National Fuel Gas Company — Form 10-Q Summary
Business context and reporting period. The filing covers the three months ended December 31, 2018, the first quarter of fiscal 2019. National Fuel is an integrated energy company with five reportable segments: Exploration and Production, Pipeline and Storage, Gathering, Utility, and Energy Marketing. Its operations are concentrated in western New York and Pennsylvania, with oil production also in California. The filing is unaudited; utility and energy-marketing results are seasonal.
Key financial results
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $490.2 million | $419.7 million |
| Operating income | $161.7 million | $149.5 million |
| Net income available to common stock | $102.7 million | $198.7 million |
| Diluted EPS | $1.18 | $2.30 |
| Operating cash flow | $104.4 million | $97.5 million |
| Capital expenditures, cash-flow statement | $177.6 million | $142.6 million |
| Dividends declared per share | $0.425 | $0.415 |
Revenue increased 16.8%; operating margin was approximately 33.0%, compared with 35.6%. Net margin fell to approximately 20.9% from 47.3%, principally because the prior-year quarter included a large, one-time tax benefit. Excluding the tax-reform deferred-tax remeasurements recorded in both periods ($5.0 million benefit in Q1 FY2019 and $111.0 million in Q1 FY2018), management said earnings increased $10.0 million year over year.
Cash and temporary cash investments were $109.8 million at December 31, 2018; cash, cash equivalents, and restricted cash totaled $112.5 million. Long-term debt was $2.132 billion, with no short-term borrowings or debt maturities due within 12 months. The company reported a 0.51 debt-to-capitalization ratio under its credit agreement. Operating cash flow less cash capital expenditures was negative approximately $73.2 million.
Material changes and segment performance
- Exploration and Production: Revenue increased $23.7 million to $162.9 million; segment earnings fell $68.5 million to $38.2 million, primarily reflecting the prior-year tax benefit. Appalachian gas production rose 9.9 Bcf, while weighted average gas price after hedging declined to $2.61/Mcf from $2.72/Mcf.
- Pipeline and Storage: Segment earnings decreased $13.4 million to $25.1 million. A transportation contract termination is expected to reduce revenue by up to approximately $13.6 million for the remainder of fiscal 2019.
- Gathering: Earnings declined $31.2 million to $14.2 million, largely because of the prior-year tax benefit; gathered volume increased 11.5 Bcf.
- Utility: Earnings increased $4.7 million to $25.6 million, supported by higher usage, system-modernization tracker revenue, and lower interest expense. Higher gas-cost revenue largely passed through to customers and did not itself increase earnings.
- Energy Marketing: The segment reported a $0.3 million loss versus $1.0 million of earnings, mainly due to lower margins as local purchase prices strengthened relative to NYMEX-based sales contracts.
Capital expenditures were higher than in the prior-year quarter. The company spent $174.9 million on long-lived assets, with the largest share in Exploration and Production. Operating cash flow increased $6.9 million, reflecting lower interest payments, partly offset by Utility gas-cost-recovery timing.
Outlook, risks, and unusual items
- Management expects to fund fiscal 2019 capital needs primarily with cash on hand and operating cash flow, but may issue short- or long-term debt as needed. Results and funding needs remain sensitive to commodity prices and production.
- Seneca’s move from two to three Pennsylvania drilling rigs is expected to support production and reserve growth in fiscal 2019. The filing does not provide a formal earnings or full-year production guidance figure.
- The Northern Access project remains delayed amid permitting litigation and rehearing proceedings. Its in-service date is expected no earlier than fiscal 2022; $76.5 million had been incurred, and unfavorable developments could lead to impairment.
- Other pipeline development plans include Empire North, with a projected second-half fiscal 2020 in-service date and estimated cost of $145 million, and FM100, targeting late calendar 2021 at a preliminary estimated cost of $280 million. These remain subject to development and regulatory risks.
- Empire’s rate settlement, effective on an interim basis January 1, 2019, remains subject to FERC approval; if approved, it is estimated to raise annual revenue by approximately $4.6 million.
- The oil-and-gas full-cost ceiling exceeded the related book value by approximately $776.3 million at December 31, 2018. The filing’s specified commodity-price sensitivities did not indicate an impairment, but changes in prices, reserves, or costs could affect future tests.
- Environmental cleanup liabilities were estimated at $7.5 million, with expected rate recovery over approximately four years. The company also identifies climate regulation, commodity-price volatility, project permitting, credit access, and derivative-market rules as risks.
- A new accounting standard led the company to recognize changes in fair value of equity investments in earnings; the quarter included $5.0 million of unrealized investment losses. The prior-year tax comparison is also affected by the one-time 2017 Tax Reform Act deferred-tax remeasurement.
Important facts for investors to verify
- Whether the $10.0 million increase in earnings excluding tax remeasurements is sustained, and how the segments perform absent prior-year tax benefits.
- The timing and revenue impact of the terminated pipeline transportation contract, and FERC’s disposition of Empire’s settlement.
- Permitting and litigation outcomes, cost updates, and impairment exposure for Northern Access and other expansion projects.
- Whether operating cash flow can fund the elevated capital program and dividends without materially increasing borrowing.
- Commodity prices, hedge results, production growth, and the assumptions underlying future full-cost ceiling tests.