NATIONAL FUEL GAS CO annual report, FY2014

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National Fuel Gas Company — FY2014 Form 10-K

Reporting period: Fiscal year ended September 30, 2014. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are for the quarter ended September 30, 2014. National Fuel is an integrated energy company spanning exploration and production, pipelines and storage, gathering, utility distribution, and energy marketing, with a strategic focus on Marcellus Shale development.

Financial performance and liquidity

  • FY2014 revenue: $2.113 billion, up 15.5% from $1.830 billion in FY2013. Revenue includes substantial gas commodity costs that are passed through to utility customers.
  • Profit: Net income was $299.4 million, up 15.2% from $260.0 million. Diluted EPS increased to $3.52 from $3.08. Operating income was $569.7 million versus $517.8 million; operating margin was approximately 27.0%, compared with 28.3%.
  • Fourth quarter: Revenue was $366.6 million, operating income $102.0 million, and net income $57.4 million; basic and diluted EPS were both $0.68.
  • Cash flow: Cash from operations was $909.4 million, up from $738.6 million. Capital expenditures were $914.4 million, leaving operating cash flow slightly below reported capital spending. Cash declined $28.0 million to $36.9 million.
  • Debt and capitalization: Long-term debt was $1.649 billion, unchanged year over year; commercial paper outstanding was $85.6 million. Shareholders’ equity was $2.411 billion. The credit-facility debt-to-capitalization ratio was 0.42 against a 0.65 limit. No long-term debt matured in the following 12 months.
  • Liquidity: Current assets were $377.3 million and current liabilities $490.6 million at year-end. The company had a $750 million committed credit facility, with no borrowings outstanding on it, and a $300 million commercial-paper program.
  • Margins and shareholder returns: Net margin was approximately 14.2%, broadly stable with FY2013. Dividends declared were $1.52 per share, versus $1.48.

Material changes and business drivers

  • Exploration and Production earnings rose to $121.6 million from $115.4 million. Appalachian gas production increased 38% to 139.1 Bcf, while higher depletion, production costs, and lower realized gas prices after hedging partly offset the production growth.
  • Pipeline and Storage earnings increased to $77.6 million from $63.2 million, supported by expansion-project contracts and higher transportation volumes.
  • Gathering earnings rose to $32.7 million from $13.3 million as gathered volumes increased to 138.7 Bcf, principally on the Trout Run and Clermont systems.
  • Utility earnings decreased to $64.1 million from $65.7 million despite colder weather; higher operating and tax costs and an earnings-sharing adjustment offset some benefits. New York’s weather-normalization mechanism reduced FY2014 earnings by about $3.0 million.
  • Energy Marketing earnings increased to $6.6 million from $4.6 million. FY2014 included a new unbilled-revenue accrual of $8.5 million, adding approximately $0.6 million to margin.
  • Proved natural gas reserves increased to 1,682.9 Bcf from 1,299.5 Bcf, mainly from Appalachian extensions and discoveries. Proved oil reserves decreased to 38.5 million barrels from 41.6 million, including removals of undeveloped reserves not planned for near-term development.

Outlook, risks, and unusual items

  • FY2015 investment outlook: Estimated capital expenditures total $1.175 billion: $650 million Exploration and Production, $250 million Pipeline and Storage, $175 million Gathering, and $100 million Utility. Management expected to use operating cash first and issue short- and long-term debt as needed.
  • Production outlook: Appalachian production was forecast at 159–197 Bcfe in FY2015, versus 139 Bcf of Appalachian gas production in FY2014. The company also committed to approximately $239 million of FY2015 spending to develop proved undeveloped reserves.
  • Projects: Major planned investments include Northern Access 2015 and 2016 pipeline expansions, Westside modernization, and the Clermont gathering system. Project timing, permitting, construction costs, shipper demand, and regulatory approvals remain important execution factors.
  • Commodity and impairment exposure: The company hedges a portion of forecast production, limiting downside but also potential upside. The oil-and-gas ceiling-test cushion was approximately $148.4 million at year-end; management estimated that a $1/MMBtu lower gas-price assumption would have resulted in a ceiling-test impairment. Reserve values are estimates and depend on prices, production, costs, and development plans.
  • Regulation and environment: Hydraulic-fracturing rules, pipeline-safety requirements, utility and FERC rate decisions, and potential climate regulation could raise costs or delay projects. Estimated remaining environmental cleanup costs were about $14.0 million, with expected recovery through rates over approximately 13 years; the company recorded a $12.6 million minimum liability for its most significant site. A Pennsylvania environmental matter was settled for a $250,000 penalty in September 2014.
  • Other items: FY2014 included a $3.6 million after-tax life-insurance death-benefit gain in Corporate. FY2013 included a $4.9 million after-tax utility refund provision. The New York utility rate settlement extended existing rates through at least September 30, 2015 and set a 9.1% allowed return on equity for ratemaking purposes, subject to an earnings-sharing mechanism.
  • Other risks: Management cites dependence on subsidiary cash flows, capital-market access, counterparty performance, weather, customer credit, pension assumptions, and operational, cyber, and environmental events. Management stated liquidity was adequate for known demands.

Important facts for investors to verify

  • Whether FY2015 Appalachian production and the $1.175 billion capital program were achieved, and the resulting borrowing and cash-flow needs.
  • Progress, approvals, committed shipper capacity, budgets, and in-service dates for Northern Access and other pipeline and gathering projects.
  • Natural gas and oil prices, hedge settlements, regional price differentials, and any resulting ceiling-test impairment or reserve revision.
  • Whether reserve additions convert to production economically, including development of proved undeveloped reserves and acreage subject to lease expiration.
  • Updates to environmental liabilities, regulatory recovery, utility rate proceedings, and pension funding requirements.
  • FY2014 financial statements were audited with an unqualified opinion; management and the auditor reported effective internal control over financial reporting as of September 30, 2014.