Business Context and Reporting Period
National Fuel Gas Company is a diversified energy holding company with Utility, Pipeline and Storage, Exploration and Production, and Energy Marketing segments. This unaudited Form 10-Q covers the quarter and six months ended March 31, 2013, the company’s fiscal second quarter and first half.
Financial Results and Liquidity
Amounts below are in millions, except per-share data. Comparisons are with the same prior-year periods.
| Metric | Quarter 2013 | Quarter 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $597.8 | $552.3 | $1,050.7 | $984.7 |
| Operating income | $163.0 | $132.1 | $294.2 | $250.5 |
| Net income | $85.7 | $67.4 | $153.7 | $128.1 |
| Diluted EPS | $1.02 | $0.81 | $1.83 | $1.53 |
| Operating margin | 27.3% | 23.9% | 28.0% | 25.4% |
| Net margin | 14.3% | 12.2% | 14.6% | 13.0% |
First-half operating cash flow was $366.9 million, versus $356.6 million; investing cash outflow was $343.2 million, versus $518.1 million; and financing cash inflow was $14.2 million, versus $273.3 million. Cash increased $37.9 million to $112.4 million. Cash capital expenditures were $339.7 million, compared with $517.3 million; total long-lived-asset expenditures including accrued amounts were $349.3 million, compared with $541.8 million.
At March 31, 2013, total assets were $6.275 billion, long-term debt was $1.649 billion, and shareholders’ equity was $2.042 billion. The company had no short-term bank debt or commercial paper outstanding. Current assets were $490.0 million and current and accrued liabilities were $373.4 million. In February, it issued $500 million of 3.75% notes due 2023, receiving net proceeds of $495.4 million; proceeds funded the $250 million maturity of 5.25% notes and general purposes, including reducing short-term debt. No long-term debt was due within the following 12 months. The company reported a 0.45 debt-to-capitalization ratio under its credit facility.
Material Changes Versus Prior Period
- Revenue rose about 8% for the quarter and 7% for the first half; net income rose about 27% and 20%, respectively. All reportable segments increased earnings in both comparisons.
- Utility earnings increased $6.2 million in the quarter and $9.8 million in the first half, mainly reflecting colder weather than the unusually warm prior-year winter, alongside favorable tax and expense effects.
- Pipeline and Storage earnings rose $4.0 million for the quarter and $10.9 million for the first half. New Line N and Northern Access expansion capacity, along with higher tariff rates, contributed to revenue growth.
- Exploration and Production earnings rose $5.5 million in the quarter but only $1.9 million in the first half. Marcellus production growth lifted gas volumes, while lower realized gas prices after hedging, higher depletion and operating costs, and interest expense offset much of the benefit.
- Appalachian gas production increased 81% for the quarter and 65% for the first half. The weighted-average realized gas price after hedging declined to $3.98/Mcf from $4.64/Mcf for the quarter and to $4.03/Mcf from $4.71/Mcf for the first half.
- Prior-year cash-flow figures were revised for non-cash capital expenditures included in accounts payable: first-half 2012 operating cash flow increased and investing cash outflow decreased by $17.7 million each. The company said the revisions were not material to prior-period statements.
Outlook, Commentary, Risks and Contingencies
- Management estimated fiscal 2013 Appalachian capital expenditures at approximately $460 million. First-half Appalachian spending was $219.3 million, including $206.8 million in the Marcellus area. Management expects to use operating cash first but anticipates short-term borrowing during fiscal 2013; cash available depends partly on commodity prices and production.
- Management cautioned that first-half results are not predictive of the full year because Utility and Energy Marketing earnings are seasonal. It did not provide a consolidated earnings forecast in the supplied filing text.
- On April 19, 2013, after quarter-end, the New York PSC directed the Utility subsidiary either to accept temporary rates subject to refund effective June 1 or show cause why they should not apply. The PSC also raised the possible use of statutory refunds of revenues above the authorized return. The company was evaluating and responding to the order.
- Oil and gas property ceiling-test headroom was approximately $61 million at March 31. Management estimated that a $1/MMBtu decrease in the applicable gas price assumption could cause book value to exceed the ceiling by approximately $186.9 million; simultaneous gas and oil price declines of $1/MMBtu and $5/barrel could imply an approximately $231 million excess and an impairment charge.
- Environmental cleanup liabilities were estimated at $16.5 million to $17.0 million, with $16.5 million recorded; the company expects recovery through rates. The NYDEC approved an amended remedy for a former manufactured-gas-plant site in April 2013. A Pennsylvania environmental penalty proposal related to Trout Run construction was disputed; the proposed penalty was described as immaterial.
- Key risks include commodity-price and production variability, hydraulic-fracturing regulation and permitting, potential ceiling-test impairment, project execution and infrastructure capacity, derivatives and counterparty exposure, pension funding, and regulatory rate outcomes. The company cited possible cost and market effects from future derivatives rules but could not predict their impact.
- Disclosure controls were judged effective as of March 31, 2013. Planned May 2013 accounting and billing system changes at National Fuel Resources would affect processes and controls; management said implementation was being monitored and tested.
Most Important Facts for Investors to Verify
- Progress, timing, and potential refund exposure from the New York PSC temporary-rate proceeding and any eventual permanent-rate decision.
- Marcellus production growth, realized commodity prices after hedging, operating-cost trends, and remaining ceiling-test cushion.
- Actual fiscal 2013 capital spending and funding needs, including borrowing, debt maturities, and compliance with credit-facility covenants.
- Cash generation through seasonal periods and the conversion of receivables and accrued capital expenditures into cash flows.
- Resolution and cost development of environmental matters, including recorded cleanup obligations and the disputed Pennsylvania penalty proposal.