NFG

Business Context and Reporting Period

Company: National Fuel Gas Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: A diversified energy holding company operating in four segments: Utility, Pipeline and Storage, Exploration and Production, and Energy Marketing. The company is heavily focused on developing Marcellus Shale acreage in the Appalachian region.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Operating revenues decreased $133.3 million (16.6%) for the quarter and $283.4 million (20.1%) for the six months compared to the prior year. This was primarily driven by lower retail gas sales revenues in the Utility segment due to lower purchased gas costs and warmer weather.
• Significant Earnings Increase: Net income increased $6.9 million for the quarter and $114.1 million for the six months. The six-month increase is largely attributable to the non-recurrence of a $182.8 million impairment charge on oil and gas properties recorded in the prior year.
• Segment Performance:
  • Exploration & Production: Earnings surged $9.3 million (quarter) and $122.6 million (six months) due to higher oil prices and increased natural gas production from the Marcellus Shale.
  • Utility: Earnings increased slightly ($0.5 million quarter; $1.4 million six months) despite revenue declines, aided by lower operating costs and tax expenses.
  • Pipeline & Storage: Earnings decreased $2.7 million (quarter) and $9.6 million (six months) due to lower transportation volumes and higher interest/operating expenses.
• Debt Reduction: Long-term debt decreased by $200 million compared to September 30, 2009, as $200 million of medium-term notes were reclassified to current liabilities due to maturity in November 2010.

Outlook, Risks, and Management Commentary

• Marcellus Shale Development: Management is aggressively developing Marcellus Shale acreage, spending $152.7 million in the first six months of 2010. Significant capital projects include the Tioga County Extension, Northern Access, and West-to-East (W2E) pipeline expansions to transport gas to markets.
• Liquidity and Financing: The company maintains a strong liquidity position with $426.8 million in cash. It expects to fund capital expenditures through cash from operations and short-term borrowings, with no long-term debt issuance expected until 2011.
• Regulatory Risks:
  • Hydraulic Fracturing: Potential increased regulation of hydraulic fracturing in New York and Pennsylvania could impact drilling costs and timelines.
  • Climate Change: New EPA regulations on greenhouse gas emissions (effective Jan 2011) and potential cap-and-trade legislation could increase compliance costs.
  • Rate Cases: An appeal regarding environmental cost recovery in New York is pending before the Court of Appeals.
• Market Risk: The company uses derivative instruments to hedge commodity price risks. At March 31, 2010, the company held significant net derivative assets ($48.9 million) and liabilities ($16.6 million).

Investor Verification Checklist

• Impairment Recurrence: Verify the stability of oil and gas prices to ensure the $182.8 million impairment charge from the prior year does not recur under the SEC full cost ceiling test.
• Capital Expenditure Execution: Monitor the progress and cost overruns of major pipeline projects (W2E, Northern Access, Tioga County) intended to monetize Marcellus Shale production.
• Regulatory Environment: Track legislative developments regarding hydraulic fracturing in New York and Pennsylvania, as well as federal climate change regulations.
• Debt Maturity: Confirm the refinancing strategy for the $200 million of medium-term notes maturing in November 2010.
• Weather Sensitivity: Assess the impact of weather normalization clauses (WNC) in New York on future earnings stability given the seasonal nature of the utility business.