Business Context and Reporting Period
Company: National Fuel Gas Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2006
Business Overview: A diversified energy company operating in five segments: Utility, Pipeline and Storage, Exploration and Production, Energy Marketing, and Timber. The company is subject to regulation by the FERC, NYPSC, and PaPUC.
Key Financial Metrics
| Metric (Nine Months Ended June 30) | 2006 ($ in millions) | 2005 ($ in millions) |
|---|---|---|
| Operating Revenues | $2,017.2 | $1,636.5 |
| Net Income Available for Common Stock | $136.1 | $140.3 |
| Income from Continuing Operations | $136.1 | $135.2 |
| Earnings Per Share (Diluted) | $1.58 | $1.65 |
| Operating Cash Flow | $409.9 | $334.4 |
| Capital Expenditures | $218.7 | $157.4 |
| Long-Term Debt (Net of Current Portion) | $1,111.7 | $1,119.0 |
| Cash and Temporary Investments | $121.6 | $57.6 |
Note: For the quarter ended June 30, 2006, Net Income was $0.1 million compared to $19.2 million in the prior year quarter.
Material Changes vs. Prior Period
- Impairment Charge: The Exploration and Production segment recorded a non-cash impairment charge of $62.4 million ($39.5 million after-tax) related to Canadian oil and gas properties. This was triggered by a decline in natural gas prices causing the book value of reserves to exceed the full-cost ceiling test limit.
- Revenue Growth: Consolidated operating revenues increased 23.3% year-over-year for the nine-month period, driven primarily by higher retail gas sales in the Utility segment (recovering higher gas costs) and increased oil/gas prices in the Exploration and Production segment.
- Utility Segment Performance: Utility earnings increased $5.9 million for the nine months, aided by a rate case settlement in New York and a symmetrical sharing adjustment, despite warmer weather reducing throughput volumes.
- Discontinued Operations: The company sold its Czech Republic operations (U.E.) in July 2005. Consequently, 2005 results included discontinued operations, while 2006 results reflect only continuing operations.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Capital Projects: The Empire Connector project in-service date was revised to November 2008 (from November 2007). The company is awaiting FERC approval.
- Capital Expenditures: Estimated 2006 capital expenditures for the Exploration and Production segment were increased to $207.0 million due to higher drilling activity and facility construction.
- Share Repurchases: The company repurchased 2.28 million shares under an 8-million share program authorized in December 2005.
Risks and Contingencies
- FERC Complaint: The NYPSC, PaPUC, and Pennsylvania Office of Consumer Advocate filed a complaint alleging Supply Corporation's rates are unjust and unreasonable, specifically regarding gas retention for fuel and loss. The company believes its rates are fair and is engaged in settlement discussions.
- Regulatory Matters: The NTSB issued safety recommendations following a 2004 gas explosion in Dubois, PA, regarding butt-fusion joints. The company is implementing these recommendations.
- Commodity Price Risk: Further decreases in natural gas prices could result in future impairments of Canadian oil and gas assets.
- Weather Sensitivity: Earnings in the Utility and Energy Marketing segments are seasonal and influenced by weather conditions (degree days).
Investor Verification Checklist
- Impairment Sustainability: Verify the sensitivity of the Canadian asset impairment to future natural gas price fluctuations.
- FERC Rate Case Outcome: Monitor the status of the FERC complaint regarding Supply Corporation's fuel and loss retention rates and potential rate reductions.
- Capital Expenditure Execution: Track the actual spend against the revised $207 million E&P budget and the timeline for the Empire Connector project.
- Utility Rate Recovery: Confirm the implementation and financial impact of the pending Pennsylvania rate case filed in June 2006.
- Share Repurchase Activity: Review the remaining capacity under the 8-million share repurchase program and its impact on future earnings per share.