National Fuel Gas Company — Q1 FY2018 10-Q
Reporting period: Three months ended December 31, 2017; comparative period is the three months ended December 31, 2016. The company operates five segments: Exploration and Production, Pipeline and Storage, Gathering, Utility, and Energy Marketing.
Financial performance and position
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Operating revenue | $419.7 million | $422.5 million |
| Operating income | $142.0 million | $172.1 million |
| Net income available to common stock | $198.7 million | $88.9 million |
| Diluted earnings per share | $2.30 | $1.04 |
| Cash from operating activities | $94.8 million | $144.6 million |
| Capital expenditures (cash flow statement) | $142.6 million | $106.1 million |
Net income included a $111.0 million income-tax benefit from remeasuring deferred taxes following enactment of the 2017 Tax Reform Act. The company reported an effective tax rate of negative 69.2%; excluding that one-time remeasurement, management said the rate would have been 25.3%. Tax-effect estimates were provisional and subject to further guidance and analysis.
Cash and temporary investments were $166.3 million at December 31, versus $555.5 million at September 30, 2017. Long-term debt, net of current portion, was $2.084 billion; no long-term debt matured within the following 12 months, and the company had no short-term debt outstanding. The $300 million of 6.50% notes due in April 2018 were redeemed in October for $307.0 million plus accrued interest. The credit facility’s debt-to-capitalization ratio was 0.53 against a 0.65 limit. Dividends declared were $0.415 per share.
Changes and segment results
- Revenue edged down $2.8 million, while operating income fell $30.1 million. Net income rose $109.7 million, primarily due to the tax-reform remeasurement rather than underlying operating growth.
- Exploration and Production earnings increased $71.6 million to $106.7 million, including a $77.3 million segment tax-remeasurement benefit. Lower gas production and lower gas prices after hedging partly offset the tax benefit; gas production declined to 36.1 Bcf from 40.6 Bcf.
- Pipeline and Storage earnings rose $19.1 million to $38.5 million, including tax-reform benefits. Revenue was broadly flat; the Line D Expansion entered service November 1, 2017.
- Gathering earnings rose $34.4 million to $45.4 million, mainly from tax-reform benefits, despite lower revenue and gathered volumes.
- Utility earnings were nearly unchanged at $21.0 million. Colder weather increased retail volumes, while regulatory adjustments and operating costs offset gains.
- Energy Marketing earnings declined $0.7 million to $1.0 million, primarily due to lower margins as local purchase-point gas prices strengthened relative to NYMEX-based sales contracts.
Outlook, risks, and unusual items
- Management expects to use cash on hand and operating cash flow for fiscal 2018 capital needs, with short- or long-term debt issuance possible as needed. Long-lived-asset expenditures were $126.5 million for the quarter, compared with $94.6 million a year earlier.
- Management expects an Empire transportation contract termination in December 2018 to reduce fiscal 2019 transportation revenue by up to approximately $14 million; it does not expect renewal at existing rates.
- The Northern Access 2016 pipeline project remains subject to New York permits and litigation. Approximately $75.5 million had been spent; no impairment was recorded, but an unfavorable resolution could impair a significant portion of project costs. No target in-service date had been set.
- The company cited commodity-price and production volatility, potential oil-and-gas ceiling-test impairments, regulatory and environmental requirements, project permitting, financing and credit-rating risks, and uncertainty around implementation of tax reform. At December 31, the ceiling-test cushion was approximately $334.6 million.
- New York regulators opened a proceeding to determine how tax-reform benefits for utilities should be treated, including potential customer refunds. The company could not predict the outcome. The New York utility rate-order appeal also remained pending.
- Environmental cleanup liabilities for former manufactured-gas-plant sites were estimated at $3.0 million, with recovery expected through rates over approximately four years. Other ordinary-course litigation and regulatory matters had no estimable loss range disclosed.
Key facts for investors to verify
- How much of reported earnings growth is attributable to the one-time tax benefit, and what are the final tax-reform and ratepayer-refund impacts?
- Whether Northern Access 2016 receives the required permits, how the litigation resolves, and whether project costs remain recoverable.
- Whether lower production and gathering volumes persist, and how commodity prices, hedges, and regional price differentials affect cash generation.
- How the expected fiscal 2019 contract termination and planned capital spending affect revenue, liquidity, and future borrowing needs.
- Whether operating cash flow and available credit remain sufficient to fund investment, dividends, and debt obligations.