National Fuel Gas Company — FY2016 Form 10-K
Business context and reporting period: This annual report covers the fiscal year ended September 30, 2016; it is not a standalone fourth-quarter filing. National Fuel is an integrated energy company with five 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 primarily in California. The company’s fourth quarter ended September 30, 2016.
Key financial results
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $1.452 billion | $1.761 billion |
| Operating income (loss) | $(416.5) million | $(611.1) million |
| Net income (loss) | $(291.0) million | $(379.4) million |
| Basic EPS | $(3.43) | $(4.50) |
| Cash from operations | $589.0 million | $853.6 million |
| Capital expenditures | $581.6 million cash basis | $1.018 billion |
| Dividends paid | $134.8 million | $130.7 million |
- Revenue fell about 17% year over year. The operating loss included a $948.3 million noncash oil and gas property impairment charge, versus $1.126 billion in FY2015. The reported operating margin was approximately negative 28.7%, heavily affected by the impairment.
- Cash from operations less cash capital expenditures was approximately $7.4 million, before $137.3 million of net sale proceeds from oil and gas properties. Cash and temporary investments ended the year at $130.0 million.
- At September 30, 2016, long-term debt net of discount and issuance costs was $2.086 billion; shareholders’ equity was $1.527 billion. There was no short-term debt outstanding. The credit-facility debt-to-capitalization ratio was 0.58.
- Segment net income (loss): Exploration and Production $(452.8) million; Pipeline and Storage $76.6 million; Gathering $30.5 million; Utility $51.0 million; Energy Marketing $4.3 million.
- FY2016’s fourth quarter reported revenue of $292.5 million and net income of $37.6 million, including a $32.7 million pretax noncash impairment charge ($19.0 million after tax). FY2015’s fourth quarter had a $187.7 million net loss.
Material changes and management commentary
- The consolidated loss narrowed by $88.5 million, mainly because Exploration and Production impairment charges were lower. Lower commodity prices continued to pressure production revenue and cash receipts.
- Seneca reduced its Marcellus development program to one drilling rig from three at the start of FY2016. Natural gas production rose to 143.5 Bcf from 139.6 Bcf, but average realized gas and oil prices after hedging declined to $3.02/Mcf and $57.91/barrel, respectively, from $3.38/Mcf and $70.36/barrel.
- Proved gas reserves declined to 1,674.6 Bcf from 2,142.1 Bcf, reflecting lower-price revisions and asset sales, including reserves transferred under the IOG joint development agreement. Total proved reserves declined to 1,849 Bcfe from 2,344 Bcfe.
- Pipeline and Storage revenue increased with expansion projects entering service, although segment earnings declined to $76.6 million. Gathering revenue rose with higher volumes, but earnings slipped to $30.5 million. Utility earnings fell to $51.0 million, with warmer weather and regulatory adjustments among the factors cited.
- Management estimated capital expenditures of $805 million for FY2017, $815 million for FY2018, and $810 million for FY2019. The FY2017 estimate includes $225 million for Exploration and Production and $415 million for Pipeline and Storage.
Outlook, liquidity, risks, and contingencies
- Management expected to fund at least the first half of FY2017 capital needs with operating cash flow and, if needed, short-term borrowings. The company said liquidity was adequate for known demands and had no long-term debt maturing before FY2018.
- Due to oil and gas impairments and covenants under its 1974 indenture, the company expected to be restricted from issuing additional long-term unsecured debt until the second half of FY2017, absent a waiver or amendment. It had a $750 million revolving facility through December 2019 and a $500 million 364-day facility through September 2017; neither was drawn at year-end.
- The NYPSC rate case filed in April 2016 sought an annual revenue increase of approximately $41.7 million; settlement discussions were underway and the outcome was uncertain. A FERC settlement for Empire was conditionally approved after year-end and was estimated to reduce annual revenue by $3 million to $4 million; the company said it was not expected to materially affect financial condition.
- The IOG agreement covers up to 75 Marcellus wells, with an option for seven more. IOG was expected to fund approximately $325 million for its 80% working interest in the 75 wells. Seneca had received $137.3 million and recorded a $19.6 million receivable by year-end.
- Key risks include commodity prices and regional gas-price differentials, additional ceiling-test impairments, reserve and production uncertainty, project permitting and construction, environmental and pipeline-safety regulation, access to financing and credit ratings, and derivative-counterparty performance. The company also cited cybersecurity, weather, benefit costs, and customer credit risks.
- Seneca disputed alleged Pennsylvania environmental and administrative violations at 23 inspected sites; the PaDEP’s proposed penalty was described as immaterial. The filing also reports approximately $4.5 million of estimated remaining cleanup costs for former manufactured-gas and third-party disposal sites.
Most important facts for investors to verify
- Whether commodity prices and reserve revisions lead to further full-cost ceiling-test impairments; the filing’s sensitivity analysis indicates additional after-tax impairment of $109.1 million for a $0.25/MMBtu gas-price decrease or $38.9 million for a $5/barrel oil-price decrease, considered separately.
- Whether operating cash flow can support the planned capital program, dividends, and debt service, particularly while long-term unsecured issuance is constrained.
- Progress, permitting, cost, and contracted shipper support for Northern Access 2016 and other pipeline and gathering projects.
- Resolution and revenue effects of the New York utility rate case and Empire’s FERC rate settlement.
- Execution and funding of the IOG development program, including the remaining receivable and planned development of proved undeveloped reserves.
- Changes in proved reserves, production economics, and the company’s ability to maintain its dividend amid continued losses and capital needs.