National Fuel Gas Company — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2017, compared with the corresponding 2016 periods. The company operates natural gas production, gathering, pipeline, storage, distribution and marketing businesses, and produces oil primarily in California. Amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $522.1 million, up 16.2% from $449.1 million | $944.6 million, up 14.6% from $824.3 million |
| Operating income (loss) | $170.0 million; prior-year loss of $237.0 million | $342.1 million; prior-year loss of $542.9 million |
| Net income (loss) available to common stock | $89.3 million; prior-year loss of $147.7 million | $178.2 million; prior-year loss of $336.8 million |
| Diluted earnings (loss) per share | $1.04; prior-year loss of $1.74 | $2.07; prior-year loss of $3.97 |
| Operating cash flow | Not separately stated | $351.9 million, versus $312.8 million |
Margins: Second-quarter operating margin was approximately 32.6% of revenue, versus negative 52.8% a year earlier; six-month operating margin was approximately 36.2%, versus negative 65.9%. These comparisons are heavily affected by prior-year oil and gas property impairment charges.
Cash, debt and liquidity at March 31, 2017: Cash and temporary investments were $231.2 million, compared with $130.0 million at September 30, 2016. Long-term debt was $2.087 billion; there was no short-term debt, and no long-term debt matures in the following 12 months. Operating cash flow of $351.9 million exceeded capital expenditures of $208.2 million; investing cash flow was a net use of $184.9 million and financing cash flow a net use of $65.8 million. The company reported a 0.56 debt-to-capitalization ratio under its credit facility and no borrowings under that facility.
Declared dividends were $0.405 per share for the quarter and $0.810 for the six-month period, up from $0.395 and $0.790, respectively, in 2016.
Changes and segment results
- The improvement in consolidated earnings was primarily due to the non-recurrence of 2016 Exploration and Production impairment charges: $397.4 million pre-tax for the quarter and $832.9 million for six months ($230.5 million and $483.1 million after tax, respectively).
- Exploration and Production earnings were $33.8 million for the quarter and $68.8 million for six months, compared with losses of $213.3 million and $450.4 million. Higher Appalachian gas production and the absence of impairments drove the improvement; production growth reflected the end of prior-year curtailments. Gas and oil prices after hedging were lower over the six-month comparison.
- Gathering earnings increased to $10.3 million for the quarter and $21.3 million for six months, supported by higher gathered volumes associated largely with Seneca’s Marcellus production.
- Pipeline and Storage earnings declined to $19.3 million for the quarter and $38.6 million for six months, principally reflecting rate reductions and lower transportation and storage revenues.
- Utility earnings declined to $25.6 million for the quarter and $46.8 million for six months, with higher pension, benefit and depreciation costs. Energy Marketing earnings also declined, to $0.9 million and $2.7 million, respectively, amid lower margins.
Outlook, risks and unusual items
- Northern Access 2016: FERC authorized the project in February 2017, but on April 7 the New York State Department of Environmental Conservation denied water-quality certification and other permits for the New York portion. The company appealed on April 21 and said it remained committed to the project; it had not set a revised in-service date. Approximately $67.8 million had been spent by March 31. Management found no impairment was required at that date, but said further adverse developments could impair a significant portion of the project costs.
- Following the permit denial, fiscal 2017 Pipeline and Storage capital expenditure expectations were reduced from approximately $225 million to $110 million. Overall, the company expected to fund fiscal 2017 capital needs primarily with cash on hand and operating cash flow, using short-term borrowing if needed; it expected to be able to issue additional long-term unsecured debt as needed.
- Management did not anticipate further oil and gas property impairments during the remainder of fiscal 2017. At March 31, the ceiling-test value exceeded the book value of oil and gas properties by approximately $201 million. Under the company’s stated price sensitivities, that cushion would fall to $46.9 million if both gas prices declined $0.25/MMBtu and oil prices declined $5/Bbl.
- A New York utility rate order issued April 20 approved an annual revenue increase of $5.9 million, effective May 1, 2017, below the company’s $41.7 million request. The order set an 8.7% return on equity; the company was evaluating the order and possible judicial review.
- Environmental cleanup liabilities were estimated at $3.4 million, expected to be recovered through rates over approximately four years. Other ordinary-course litigation and regulatory matters could affect earnings or cash flow when resolved, but the company said it could not estimate possible losses.
- Key risks include commodity prices and ceiling-test impairments, production and reserve uncertainty, project permitting and construction delays, regulatory rate outcomes, environmental requirements, weather, derivative-market changes, and access to financing. Management cautioned that interim results are not a prediction of full-year results because utility and energy marketing earnings are seasonal.
Important facts for investors to verify
- Progress and legal outcome of the Northern Access 2016 appeal, revised schedule, funding needs and potential impairment of the $67.8 million in recorded project costs.
- Whether commodity prices, reserves, hedges and future cost estimates preserve the oil and gas ceiling-test cushion.
- Actual fiscal 2017 capital spending versus the revised Pipeline and Storage estimate, and the company’s financing and debt-covenant capacity.
- Effects of the New York rate order and any judicial review, as well as ongoing pipeline rate reductions and revenue-sharing provisions.
- Whether production growth, gathering volumes and segment margins continue to offset weaker Utility, Pipeline and Storage, and Energy Marketing results.