NFG

Business Context and Reporting Period

Company: National Fuel Gas Company
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended June 30, 2009
Business Overview: A diversified energy company operating in four reportable segments: Utility, Pipeline and Storage, Exploration and Production, and Energy Marketing. The Timber segment was reclassified to "All Other" during the prior fiscal year.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Operating revenues decreased 33% for the quarter and 11% for the nine months compared to the prior year. This was primarily driven by lower commodity prices and the cessation of off-system sales in the Utility segment due to FERC regulatory changes.
• Earnings Decrease: Net income dropped 28% for the quarter and 67% for the nine months. The nine-month decline was significantly impacted by a non-cash impairment charge of $182.8 million ($108.2 million after-tax) recorded in the Exploration and Production segment in the prior quarter due to the SEC full cost ceiling test.
• Segment Performance:
  • Exploration and Production: Recorded a net loss of $38.4 million for the nine months (vs. $108.4 million profit in 2008) largely due to the impairment charge and lower oil/gas prices.
  • Utility: Earnings decreased slightly due to higher interest expenses from new debt issuance and lower usage per account, partially offset by colder weather in Pennsylvania.
  • Pipeline and Storage: Earnings increased slightly for the nine months due to higher transportation revenues from the Empire Connector project.
• Liquidity Improvement: Cash and temporary cash investments increased significantly to $433.2 million from $68.2 million at the prior fiscal year-end, bolstered by a $250 million debt issuance in April 2009.

Guidance, Outlook, and Risks

• Capital Projects: The Company is pursuing the Midstream Covington Gathering Project in Pennsylvania (estimated cost $25-30 million) and evaluating the Appalachian Lateral pipeline project (estimated cost $750 million to $1 billion). The Empire Connector project is substantially complete.
• Acquisitions: In July 2009 (subsequent event), the Exploration and Production segment purchased Ivanhoe Energy's U.S. operations for approximately $39.2 million to complement assets in California.
• Debt and Liquidity: The Company issued $250 million of 8.75% notes in April 2009. It maintains $420 million in uncommitted credit lines and a $300 million commercial paper program. The debt-to-capitalization ratio was 43% at June 30, 2009, well below the 65% covenant limit.
• Key Risks:
  • Commodity Prices: Significant exposure to fluctuations in natural gas and crude oil prices, which impact the full cost ceiling test and earnings.
  • Regulatory: Risks related to rate cases in New York and Pennsylvania, and FERC regulations affecting off-system sales and pipeline rates.
  • Environmental: Estimated remaining clean-up costs for former manufactured gas plant sites range from $19.0 million to $23.2 million.

Investor Verification Checklist

• Verify the impact of the $182.8 million impairment charge on the Exploration and Production segment's future capitalization and earnings.
• Monitor the status of the FERC Order No. 717 regarding off-system sales and its long-term effect on Utility segment revenues.
• Assess the sensitivity of the full cost ceiling test to current oil and natural gas prices, as a decline could trigger further impairments.
• Review the progress and regulatory approvals for the Appalachian Lateral and Midstream Covington projects.
• Confirm the Company's ability to maintain liquidity and access credit markets given the higher interest rates on recent debt issuances.