National Fuel Gas Company — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2015, ended March 31, 2015. Comparisons are with the corresponding 2014 periods. Dollar amounts below are in millions unless noted.
Business context and financial performance
National Fuel is an integrated energy company with five reporting segments: Exploration and Production, Pipeline and Storage, Gathering, Utility, and Energy Marketing. It produces natural gas in Appalachia and oil primarily in California, and operates gathering, pipeline, storage, utility distribution, and marketing businesses.
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Operating revenue | $596.1, down 21.2% from $756.2 | $1,120.0, down 14.3% from $1,306.3 |
| Operating income | $44.3, versus $180.1 | $204.9, versus $340.7 |
| Net income | $16.7, versus $95.2 | $101.4, versus $177.5 |
| Diluted earnings per share | $0.20, versus $1.12 | $1.19, versus $2.09 |
| Operating margin | 7.4%, versus 23.8% | 18.3%, versus 26.1% |
| Operating cash flow | Not separately reported for the quarter | $507.5, versus $503.2 |
| Cash capital expenditures | Not separately reported for the quarter | $493.3, versus $367.4 |
Revenue and earnings comparisons reflect, in part, lower commodity prices and lower gas-related sales prices. In the Utility segment, lower retail revenue largely reflected a lower cost of gas sold; such revenue movements do not translate directly into earnings changes.
Segment results and material changes
- Exploration and Production: Reported a $53.6 million loss for the quarter and a $26.8 million loss for the six months, versus profits of $24.4 million and $55.5 million, respectively, in 2014. Results included a $120.3 million non-cash pre-tax oil and gas property impairment ($69.5 million after tax). Lower oil and gas prices after hedging also pressured results.
- Pipeline and Storage: Earnings rose to $23.4 million for the quarter and $44.2 million for the six months, supported by transportation demand charges from the Mercer Expansion Project and new contracts.
- Gathering: Quarterly earnings fell to $6.4 million, partly due to higher depreciation following impairment charges on Tionesta gathering facilities. Six-month earnings increased to $18.0 million on higher gathering revenue and volumes.
- Utility: Earnings increased to $38.2 million for the quarter and $60.8 million for the six months. Regulatory adjustments supported results; colder-than-normal weather reduced earnings under the New York weather normalization clause by approximately $2.9 million for the quarter.
- Energy Marketing: Earnings were $3.4 million for the quarter, down $0.4 million, reflecting lower margins amid high-priced gas purchases during extremely cold February weather. Six-month earnings increased to $6.2 million.
Cash flow, debt, and liquidity
- Operating cash flow of $507.5 million was slightly above the prior-year $503.2 million. Investing activities used $494.6 million, principally reflecting capital expenditures; financing activities provided $19.7 million.
- Cash and temporary investments were $69.4 million at March 31, 2015, up from $36.9 million at September 30, 2014. Current assets were $486.9 million and current liabilities $644.2 million.
- Long-term debt was $1.649 billion, unchanged from September 30, 2014. Commercial paper and bank notes totaled $157.5 million, compared with $85.6 million of short-term debt at fiscal year-end. Total capitalization was $4.248 billion.
- The company reported a debt-to-capitalization ratio of 0.41 under its $750 million committed credit facility, with no borrowings under that facility. The facility extends through December 5, 2019; the commercial paper program has a $300 million limit.
- Dividends declared were $0.385 per share for the quarter and $0.770 for the six months, up from $0.375 and $0.750, respectively, in 2014.
Outlook, risks, and contingencies
- Management expected further significant ceiling-test impairments in the quarters ending June 30, September 30, and December 31, 2015, citing low commodity prices and the expected effect of rolling higher historical prices out of the 12-month average. The filing cautions that actual impairment depends on prices, reserves, costs, and other assumptions.
- Fiscal 2015 Exploration and Production forecast production was reduced to 155–175 Bcfe from 155–190 Bcfe. Fiscal 2016 Exploration and Production capital spending was reduced to approximately $440 million from approximately $715 million.
- The company intended to issue long-term debt in the near term and expected to use short-term debt as needed for fiscal 2015 capital requirements. Management warned that further impairments could restrict incremental long-term debt issuance under the 1974 indenture for at least 12 months beginning in October 2015, while noting access to credit facilities and replacement debt remained available.
- Major planned infrastructure work included Westside Expansion and Modernization, Northern Access 2015, Northern Access 2016, the Tuscarora Lateral Project, and continued development of the Clermont gathering system. Project costs, construction timing, regulatory approvals, shipper commitments, and financing remain relevant execution considerations.
- Estimated remaining environmental cleanup costs were $13.8 million, expected to be recovered through rates over approximately 12 years. Remediation at a New York manufactured-gas-plant site was expected to begin in summer 2015. Other ordinary-course legal and regulatory matters could affect results, but possible losses could not be estimated.
- Commodity-price and hedging risks, potential hydraulic-fracturing regulation, credit-market access, counterparty exposure, and project delays or cost changes are identified risks. Management stated disclosure controls were effective as of March 31, 2015.
Important facts for investors to verify
- Whether subsequent quarterly ceiling tests produced the anticipated impairments, and the effect on earnings, asset values, and debt covenants.
- Whether production, commodity prices, and hedge realizations support the revised fiscal 2015 production outlook and fiscal 2016 spending plan.
- Progress, final costs, regulatory approvals, and service commencement for major pipeline and gathering projects, including Northern Access 2016.
- Future borrowing needs and access to long-term debt markets if indenture restrictions apply; monitor commercial paper use and credit ratings.
- Whether the $13.8 million environmental estimate, rate recovery, and remediation schedule remain current, and whether other legal or regulatory matters become quantifiable.