National Fuel Gas Company — Form 10-Q
Reporting period: Fiscal third quarter and first nine months ended June 30, 2019. The quarter ended June 30 is the company’s fiscal Q3; this filing is dated August 2, 2019. National Fuel operates five segments: Exploration and Production, Pipeline and Storage, Gathering, Utility, and Energy Marketing.
Financial performance and position
| Metric | Three months ended June 30, 2019 | Nine months ended June 30, 2019 |
|---|---|---|
| Revenue | $357.2 million, versus $342.9 million | $1,400.0 million, versus $1,303.5 million |
| Operating income | $112.8 million, versus $114.0 million | $427.9 million, versus $435.1 million |
| Net income available to common stock | $63.8 million, versus $63.0 million | $257.0 million, versus $353.5 million |
| Diluted EPS | $0.73, versus $0.73 | $2.96, versus $4.09 |
| Operating cash flow | Not provided for the quarter | $570.6 million, versus $518.1 million |
| Capital expenditures | Not provided for the quarter | $587.4 million, versus $404.0 million of cash capital expenditures |
The nine-month net income decline chiefly reflects a much smaller tax benefit from remeasurement of deferred taxes under the 2017 Tax Reform Act: $5 million in 2019 versus $107 million in 2018. Excluding those remeasurements, management said earnings increased $5.5 million year over year. Dividends declared were $0.435 per share for the quarter and $1.285 per share for the nine months.
At June 30, cash and temporary cash investments were $87.5 million, with another $6.8 million in hedging collateral deposits. Long-term debt was $2.13 billion; there was no short-term debt outstanding and no long-term debt due within 12 months. Shareholders’ equity was $2.14 billion. The company reported a 0.50 debt-to-capitalization ratio under its credit agreement and had a $750 million revolving credit facility available through October 2023. Operating cash flow was below capital expenditures by approximately $16.9 million for the nine-month period.
Material changes versus comparable periods
- Quarterly revenue rose $14.3 million, while operating income decreased $1.2 million and net income increased $0.7 million. Utility and Gathering earnings improved; Pipeline and Storage and Exploration and Production earnings declined, and Energy Marketing recorded a loss.
- Nine-month revenue increased $96.5 million, but operating income decreased $7.2 million. Exploration and Production revenue benefited from higher Appalachian gas production; Utility revenue also increased. Segment earnings fell in Exploration and Production, Pipeline and Storage, and Gathering, largely reflecting prior-year tax-remeasurement benefits and operating cost changes.
- Exploration and Production gas production increased 23.3 Bcf year over year for the nine months, while oil production declined 225,000 barrels. Pipeline and Storage transportation volumes declined 34.4 Bcf, partly reflecting contract terminations and lower shipper utilization.
- Operating cash flow increased $52.5 million, mainly reflecting federal tax refunds received in 2019 compared with tax payments in the prior-year period. Capital expenditures rose $174.9 million, principally from higher Exploration and Production spending.
- Long-term debt was broadly unchanged from September 30, 2018. Cash and temporary cash investments declined from $229.6 million to $87.5 million.
Outlook, commentary, and risks
- The filing provides no consolidated earnings guidance. Management cautions that nine-month results should not be taken as a full-year forecast; utility and energy marketing earnings are seasonal, with winter months normally contributing substantially.
- Management expected to fund fiscal 2019 capital needs primarily with cash on hand and operating cash flow, with short- or long-term borrowing possible as needed. Liquidity was described as adequate for known demands.
- Major projects include Empire North, under construction with an estimated cost of approximately $142 million and a projected in-service date in the second half of fiscal 2020; Line N to Monaca, targeted as early as late September 2019 at approximately $24.5 million; and FM100, targeted for late calendar 2021 with a preliminary estimate of approximately $280 million.
- Northern Access remains delayed by New York permitting litigation and further development work; the company expected service no earlier than fiscal 2022. Approximately $57.1 million had been spent, and the preliminary estimate remained $500 million pending greater clarity on timing.
- Supply Corporation filed a FERC rate case on July 31, 2019, proposing rate increases expected to be suspended and potentially effective February 1, 2020, subject to refund. Empire’s rate settlement, approved May 3, 2019, was estimated to add approximately $4.6 million in annual revenue based on current contracts.
- New York’s Climate Leadership and Community Protection Act sets ambitious greenhouse-gas and renewable-energy targets. Management noted potential effects on compliance costs, permitting, assets, and customer demand. Other key risks include commodity prices and differentials, production and reserve estimates, project approvals and execution, regulation, financing and credit ratings, and environmental requirements.
- The company reported approximately $7.1 million of estimated remaining cleanup costs for former manufactured gas plant sites, with expected rate recovery over about three years. Other ordinary-course legal and regulatory matters could affect earnings and cash flows, but management could not estimate possible losses. The oil and gas ceiling exceeded book value by approximately $566.8 million at June 30; the disclosed price sensitivities did not produce an impairment.
- A minority investment in a non-operated gas processing facility was impaired during the quarter, contributing to higher Gathering depreciation expense. The company also expects lease-accounting adoption in fiscal Q1 2020 to increase reported assets and liabilities.
Important facts for investors to verify
- Whether the improvement in underlying earnings, excluding prior-year tax remeasurement effects, is sustained in subsequent quarters.
- Whether production growth, commodity prices after hedging, and higher depletion and production costs support Exploration and Production profitability and planned capital spending.
- Renewal or replacement of terminated transportation contracts, utilization trends, and the outcome and timing of Supply Corporation’s FERC rate case.
- Project construction costs, schedules, customer commitments, and permitting outcomes, especially for Northern Access, Empire North, FM100, and Line N to Monaca.
- Cash generation relative to capital expenditures and dividends, and the company’s borrowing needs if commodity prices or operating cash flow weaken.
- Potential effects of New York climate legislation and other environmental regulation on the company’s assets, projects, costs, and demand.