations and potential additional proceeds of up to $10 million over five years. No material earnings impact was expected.
- Fitch lowered the company’s long-term rating from A- to BBB+ in March 2010; management did not expect this to impair commercial-paper access. Pension funding could rise after fiscal 2010 to comply with the Pension Protection Act. The company also noted uncertainty about future derivatives regulation and potential U.S. Customs processing fees on certain historical gas imports.
Important facts for investors to verify
- Whether Marcellus production growth, commodity prices and hedges support projected returns on the increased exploration and development spending.
- Pipeline expansion approvals, firm shipper commitments, project timing and costs, particularly the delayed West-to-East project and planned Northern Access and Tioga County projects.
- Availability and terms of refinancing for the $200 million November 2010 maturity, and renewal of the $300 million committed credit facility due to expire September 30, 2010.
- Full-cost ceiling-test headroom under changing oil and gas prices, and any resulting impairment or reserve-estimate changes.
- Resolution of the $2 million escrow, the New York rate appeal, environmental cleanup estimates, and possible Customs fees.
- Actual sawmill-sale closing proceeds and any resulting earnings or cash-flow effects; also, the filing’s forward-looking estimates remain subject to stated risks and may differ from outcomes.