National Fuel Gas Company — Form 10-Q Summary
Business context and reporting period. Diversified energy holding company with Utility, Pipeline and Storage, Exploration and Production, and Energy Marketing segments. This filing covers the quarter and nine months ended June 30, 2012, the third quarter of the company’s fiscal year; balance-sheet comparisons are to September 30, 2011. Amounts below are in millions of dollars unless otherwise noted.
Financial performance and position
- Quarter: Revenue was $328.9, down 13.7% from $381.0; operating income was $90.3, down from $94.8; net income was $43.2, down 7.9% from $46.9. Diluted EPS was $0.52 versus $0.56. Operating and net margins were approximately 27.5% and 13.1%, respectively, compared with 24.9% and 12.3% in the prior-year quarter.
- Nine months: Revenue was $1,313.6, down 12.0% from $1,492.8; operating income was $340.8 versus $366.0; net income was $171.3, down 22.5% from $221.0. Diluted EPS was $2.05 versus $2.64. Operating and net margins were approximately 25.9% and 13.0%, respectively, compared with 24.5% and 14.8%. Prior-year results included a $50.9 pretax ($31.4 after-tax) gain on the sale of unconsolidated subsidiaries.
- Cash flow: Nine-month operating cash flow was $541.0, compared with $536.3. Cash capital expenditures were $776.9; net investing cash outflow was $778.2. Financing provided $297.6, including $496.1 net proceeds from the December 2011 debt issuance. Cash increased $60.4 to $140.8. Total long-lived-asset expenditures, including accrual timing, were $803.2.
- Debt and liquidity: Long-term debt, including its current portion, totaled $1,399.0, versus $1,049.0 at September 30, 2011. Short-term bank notes and commercial paper totaled $70.2. The company had $250.0 of 5.25% notes due March 2013. It reported a $750.0 committed credit facility through January 2017, with no amount outstanding; the facility’s debt-to-capitalization covenant limit was 0.65 and the reported ratio was 0.42. Cash was $140.8. The fair value of long-term debt, including current maturities, was $1,595.6.
- Segments: Nine-month earnings declined in Utility ($52.7 versus $62.4), Exploration and Production ($74.4 versus $93.5), and Energy Marketing ($4.7 versus $9.1); Pipeline and Storage increased to $35.4 from $24.0. Quarter earnings were $5.1, $21.9, $0.9, and $12.6, respectively, for those segments.
- Other balance-sheet items: Total assets were $5,836.9, up from $5,221.1 at September 30, 2011. Shareholders’ equity was $1,989.2 versus $1,891.9.
Material changes and management commentary
- Management attributed lower quarterly earnings mainly to reduced Exploration and Production, Utility, and Energy Marketing results. The nine-month earnings decline was principally affected by the prior-year asset-sale gain, as well as weaker results in those same businesses.
- Utility revenue and earnings were pressured by warmer weather, lower gas costs and reduced sales volumes. Nine-month Utility earnings fell $9.7; the New York weather-normalization clause preserved approximately $5.9 of earnings in the period.
- Exploration and Production quarterly earnings fell $10.9, chiefly due to lower natural-gas prices after hedging and higher depletion, operating and interest costs. Appalachian gas production grew, but the average gas price after hedging declined. A Pennsylvania well impact fee reduced nine-month earnings by $8.1.
- Pipeline and Storage earnings benefited from new firm transportation contracts, including the Line N and Tioga County projects, and higher transportation revenue. Its nine-month earnings increased $11.4.
- Low natural-gas prices led the company to reduce drilling activity under its EOG joint venture. Fiscal 2013 Exploration and Production capital spending was revised to $450.0 from $500.0, including Appalachian spending of $382.5 from $442.5. Forecast Appalachian production was reduced to 72–83 Bcfe from 80–93 Bcfe.
- Pipeline expansion continues: Northern Access service was expected to begin in November 2012, with estimated project cost of $75.0; the Trout Run gathering system entered service in May 2012. Capital investment remains substantial and is primarily funded from operating cash, with short-term borrowing expected to increase during fiscal 2012.
Outlook, risks, and contingencies
- Management said liquidity was adequate for known demands, but funding needs depend in part on commodity prices, production, capital spending, and access to financing. The company expects to refinance the $250.0 notes due in March 2013 using cash, short-term borrowings, and/or long-term debt.
- Natural-gas price weakness could further affect drilling plans and could trigger a non-cash full-cost ceiling impairment. At June 30, the ceiling exceeded oil and gas property book value by about $107.0; management’s sensitivity analysis indicated a $1/MMBtu lower gas price alone would have caused an estimated $65.8 ceiling shortfall.
- Environmental and regulatory exposure includes estimated remaining cleanup costs of $15.5–$19.7, of which the $15.5 minimum was accrued; the company expects recovery through rates. Other routine litigation and regulatory matters could affect earnings and cash flows when resolved, but management could not estimate a loss range and did not expect a material adverse effect on financial condition.
- Supply Corporation’s rate-case settlement was accepted on an interim basis effective May 1, 2012, subject to refund; the written settlement still required FERC approval. The filing describes possible customer refunds if final rates differ from interim collections.
- Other identified risks include hydraulic-fracturing regulation, permitting and construction delays, commodity-price and location-basis changes, derivative counterparty and collateral exposure, pension funding assumptions, and evolving Dodd-Frank requirements. Management noted that a 10-percentage-point change in the assumed oil basis differential could materially change the fair value of Level 3 oil swaps.
- Management stated disclosure controls were effective as of June 30, 2012, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether fiscal 2013 Appalachian production and capital-spending reductions are achieved, and how commodity prices affect future drilling and ceiling-test headroom.
- Progress, costs, customer commitments, and in-service timing for Northern Access, Line N 2012, and other pipeline and gathering projects.
- Final FERC approval and any refund exposure under Supply Corporation’s interim rate settlement.
- Funding and refinancing plans for the $250.0 million March 2013 maturity, alongside capital spending and short-term debt use.
- How much of the year-over-year earnings comparison reflects recurring operations versus the prior-year $31.4 million after-tax asset-sale gain, weather, and hedging results.