Business Context and Reporting Period
Company: National Fuel Gas Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: A diversified energy company operating in five reportable segments: Utility, Pipeline and Storage, Exploration and Production, Energy Marketing, and Timber. The Company serves customers primarily in New York and Pennsylvania.
Key Financial Metrics (Nine Months Ended June 30, 2008)
| Metric | 2008 (in millions) | 2007 (in millions) |
|---|---|---|
| Operating Revenues | $2,002.5 | $1,737.5 |
| Operating Income | $407.0 | $323.0 |
| Net Income (Continuing Ops) | $225.5 | $167.4 |
| Diluted EPS (Continuing Ops) | $2.65 | $1.96 |
| Operating Cash Flow | $415.1 | $404.6 |
| Capital Expenditures | $264.7 | $206.5 |
| Long-Term Debt (Net) | $999.0 | $799.0 |
| Cash & Equivalents | $259.2 | $124.8 |
Note: 2007 figures include discontinued operations from the sale of Seneca Energy Canada Inc. (SECI). 2008 figures reflect continuing operations only.
Material Changes vs. Prior Period
- Earnings Growth: Net income from continuing operations increased by $58.1 million (34.7%) compared to the prior year, driven primarily by the Exploration and Production segment.
- Revenue Increase: Operating revenues rose $265.0 million, largely due to higher commodity prices in the Exploration and Production and Energy Marketing segments, and increased off-system sales in the Utility segment.
- Debt Issuance: In April 2008, the Company issued $300.0 million of 6.50% senior unsecured notes due 2018. Proceeds were used to refund $200.0 million of maturing medium-term notes.
- Share Repurchases: The Company repurchased 2.83 million shares for $129.6 million during the nine-month period, reducing the weighted average shares outstanding.
- Discontinued Operations: The 2007 period included $12.4 million in income from discontinued operations (SECI), which was sold in August 2007. No such income was recorded in 2008.
Guidance, Outlook, and Risks
Management Commentary & Outlook
- Capital Projects: The Empire Connector project is on schedule for an in-service date of November 2008, contingent on the completion of the Millennium Pipeline. Total project cost is estimated at $180 million.
- Asset Sales: The Company is exploring the sale of Horizon LFG (landfill gas pipelines) and Horizon Power's unconsolidated subsidiaries.
- Seasonality: Earnings are seasonal, with the winter heating season (fiscal Q3 and Q4) typically representing a substantial portion of annual earnings for Utility and Energy Marketing segments.
Risks and Contingencies
- Environmental Liability: The Company has recorded a minimum liability of $13.5 million for clean-up costs at former manufactured gas plant sites. A specific site in New York has an estimated liability of $10.4 million, with potential for additional costs.
- Regulatory Matters: The Company is appealing a New York Public Service Commission (NYPSC) rate order regarding the reasonableness of disallowed expenses and the cost of equity calculation.
- Market Risk: Earnings are sensitive to fluctuations in natural gas and crude oil prices, though the Company uses derivative instruments to hedge these risks.
Investor Verification Checklist
- Empire Connector Timeline: Verify the completion status of the Millennium Pipeline, as it is a prerequisite for the November 2008 in-service date of the Empire Connector.
- Environmental Accruals: Monitor updates on the New York manufactured gas plant site remediation costs, as the Company acknowledged potential for additional charges beyond the $10.4 million recorded.
- Commodity Hedging: Review the effectiveness of hedging strategies in the Exploration and Production segment given the volatility in oil and gas prices.
- Regulatory Appeals: Track the outcome of the appeal filed with the New York Supreme Court regarding the NYPSC rate order.
- Asset Disposition: Confirm progress on the potential sale of Horizon LFG and Horizon Power subsidiaries.