NATIONAL FUEL GAS CO quarterly report, Q1 FY2017

National Fuel Gas Company — Fiscal 2017 First Quarter 10-Q

Reporting period: Three months ended December 31, 2016, compared with the three months ended December 31, 2015, unless otherwise noted. The company is an integrated natural gas producer, gathering and pipeline operator, utility, and energy marketer, with oil production primarily in California. Figures are unaudited.

Financial performance and liquidity

Metric	Q1 FY2017	Q1 FY2016
Operating revenue	$422.5 million	$375.2 million
Operating income (loss)	$172.1 million	$(305.9) million
Net income (loss) available to common shareholders	$88.9 million	$(189.1) million
Diluted earnings (loss) per share	$1.04	$(2.23)
Cash from operating activities	$144.6 million	$114.1 million
Cash used in investing activities	$104.6 million	$191.6 million
Cash from (used in) financing activities	$(33.5) million	$0.3 million

Revenue rose about 12.6%; operating margin was approximately 40.7% versus a loss margin of approximately 81.5% in the prior-year quarter. The prior-year loss included a $435.5 million pretax ($252.6 million after-tax) noncash oil-and-gas property impairment that did not recur. Results also benefited from higher earnings in Exploration and Production, Gathering, Utility, and Energy Marketing.

• Segment earnings: Exploration and Production $35.1 million (prior-year loss $237.1 million); Pipeline and Storage $19.4 million (down $1.9 million); Gathering $11.0 million (up $6.1 million); Utility $21.2 million (up $2.6 million); Energy Marketing $1.8 million (up $0.6 million).
• Cash and working capital: Cash was $136.5 million at December 31, 2016. Current assets were $467.7 million and current liabilities $306.2 million. The company reported no short-term debt outstanding at quarter-end.
• Debt and equity: Long-term debt was $2.087 billion; total shareholders’ equity was $1.569 billion. The debt-to-capitalization ratio under the credit facility was 0.57. No long-term debt was due within the following 12 months.
• Dividends: $0.405 per common share declared for the quarter, compared with $0.395 a year earlier.

Material changes and business drivers

• Exploration and Production revenue increased $9.0 million, supported by 20.9% higher gas production, particularly in Appalachia. The weighted average gas price after hedging fell to $2.97/Mcf from $3.16; the oil price after hedging fell to $54.71/Bbl from $59.76.
• Gathering revenue increased $9.1 million as gathered volume rose to 50.6 Bcf from 33.8 Bcf, reflecting system growth and higher Seneca production.
• Utility revenue increased $25.3 million, mainly from higher gas volumes and gas costs; colder weather than the prior-year quarter contributed to higher throughput and earnings. New York’s weather normalization clause mitigates some earnings effects of weather.
• Pipeline and Storage revenue was nearly flat. Lower regulated rates were largely offset by a full quarter of revenue from projects placed in service in the prior year. Earnings declined on higher expenses and lower allowance for funds used during construction.
• Cash from operations increased $30.5 million, primarily from higher Appalachian gas receipts. Cash capital expenditures were $106.1 million, versus $186.4 million a year earlier. Total long-lived-asset expenditures were $94.6 million, down from $161.5 million.

Outlook, risks, and contingencies

• The filing gives no consolidated earnings guidance and cautions that the winter quarter is seasonal and should not be taken as a forecast for the full fiscal year.
• Fiscal 2017 Pipeline and Storage capital expenditure expectations were reduced from approximately $415 million to $225 million. The company expects to fund investment primarily with cash on hand and operating cash flow, with short-term borrowing as needed. Existing indenture covenants were expected to restrict new long-term unsecured debt until the second half of fiscal 2017.
• Northern Access 2016: Estimated project cost is $455 million; approximately $61.7 million had been spent by December 31, 2016. The company expected FERC authorization in the first half of fiscal 2017 and a New York water-quality certificate decision by April 2017. Target in-service timing is the second quarter of fiscal 2018; approvals remained outstanding.
• Oil and gas ceiling test: At December 31, 2016, the ceiling exceeded the book value of oil and gas properties by approximately $71.5 million. Management’s sensitivity analysis estimated an after-tax impairment of $37.8 million if natural gas prices were $0.25/MMBtu lower, and $75.5 million if gas prices were $0.25/MMBtu lower and oil prices $5/Bbl lower. Commodity prices, reserves, and cost estimates could change the outcome.
• Regulatory proceedings: A New York utility rate case sought approximately $41.7 million in annual revenue increases; a revised administrative law judge recommendation was $8.5 million. The NYPSC was not bound by the recommendation, and the outcome was uncertain. FERC approved an Empire rate settlement expected to reduce annual revenue by an estimated $3 million to $4 million based on current contracts; the company said it was not expected to materially affect financial condition.
• Environmental and legal matters: Estimated remaining environmental cleanup costs were $3.8 million, expected to be recovered through rates over approximately 11 years. Seneca disputed alleged Pennsylvania environmental and administrative violations; the proposed penalty was described as not material. Other ordinary-course proceedings could affect earnings or cash flows, but possible losses could not be estimated.
• Key stated risks include commodity prices and ceiling-test impairments, project permitting and construction, rate regulation, access to financing and credit ratings, production and reserve uncertainty, environmental and climate regulation, weather, and derivative-market changes.

Important facts for investors to verify

1. Whether FERC and NYDEC approvals for Northern Access 2016 were obtained, and whether cost, schedule, and capital plans changed.
2. The final NYPSC decision and effective rates in the New York utility rate case.
3. Changes in oil and gas prices, hedging positions, production, reserves, and ceiling-test headroom in subsequent quarters.
4. Cash generation and borrowing needs against planned capital expenditures, including the long-term debt covenant restriction and available credit facilities.
5. Whether environmental, regulatory, or other legal matters resulted in material costs or obligations.