Business Context and Reporting Period
Company: National Fuel Gas Company (and subsidiaries)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended June 30, 1999
Business Overview: The Company operates through Utility, Pipeline and Storage, Exploration and Production, International, and Other Nonregulated segments. The business is seasonal, with significant earnings typically generated during winter heating months. The Company is currently navigating regulatory restructuring in New York and Pennsylvania regarding retail gas sales.
Key Financial Metrics
| Metric | Three Months Ended June 30, 1999 |
Nine Months Ended June 30, 1999 |
|---|---|---|
| Operating Revenues | $248.7 million | $1,072.5 million |
| Operating Income | $31.3 million | $171.6 million |
| Net Income (Available for Common Stock) | $11.8 million | $110.6 million |
| Earnings Per Share (Diluted) | $0.30 | $2.84 |
| Net Cash Provided by Operating Activities | N/A | $252.1 million |
| Capital Expenditures | N/A | $209.9 million |
| Long-Term Debt (Net of Current Portion) | $726.3 million | $726.3 million |
| Short-Term Debt (Notes Payable) | $351.0 million | $351.0 million |
| Cash and Temporary Investments | $35.8 million | $35.8 million |
Material Changes vs. Prior Period
- Quarterly Earnings Decline: Net income for the quarter ended June 30, 1999, was $11.8 million ($0.30 diluted EPS), a decrease from $19.1 million ($0.49 diluted EPS) in the same period in 1998. This decline was driven by a $5.9 million expense related to stock appreciation rights (SARs) due to a stock price rebound, a $1.6 million early retirement charge, and lower earnings in the Utility and Pipeline segments.
- Year-to-Date Earnings Surge: Net income for the nine months ended June 30, 1999, was $110.6 million ($2.84 diluted EPS), a significant increase from $26.3 million ($0.68 diluted EPS) in 1998. The 1998 period was negatively impacted by a $129.0 million non-cash impairment of oil and gas assets and a $9.1 million cumulative effect of a change in accounting for depletion. Excluding these non-cash items, 1998 adjusted earnings would have been $114.5 million.
- Revenue Trends: Operating revenues increased slightly by 2.3% for the quarter and 0.2% for the nine months compared to the prior year. The Utility segment saw revenue declines due to rate reductions in New York and customer migration to transportation services, while the Exploration and Production segment saw revenue increases due to higher production volumes.
- Interest Expense: Interest charges increased due to higher average long-term debt balances resulting from acquisitions in the prior year (PSZT, HarCor, Whittier, BER).
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Seasonality: Management notes that earnings for the nine months ended June 30 should not be taken as a prediction for the full year, as the heating business is seasonal with substantial earnings normally occurring in winter months.
- Regulatory Environment: The Company is actively involved in New York and Pennsylvania gas restructuring efforts. In New York, a rate plan effective October 1998 reduced rates by 1.1% and established a reserve for restructuring costs. In Pennsylvania, a new "Natural Gas Choice and Competition Act" requires tariffs for direct customer access to competitive markets by April 2000.
- Capital Resources: Liquidity is considered adequate. The Company has regulatory authorizations and unused credit lines permitting an additional $399.0 million in short-term debt and up to $499.0 million in additional long-term unsecured indebtedness.
Risks and Contingencies
- Market Risk: The Company uses derivative instruments (swaps and options) to manage price risk for natural gas and crude oil. At June 30, 1999, the unrealized net loss on price swaps was $2.4 million, and the fair value of options was a net liability of $3.4 million.
- Environmental Liabilities: Estimated clean-up costs for former manufactured gas plant sites range from $9.1 million to $10.1 million. A minimum liability of $9.1 million has been recorded.
- Year 2000 Compliance: The Company believes its internal systems are Year 2000 ready but faces risks regarding third-party vendors and infrastructure (electricity, telecommunications). Contingency plans are being finalized.
- Weather Dependence: Earnings are sensitive to weather conditions, though weather normalization clauses in New York tariffs mitigate some impact.
Investor Verification Checklist
- Adjusted Earnings Comparison: Verify the impact of the 1998 non-cash impairment ($129M) and accounting change ($9.1M) to accurately compare year-over-year operational performance.
- Stock Appreciation Rights (SARs): Review the volatility of the $5.9 million SAR expense in Q2 1999 and its potential impact on future quarters based on stock price movements.
- Regulatory Rate Cases: Monitor the outcome of the New York PSC gas restructuring proceedings and the implementation of the Pennsylvania "Natural Gas Choice and Competition Act" tariffs.
- Debt Maturity and Refinancing: Track the redemption of high-interest HarCor notes (14.875%) and the issuance of new medium-term notes to assess interest expense trends.
- Environmental Accruals: Confirm if the estimated $9.1M to $10.1M environmental liability range remains accurate given potential regulatory changes.