National Fuel Gas Company — Q1 FY2012 10-Q
Business context and reporting period. This unaudited filing covers the three months ended December 31, 2011, compared with the three months ended December 31, 2010. National Fuel is a diversified energy holding company with Utility, Pipeline and Storage, Exploration and Production, and Energy Marketing segments. Results are seasonal; the company cautions that this quarter’s earnings should not be treated as a forecast for the full fiscal year.
Key financial metrics
| Metric | Q1 FY2012 | Prior-year quarter |
|---|---|---|
| Operating revenue | $432.4 million | $450.9 million |
| Operating income | $118.4 million | $117.4 million |
| Net income available to common stock | $60.7 million | $58.5 million |
| Diluted EPS | $0.73 | $0.70 |
| Operating cash flow | $79.2 million | $87.5 million |
| Capital expenditures in cash flow statement | $232.7 million | $193.8 million |
- Revenue declined 4.1%, while net income rose 3.7%. Operating margin was approximately 27.4%, versus 26.0%; net margin was approximately 14.0%, versus 13.0% (calculated from reported figures).
- Cash and temporary investments were $224.3 million at December 31, up from $80.4 million at September 30. Current assets were $589.1 million and current liabilities $421.0 million. The cash increase primarily reflected financing proceeds.
- Long-term debt, net of current portion, was $1.399 billion; commercial paper was $20.0 million. The company issued $500 million of 4.90% notes due 2021, receiving $496.1 million net, and repaid $150 million of notes that matured in November.
- Segment earnings: Utility $19.4 million (down $3.6 million); Pipeline and Storage $10.0 million (up $1.4 million); Exploration and Production $30.3 million (up $2.9 million); Energy Marketing $0.4 million (down $0.5 million).
Material changes versus the prior comparable period
- Utility revenue fell $34.2 million, primarily because warmer weather reduced retail sales and lower gas costs were passed through to customers. Weather was about 18% warmer than normal in Buffalo and 17% warmer in Erie; the New York weather-normalization clause preserved approximately $1.4 million of earnings.
- Exploration and Production revenue increased $15.8 million, driven by higher Appalachian gas production and higher oil prices. Appalachian gas production rose to 13.1 Bcf from 8.1 Bcf; weighted-average gas price after hedging fell to $4.78/Mcf from $5.26/Mcf, while oil price after hedging rose to $91.38/Bbl from $76.24/Bbl.
- Pipeline and Storage revenue increased $2.9 million, largely due to new transportation contracts associated with the Line N Expansion and Tioga County Extension projects. Those projects entered service in October and November 2011, respectively.
- Capital spending increased: total expenditures for long-lived assets were $279.0 million, compared with $200.9 million. This measure includes accrued amounts and differs from cash capital expenditures reported in the cash flow statement.
- Operating cash flow decreased $8.3 million, principally reflecting lower cash from Utility and Energy Marketing operations, partly offset by higher Exploration and Production cash receipts.
Outlook, management commentary, risks and contingencies
- Management reduced its FY2012 Exploration and Production capital expenditure estimate from $858.5 million to $760.0 million, including a reduction in Appalachian spending from $808.5 million to $710.0 million, citing low natural gas prices. Expected Marcellus drilling was reduced from 100–125 to 60–90 net horizontal wells. No full-year earnings guidance is stated in the provided filing text.
- The company spent $172.0 million developing the Marcellus during the quarter and reported control of approximately 745,000 net acres in the play. Management expects to use operating cash as the primary project funding source, with increased short-term borrowing also anticipated during FY2012.
- Pipeline projects include Northern Access, estimated at $62 million with service expected in November 2012; Line N 2012 Expansion, with preliminary costs of approximately $30 million for capacity plus $5.8 million for system replacement; and the proposed W2E Overbeck-to-Leidy project, estimated at $290 million, with initial service potentially in late 2013 or late 2014. Project timing, costs, approvals and shipper demand remain important execution factors.
- On January 6, 2012, after quarter-end, the company replaced its $300 million committed credit facility with a $750 million facility extending to January 6, 2017. At December 31, its debt-to-capitalization ratio under the facility was 0.42, against a 0.65 limit.
- Supply Corporation’s FERC rate case proposed higher rates, accepted subject to refund effective May 1, 2012. Final rates could require refunds with interest. Empire planned to file a cost-and-revenue study by the end of March 2012.
- Environmental cleanup costs were estimated at $16.0–$20.2 million; the $16.0 million minimum was accrued, and the company expects recovery through rates. The company also disclosed an IRS dispute concerning tax accounting for certain capitalized utility costs and other ordinary-course litigation and regulatory matters.
- Key risks include commodity-price and production volatility, full-cost ceiling-test impairments, hydraulic-fracturing and other environmental regulation, project and permitting delays, pipeline safety requirements, counterparty and hedge risk, credit access, pension funding, and changing rates or regulatory decisions. At December 31, the oil and gas ceiling-test cushion was approximately $360.3 million; management’s sensitivity analysis showed a reduced cushion under lower commodity-price assumptions.
- The company reported $54.8 million of Level 3 net derivative liabilities, primarily crude-oil swaps using unobservable location-basis inputs. Derivative values and collateral requirements can vary with commodity prices, credit risk and market conditions.
Most important facts for investors to verify
- Whether lower natural gas prices lead to further reductions in FY2012 spending, Marcellus drilling or production plans, and whether the reported ceiling-test cushion remains adequate.
- Actual project costs, schedules, approvals and contracted capacity for Northern Access, Line N expansions, W2E and gathering-system investments.
- Final FERC rate-case outcomes, potential refunds, and the timing and result of Empire’s required rate study.
- Liquidity and borrowing needs as capital spending continues, including use of the expanded credit facility and compliance with debt covenants.
- Hedge effectiveness, derivative valuation and collateral exposure, along with outcomes of the IRS tax dispute and environmental remediation obligations.