National Fuel Gas Company — Fiscal 2017 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended June 30, 2017; filed August 4, 2017. The company operates natural gas exploration and production, pipeline and storage, gathering, utility distribution, and energy marketing businesses. The quarter is the fiscal third quarter; results for the nine-month period are not a full-year forecast, and utility and energy marketing activity is seasonal.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Operating revenue | $348.4 million, versus $335.6 million in 2016 | $1,292.9 million, versus $1,159.9 million in 2016 |
| Operating income (loss) | $123.4 million, versus $45.2 million | $465.5 million, versus $(497.8) million |
| Net income (loss) available to common shareholders | $59.7 million; diluted EPS $0.69, versus $8.3 million and $0.10 | $237.9 million; diluted EPS $2.77, versus a loss of $328.5 million and $(3.87) per share |
| Operating margin | Approximately 35.4%, versus 13.5% | Approximately 36.0%, versus negative 42.9% |
| Cash from operating activities | Not separately presented for the quarter | $551.1 million, versus $460.0 million |
| Capital expenditures | Not separately presented for the quarter | $314.8 million in cash-flow statements; $301.8 million reported expenditures for long-lived assets |
Operating margins are calculated from reported operating income and revenue. The 2016 nine-month comparison was heavily affected by oil and gas property impairment charges.
Balance sheet and liquidity at June 30, 2017
- Cash and temporary cash investments: $285.3 million, up from $130.0 million at September 30, 2016.
- Long-term debt, net of discount and issuance costs: $1,788.0 million; an additional $300.0 million of long-term debt was current, consisting of 6.50% notes maturing in April 2018. Total debt carrying amount, including current debt, was $2,088.0 million.
- No short-term debt was outstanding. The company had a $750 million revolving facility through December 2019 and a $500 million 364-day facility through September 8, 2017; it reported no borrowings under the credit agreement. Facility debt-to-capitalization ratio was 0.55.
- Shareholders’ equity was $1,684.0 million. Common dividends declared were $0.415 per share for the quarter and $1.225 per share for the nine months.
Material changes versus 2016
- Quarterly net income rose $51.4 million; nine-month results improved $566.4 million. The principal driver was the non-recurrence of 2016 exploration and production impairment charges: $82.7 million pre-tax in the quarter and $915.6 million pre-tax for the nine months (after-tax impacts of $47.9 million and $531.0 million, respectively).
- Exploration and production earned $30.1 million in the quarter and $99.0 million year to date, compared with a quarterly loss of $19.2 million and a nine-month loss of $469.6 million. Higher Appalachian gas production and prices, lower depletion, and the absence of prior-year impairments contributed; lower oil production/prices after hedging and higher production costs partly offset the gains.
- Gathering nine-month earnings increased to $31.4 million from $22.0 million, with gathered volume up 30.7 Bcf. Pipeline and storage earnings declined to $54.7 million from $59.8 million, primarily reflecting rate reductions and lower transportation revenues. Utility nine-month earnings were $51.1 million, down from $52.7 million; energy marketing earnings declined to $2.1 million from $4.1 million.
- Nine-month operating cash flow increased $91.2 million, primarily on higher cash receipts from Appalachian natural gas production. Capital expenditures were lower than in the prior-year period.
Outlook, risks, and unusual items
- Management expected to fund fiscal 2017 capital needs primarily with cash on hand and operating cash flow, and said it did not anticipate additional oil and gas property impairments during the remainder of fiscal 2017. It stated that additional long-term unsecured debt could be issued as needed. No quantified earnings guidance was provided.
- The oil and gas ceiling-test cushion was approximately $304.8 million at June 30. Management’s sensitivity analysis showed it would remain above book value under specified price decreases, but reserve changes, costs, or further commodity-price declines could reduce the cushion or cause impairment.
- The Northern Access 2016 pipeline had FERC approval, but New York denied required water-quality certification and other permits. The company challenged the decisions in court and had not set a revised in-service date. Project costs were $73.7 million; management recorded no impairment at June 30, but an unfavorable resolution could impair a significant portion.
- A New York utility rate order effective May 1 provided $5.9 million of annual revenue increase, below the company’s requested $41.7 million. The company appealed the order; outcome is uncertain. An earnings-sharing mechanism may apply from April 2018 if new rates do not take effect by October 2018.
- Estimated remaining environmental cleanup costs were $3.2 million, expected to be recovered through rates over approximately four years. Other ordinary-course litigation and regulatory matters could affect earnings and cash flows, although management did not expect them to materially change current liquidity.
- Key risks include natural gas and oil prices, production and reserve uncertainty, project permitting and construction, regulatory decisions, financing and credit ratings, weather, derivatives and counterparty exposure, and environmental and climate regulation.
Important facts for investors to verify
- Whether Northern Access 2016 obtains the disputed New York permits, the outcome of the legal challenges, and potential impairment exposure on its $73.7 million of recorded project costs.
- The April 2018 maturity and refinancing plan for $300 million of 6.50% notes, and continued compliance with credit-facility and indenture covenants.
- Changes in commodity prices, production, hedging results, and the $304.8 million ceiling-test cushion.
- The outcome of the New York rate-order appeal and any resulting changes to utility revenues or earnings sharing.
- Capital spending, operating cash flow, and the degree to which Seneca’s development program depends on partner funding under the IOG joint development agreement.