National Fuel Gas Company — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2012. Unaudited consolidated results; amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Three months ended Mar. 31, 2012 | Prior-year quarter | Six months ended Mar. 31, 2012 | Prior-year six months |
|---|---|---|---|---|
| Operating revenue | $552.3 | $660.9 | $984.7 | $1,111.8 |
| Operating income | $132.1 | $153.8 | $250.5 | $271.2 |
| Net income | $67.4 | $115.6 | $128.1 | $174.2 |
| Diluted EPS | $0.81 | $1.38 | $1.53 | $2.08 |
| Operating margin | 23.9% | 23.3% | 25.4% | 24.4% |
| Cash from operations | — | — | $338.9 | $343.2 |
| Capital expenditures paid | — | — | $499.6 | $392.3 |
- Operating cash flow less cash capital expenditures was approximately negative $160.7 million for the six months.
- At March 31, cash and temporary investments were $192.2 million. Current assets were $516.4 million versus current liabilities of $726.5 million.
- Long-term debt including its current portion was $1.399 billion; commercial paper was $20 million. Total debt increased from $1.089 billion at September 30, 2011. The company issued $500 million of 4.90% notes due 2021 and had $250 million of 5.25% notes due March 2013.
- Dividends were $0.355 per share for the quarter and $0.71 per share for the six months.
Material changes and operating drivers
- Net income fell $48.2 million in the quarter and $46.1 million for the six months. The main comparison effect was a prior-year $50.9 million pretax ($31.4 million after-tax) gain on the sale of Seneca Energy and Model City investments, which did not recur.
- Excluding that sale gain, the company also cited lower earnings in Exploration and Production, Utility, and Energy Marketing, partly offset by Pipeline and Storage growth. For the six months, segment earnings were: Utility $47.6 million, Exploration and Production $52.5 million, Pipeline and Storage $22.8 million, and Energy Marketing $3.7 million.
- Unusually warm weather reduced utility throughput and earnings; New York’s weather normalization clause partly cushioned the impact. Lower natural gas prices reduced gas revenue, while lower purchased-gas costs also reduced reported utility revenue.
- Exploration and Production earnings declined amid lower gas prices after hedging, the prior-year sale of Gulf Coast offshore properties, higher depletion and operating costs, and a new Pennsylvania impact fee. The company accrued $6.4 million for the fee, including $5.1 million attributed to prior quarters. Higher Appalachian production and oil prices provided offsets.
- Pipeline and Storage earnings improved on new firm-transportation contracts, including Line N and Tioga County projects; lower efficiency-gas revenue and higher depreciation partly offset the gains.
Outlook, risks and contingencies
- Management reduced planned capital spending in response to the significant decline in natural gas prices. Exploration and Production fiscal 2012 spending was reduced from $760 million to $650 million; fiscal 2013 was reduced from $925.3 million to $500 million. Pipeline and Storage fiscal 2013 spending was cut from $122.5 million to about $40 million. The company also reduced Appalachian drilling rigs from six to four and planned a further reduction to three in the following quarter.
- Management expects to rely primarily on operating cash flow for projects but anticipated increased short-term borrowing during fiscal 2012. A $750 million committed credit facility runs through January 2017; no borrowings were outstanding under it at March 31. The company reported a 0.42 debt-to-capitalization ratio against a 0.65 covenant limit.
- Growth projects include Northern Access, with service expected in November 2012 and estimated cost of $68 million, and gathering-system construction. Northern Access received its notice to proceed in April 2012. Project completion, permitting, demand and cost execution remain relevant considerations.
- Pipeline and Storage’s FERC rate case was moving toward a settlement: interim rates were accepted effective May 1, 2012, subject to surcharge and refund if the settlement was not finalized.
- Oil and gas property ceiling-test headroom was approximately $279.6 million at March 31. Management disclosed that a $1/MMBtu lower gas price and $5/bbl lower oil price together would reduce headroom to about $57.6 million, all else equal; further price declines could increase impairment risk.
- Environmental cleanup liabilities were estimated at $15.6 million to $19.8 million, with the $15.6 million minimum accrued; the company expects recovery through rates. Other ordinary-course litigation and regulatory matters could affect earnings and cash flow, but loss ranges were not estimable.
- Risks highlighted include commodity prices, hydraulic-fracturing rules and permitting, reserve estimates and production, pipeline capacity and project delays, derivatives and counterparty exposure, pension funding, regulation, and cybersecurity. The company reported Level 3 crude-oil derivative net liabilities of $68.8 million; valuation is sensitive to location basis differentials.
- Management cautioned that interim earnings are seasonal and should not be treated as a full-year forecast. The filing provides no specific earnings guidance.
Most important facts for investors to verify
- Whether lower gas prices, revised drilling plans and capital spending affect production, reserves, and the full-cost ceiling-test cushion.
- Cash generation relative to capital spending, and how the company funds the resulting investment needs and the $250 million 2013 debt maturity.
- Finalization and financial effects of the Supply Corporation FERC rate settlement, and execution and returns of major pipeline and gathering projects.
- Whether utility weather normalization and gas-cost recovery continue to moderate weather and commodity effects on earnings and cash flow.
- Exposure to Pennsylvania impact fees, environmental remediation, hydraulic-fracturing regulation, and Level 3 derivative valuation and collateral requirements.