Business context and reporting period
National Fuel Gas Company’s unaudited Form 10-Q covers the quarter and nine months ended June 30, 2013, the third quarter of its fiscal year. The diversified energy company reports Utility, Pipeline and Storage, Exploration and Production, and Energy Marketing segments. Amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | Three months ended June 30, 2013 | 2012 comparable | Nine months ended June 30, 2013 | 2012 comparable |
|---|---|---|---|---|
| Operating revenue | $440.0 | $328.9 | $1,490.7 | $1,313.6 |
| Operating income | $127.0 | $90.3 | $421.2 | $340.8 |
| Net income available to common stock | $58.5 | $43.2 | $212.2 | $171.3 |
| Diluted EPS | $0.69 | $0.52 | $2.52 | $2.05 |
- Operating margin was approximately 28.9% for the quarter and 28.3% for the nine-month period, versus 27.5% and 25.9%, respectively, in 2012. Net margin was approximately 13.3% and 14.2%, versus 13.1% and 13.0%.
- Nine-month operating cash flow was $587.2 million, compared with $573.8 million. Cash capital expenditures were $513.4 million, compared with $809.7 million; operating cash flow less cash capital expenditures was therefore approximately $73.8 million, versus a deficit of approximately $235.9 million.
- Cash and temporary cash investments were $134.6 million at June 30, 2013, up from $74.5 million at September 30, 2012. Current assets were $429.1 million and current liabilities $269.4 million, a current ratio of approximately 1.59; the prior-period ratio was approximately 0.48, reflecting current debt reported at September 30, 2012.
- Long-term debt, with no current portion or short-term borrowings outstanding at June 30, was $1.649 billion, up from total debt of $1.399 billion at September 30, 2012. Debt was approximately 43.5% of total capitalization. The company reported $2.137 billion of shareholders’ equity.
- Comprehensive income was $116.9 million for the quarter and $252.6 million for the nine months. Other comprehensive income included substantial unrealized derivative gains; these are distinct from net income.
- Dividends declared were $0.375 per share for the quarter and $1.105 per share for the nine months, compared with $0.365 and $1.075 in 2012.
Material changes versus the prior comparable period
- Net income rose $15.3 million in the quarter and $40.9 million for nine months, with increases across all four reported segments and All Other.
- Exploration and Production was the largest contributor to the increase. Nine-month segment earnings rose $11.7 million to $86.1 million, supported by higher Appalachian gas production and oil prices after hedging. Higher depletion, production costs, taxes and interest partly offset the gains. A $5.0 million deferred state-tax adjustment was recorded in the quarter as a greater share of earnings was attributed to Pennsylvania.
- Pipeline and Storage nine-month earnings increased $12.4 million to $47.8 million. New expansion capacity and higher tariff rates increased transportation and storage revenues; expansion projects entering service also increased operating costs and depreciation.
- Utility nine-month earnings increased $12.3 million to $65.0 million, largely from colder weather and higher usage. Weather-normalization mechanisms in New York temper the impact of weather on earnings.
- Revenue growth also reflected higher gas prices and volumes in Energy Marketing. Segment earnings increased only $1.0 million for nine months, to $5.7 million.
- Capital expenditures were lower year over year, principally because Exploration and Production spending fell to $385.0 million from $598.6 million. The company reported $312.4 million of Appalachian E&P capital expenditures for the nine months, including $290.1 million in the Marcellus Shale.
Outlook, management commentary, risks and unusual items
- Management estimated fiscal 2013 Appalachian-region capital expenditures of approximately $460 million. The filing cautions that nine-month results are not predictive of the full year because Utility and Energy Marketing earnings are seasonal, with winter months normally contributing substantially.
- In February 2013, the company issued $500 million of 3.75% notes due 2023, receiving net proceeds of $495.4 million. Proceeds supported repayment of $250 million of 5.25% notes that matured in March and general corporate purposes, including reducing short-term debt. No long-term debt was due within the following 12 months.
- At June 30, the company had a $750 million committed credit facility through January 2017 and no borrowings under it. Its debt-to-capitalization ratio under the facility was 0.44, below the 0.65 covenant limit. Management considered liquidity adequate; short-term funding needs remain dependent in part on operating cash flow, commodity prices and capital spending.
- New York regulators made Distribution Corporation’s rates temporary and subject to refund pending a permanent-rate proceeding. Settlement discussions were underway. Distribution Corporation also challenged the constitutionality of a state-law provision concerning refunds; the outcome was uncertain.
- The oil and gas full-cost ceiling exceeded the recorded book value by approximately $199.1 million at June 30. Management disclosed sensitivity to commodity prices: a $1/MMBtu decrease in the gas price assumption alone would result in an estimated $56.6 million ceiling shortfall and impairment charge; simultaneous specified decreases in gas and oil assumptions would result in an estimated $98.5 million shortfall. These sensitivities assume no other changes.
- The company reported approximately $16.8 million of estimated remaining environmental cleanup costs, recorded as a liability, and expected recovery through rates over approximately 11 years. It said it was not aware of material additional environmental exposure. A Pennsylvania environmental enforcement matter relating to Trout Run construction was disputed; the penalty sought was described as immaterial.
- Management identified potential risks from commodity prices, production and reserve uncertainty, pipeline and gathering capacity, hydraulic-fracturing regulation, environmental and pipeline-safety requirements, rate proceedings, financing and counterparty credit. Future derivative-market rules could increase costs, though the company could not predict the impact.
- The company disclosed a nonmaterial prior-period cash-flow presentation error: 2012 nine-month operating cash flow was revised upward by $32.8 million and investing cash flow downward by the same amount. Management stated that disclosure controls were effective at June 30, 2013. New accounting and customer-billing systems were implemented at an Energy Marketing subsidiary during the quarter.
Important facts for investors to verify
- Progress and final terms of the New York permanent-rate proceeding, potential refunds, and the related court case.
- Whether Marcellus production, realized prices after hedging, and planned capital spending support the stated growth outlook without further cost escalation.
- Commodity-price assumptions and remaining headroom in the oil and gas ceiling test, including the risk of a future impairment.
- Funding needs, debt levels, covenant capacity and access to credit as major development and pipeline projects proceed.
- Environmental and regulatory developments, including the Trout Run matter and possible changes to hydraulic-fracturing, greenhouse-gas and pipeline-safety requirements.