National Fuel Gas Company — FY2013 Form 10-K
Reporting period: Fiscal year ended September 30, 2013. This is an annual filing, not a standalone fourth-quarter report; quarterly data are included. National Fuel is a diversified energy company with Utility, Pipeline and Storage, Exploration and Production, Energy Marketing, and Gathering segments. Gathering was presented as a separate reportable segment for the first time, with prior-year segment information restated.
Financial performance and position
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Operating revenue | $1.830 billion | $1.627 billion | +12.5% |
| Operating income | $517.8 million | $448.0 million | +15.6% |
| Net income available to common stock | $260.0 million | $220.1 million | +18.1% |
| Diluted EPS | $3.08 | $2.63 | +17.1% |
| Operating cash flow | $738.6 million | $659.0 million | +$79.6 million |
| Cash capital expenditures | $703.5 million | $1.035 billion | −32.0% |
- Operating margin was approximately 28.3%, versus 27.5% in FY2012; net margin was approximately 14.2%, versus 13.5%.
- Operating cash flow less cash capital expenditures was approximately $35.1 million. Dividends paid were $122.7 million; declared dividends were $1.48 per share.
- Long-term debt was $1.649 billion, up from $1.399 billion. Year-end short-term bank and commercial-paper borrowings were zero; cash and temporary investments were $64.9 million. Debt-to-capitalization under the credit-facility definition was 0.43, below the 0.65 covenant limit.
- The company reported $6.218 billion in total assets and $2.195 billion in shareholders’ equity. Its $750 million committed credit facility extends through January 2017; the company reported no borrowings under it at year-end.
Material changes and segment trends
- Exploration and Production earnings rose to $115.4 million from $96.5 million, led by sharply higher Appalachian/Marcellus production. Gas production increased to 103.7 Bcf from 66.1 Bcf; gas revenue after hedging rose to $424.7 million. Higher depletion, production costs, and interest expense partially offset growth.
- Pipeline and Storage earnings increased to $63.2 million from $60.5 million. Revenues benefited from new Marcellus-related capacity and higher rates under Supply Corporation’s FERC rate settlement; transportation volume rose to 579.8 Bcf from 371.1 Bcf.
- Utility earnings rose to $65.7 million from $58.6 million, mainly reflecting colder weather and lower interest expense, partly offset by a $4.9 million after-tax refund provision tied to New York rate proceedings.
- Gathering earnings nearly doubled to $13.3 million from $6.9 million as gathered volume increased to 93.6 Bcf from 48.6 Bcf, reflecting Trout Run and Covington system growth. Energy Marketing earnings were $4.6 million, up modestly.
- Revenue and income also reflect weather, commodity prices, hedging, rate mechanisms, and new capacity. FY2012 included a $12.8 million after-tax benefit from elimination of a Pipeline and Storage regulatory liability; FY2013 did not repeat it. The 2011 comparison included a $31.4 million after-tax asset-sale gain.
Outlook, commentary, and risks
- Management forecast FY2014 capital expenditures of approximately $967.7 million, including $634.8 million for Exploration and Production, $126.5 million for Pipeline and Storage, and $121.0 million for Gathering. The filing estimated Appalachian E&P capital spending of $530.1 million and Appalachian production of 125–143 Bcfe in FY2014, compared with 101 Bcfe in FY2013.
- Management expected to fund investment primarily from operating cash flow, with short-term borrowing as needed. A $500 million 3.75% note issue in February 2013 helped refinance $250 million of 5.25% notes and reduce short-term debt.
- NYPSC proceedings made New York Utility rates temporary and subject to refund pending a permanent rate determination. The company recorded a $7.5 million pre-tax refund provision and said outcomes of related administrative and judicial proceedings were uncertain.
- Commodity-price volatility, regional gas-price differentials, production and reserve-estimate uncertainty, and access to gathering, processing, and pipeline capacity could affect E&P results. The company hedges a portion of expected production, which limits downside exposure but can also constrain gains from higher prices.
- The full-cost ceiling exceeded oil and gas property book value by about $159.4 million at year-end. Management’s sensitivity analysis indicated a $1/MMBtu decrease in the gas price used in the test could produce an approximately $135.5 million impairment; a combined $1/MMBtu gas and $5/bbl oil decrease could produce an approximately $176.7 million impairment.
- Additional risks include potential hydraulic-fracturing and environmental regulation, pipeline safety requirements, interest-rate and refinancing risk, pension funding, counterparty performance, and weather. The company estimated $14.7 million of remaining environmental cleanup costs and expected rate recovery. A Pennsylvania well-inspection matter was settled for $198,500; a separate gathering-construction penalty proposal was disputed, with the amount described as not material.
Investor verification priorities
- Check the final outcome and financial effect of the New York Utility rate case, refund provision, and related appeal.
- Track FY2014 capital spending, Appalachian production against the 125–143 Bcfe forecast, and whether planned pipeline and gathering projects achieve service and contracted returns.
- Review commodity prices, realized regional differentials, hedge positions and collateral, and any resulting full-cost ceiling impairment exposure.
- Reconcile future investment plans with operating cash generation, debt issuance, liquidity availability, dividends, and covenant headroom.
- Assess reserve revisions and development of proved undeveloped reserves, including the assumptions and timing supporting management’s estimates.
- Monitor environmental and regulatory proceedings, pension contributions, and the company’s stated risks from changing safety and hydraulic-fracturing rules.