Why National Fuel Gas’s Utility segment’s earnings are down



Segment earnings

National Fuel Gas (NFG), which is seeing activism from GAMCO Investors, noted in its latest fiscal 3Q14 results that its earnings growth was driven by higher earnings in the Midstream and Upstream businesses. It said in its 10Q filing that higher earnings at these businesses were partially offset by lower earnings in the Downstream business, comprising the Utility and Energy Marketing segments and the Other category.

NFG utility1

Segment earnings down due to higher operating expenses

As we discussed previously in this series, NFG’s Utility segment operations are carried out by the New York–based National Fuel Gas Distribution Corporation.

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The Utility segment’s earnings of $4.8 million, or $0.06 per share, for the latest fiscal 3Q ended June 30, 2014, decreased $2.8 million, or $0.03 per share from the corresponding period a year ago. NFG said in its earnings release that earnings fell due to higher operating expenses associated with defined benefit and defined contribution retirement plans as a result of a recent settlement with the NYPSC (New York Public Service Commission) as well as higher bad debt expense. The Utility segment’s rates, services, and other matters are regulated by the NYPSC with respect to services provided within New York and by the PaPUC (Pennsylvania Public Utility Commission) within Pennsylvania.

But operating revenues for the Utility segment increased to $147 million, largely due to higher off-system gas sales revenue of $1.9 million driven by higher volumes.

We discussed earlier in this series how GAMCO wants NFG to spin off its utility business as a public entity in order to participate in the consolidation currently taking place in the power and utility space. Duke Energy (DUK) in February announced plans to to divest its Midwest generation assets. American Electrical Power (AEP) and PPL (PPL) also announced similar asset sales in 2Q. Mergers and acquisitions in the power industry closely affect the Utilities Select Sector SPDR (XLU).

Fiscal 2015 earnings poised to decline

NFG’s management said they expect declining earnings for the utility segment for fiscal 2015 due to the forecast of normal weather as well as operating and maintenance (or O&M) costs of around $7 million connected to implementation of a new customer billing system.

Energy Marketing segment sees lower revenue and earnings

Earnings and operating revenue for the Energy Marketing segment decreased for fiscal 3Q14. The decline reflected a lower margin of $0.3 million due to the impact associated with recording unbilled revenues and related gas costs. NFG’s 10Q said the segment saw a positive impact on its margins from the increase in volumes sold to retail customers. This increase was due to the colder weather during the third quarter and nine months ended June 30, 2014. But this rise was offset by a decline in the benefit realized from the company’s contracts for storage capacity.

Despite higher production volumes in its latest quarter, NFG said it’s narrowing its fiscal 2014 guidance. The next part of this series will discuss the details of the company’s guidance.


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