National Fuel Gas Company — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2020; statements are unaudited. The company operates natural gas production, gathering, pipeline and storage, utility distribution, and marketing businesses, primarily in western New York and Pennsylvania, with oil production mainly in California. Dollar amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Nine months ended June 30, 2020 | Nine months ended June 30, 2019 |
|---|---|---|---|---|
| Revenue | $323.0 | $357.2 | $1,258.3 | $1,400.0 |
| Operating income | $80.4 | $112.8 | $203.8 | $427.9 |
| Net income available to common stock | $41.3 | $63.8 | $21.8 | $257.0 |
| Diluted EPS | $0.47 | $0.73 | $0.25 | $2.96 |
| Operating margin (calculated) | 24.9% | 31.6% | 16.2% | 30.6% |
- Quarterly revenue fell 9.6% year over year; nine-month revenue fell 10.1%. Nine-month net income declined sharply, reflecting oil and gas impairments, a state deferred-tax valuation allowance, lower commodity prices, and lower utility earnings.
- Cash provided by operating activities was $623.9 versus $570.6 for the prior-year nine-month period. Cash capital expenditures were $551.0 versus $587.4. Investing cash outflow was $573.9; financing provided $486.8.
- Cash and temporary cash investments were $556.3 at June 30, 2020, compared with $20.4 at September 30, 2019. Current assets were $831.7 and current liabilities $342.4. Long-term debt was $2,628.8, up from $2,133.7; no long-term debt matured within the next 12 months.
- The company issued $500.0 of 5.50% notes due January 2026 and 4.37 million common shares for net proceeds of $493.1 and $165.9, respectively. It reported no short-term bank notes or commercial paper outstanding at June 30. The credit-facility debt-to-capitalization ratio was 0.53 against a 0.65 maximum.
- Declared dividends were $0.445 per share for the quarter and $1.315 per share for the nine months, versus $0.435 and $1.285, respectively, in 2019.
Material changes and business drivers
- Exploration and Production reported a $6.4 quarterly loss versus $26.5 of earnings a year earlier, and a $157.7 nine-month loss versus $86.6 of earnings. Nine-month segment results included $142.5 after-tax impairment expense. Lower gas and oil prices outweighed higher production.
- Pipeline and Storage earnings increased to $22.6 for the quarter and $62.8 for the nine months, supported by higher rates under a FERC-approved settlement and additional transportation demand charges. Gathering earnings rose to $15.2 and $51.1, respectively, with higher volumes contributing to the nine-month increase.
- Utility earnings declined to $6.3 for the quarter and $64.3 for the nine months. COVID-related operating costs and higher allowance for uncollectible accounts contributed; warmer weather also reduced nine-month usage.
- The company recorded pre-tax oil and gas property impairments of $18.2 for the quarter and $196.0 for the nine months. It also recorded a $57.7 valuation allowance against certain state deferred tax assets; the nine-month effective tax rate was 78.9%, versus 22.3%.
Outlook, risks, and significant events
- Management expected a significant additional full-cost ceiling-test impairment in the September 2020 quarter and likely in fiscal Q1 2021, given low commodity prices. The filing provides no overall earnings-per-share guidance. Seneca nevertheless anticipated higher fiscal 2020 gas production than fiscal 2019, partly including acquired production.
- COVID-19 effects remained uncertain. Management cited depressed oil and gas demand and prices, possible customer payment deterioration, suspended utility service terminations, and potential cost, supply-chain, project, and financing impacts. No material operational issues had occurred to date; the company anticipated some increase in uncollectible expense.
- On July 31, 2020, after quarter-end, the company completed its $503.9 acquisition of Shell’s Pennsylvania upstream and gathering assets, including over 400,000 net acres and estimated proved developed gas reserves of approximately 700 Bcf. Management expected integration and operating-cost synergies. On August 1 it sold certain NFR commercial and industrial gas contracts; on August 5 it agreed to sell Pennsylvania timber and other assets for approximately $115.7, subject to adjustments, with closing expected by November 1.
- Management said future ceiling-test impairments could restrict incremental long-term debt issuance. The filing noted that indenture covenants permitted up to $125 of additional long-term debt at June 30, apart from debt issued to refinance maturities. The company’s S&P rating was BBB- with a stable outlook; it warned that further downgrades could raise borrowing costs and affect market access.
- The Northern Access pipeline project remained subject to permitting litigation and was not expected in service before fiscal 2022. Empire North was under construction, with partial service beginning in July 2020 and remaining facilities targeted for late fiscal Q4. Supply Corporation’s FM100 project targeted late calendar 2021 service and had a preliminary cost estimate of $280.
- Environmental cleanup liabilities were estimated at $6.6, with expected recovery through rates over approximately three years. The filing said other normal-course legal and regulatory matters could affect earnings or cash flow when resolved, but no loss range could be estimated.
Key facts for investors to verify
- Subsequent quarterly impairment charges, commodity-price assumptions, and any resulting effect on earnings and debt covenants.
- Integration, realized production, costs, and synergies from the Shell acquisition, and the timing and proceeds of the timber-asset sale.
- Customer collections, bad-debt expense, and any regulatory recovery for COVID-related costs.
- Credit-rating developments, access to capital markets, and financing needs including the $500 million notes maturing in December 2021.
- Permitting and construction progress, costs, and in-service timing for Northern Access, Empire North, and FM100.