NATIONAL FUEL GAS CO quarterly report, Q2 FY2021

Business context and reporting period

National Fuel Gas Company filed this unaudited Form 10-Q for its fiscal second quarter and six months ended March 31, 2021. Its four reportable segments are Exploration and Production, Pipeline and Storage, Gathering, and Utility. The company operates primarily in the Appalachian basin, with oil production also in California.

Financial performance and position

For the six-month period, operating cash flow was $417.1 million, capital expenditures paid were $338.9 million, investing cash outflow was $222.2 million, and financing cash outflow was $135.0 million. Cash and temporary cash investments were $80.5 million at March 31, up from $20.5 million at September 30, 2020.

Long-term debt, net of current portion and issuance costs, was $2.627 billion, compared with $2.630 billion at September 30, 2020. No short-term bank debt or commercial paper was outstanding at March 31. The company reported $1.0 billion of committed revolving credit access across two facilities; its credit-facility debt-to-capitalization ratio was 0.53 against a 0.65 limit. The separate indenture covenant permitted approximately $57.1 million of additional unsubordinated long-term debt at that date.

Common dividends declared were $0.445 per share for the quarter and $0.89 for the six months, versus $0.435 and $0.87, respectively, in the prior-year periods.

Material changes versus prior periods

• Six-month revenue rose 6.1%; six-month net income improved by $209.7 million from a loss. Results benefited from higher natural gas production and contributions from Shell assets acquired in July 2020, as well as a $51.1 million pre-tax timber-property sale gain.
• Exploration and Production revenue increased with Appalachian gas volumes; six-month gas production rose to 158.0 Bcf from 110.9 Bcf. The segment recorded a $76.2 million non-cash impairment in the December 2020 quarter, compared with $177.8 million in the prior-year six-month period.
• Pipeline and Storage and Gathering earnings increased, principally reflecting higher transportation and gathering activity, including the Empire North project and acquired Tioga gathering assets. Utility six-month earnings declined $3.0 million, largely from higher operating costs, bad-debt provisions, taxes, and regulatory true-ups.
• Utility and energy-marketing revenue comparisons were affected by the wind-down of NFR marketing after the sale of commercial and industrial contracts in August 2020. The timber sale completed in December 2020 generated $104.6 million net proceeds and a $51.1 million gain.
• The company issued $500 million of 2.95% notes due 2031 and redeemed $500 million of 4.90% notes due December 2021. The redemption generated a $15.7 million call premium recorded as interest expense.

Outlook, risks and contingencies

• No full-year earnings guidance is provided in the filing. Management cautions that interim earnings are not predictive of the fiscal year because utility results are seasonal.
• The FM100 pipeline project, with estimated cost of approximately $280 million, was under construction and targeted for service in late calendar 2021; approximately $67.9 million was capitalized as construction work in progress at March 31. Management said COVID-19 had not materially affected target in-service dates to date, but supply-chain or construction delays remained possible.
• The Northern Access project remained subject to permitting litigation. The Second Circuit upheld FERC’s waiver orders and a New York state court found certain state permits preempted, but further proceedings remain; the company has not updated the project’s $500 million preliminary cost estimate or expected in-service date pending greater legal clarity.
• Oil and gas ceiling-test headroom was approximately $145.4 million at March 31. Management’s sensitivity analysis estimated an after-tax impairment of $123.6 million if natural-gas prices were $0.25/MMBtu lower, and $154.9 million if both gas prices fell by that amount and oil prices fell by $5/barrel.
• COVID-related customer nonpayment and restrictions on residential service disconnections may increase receivables and bad-debt expense; recovery of related costs through regulation is uncertain. The company increased its allowance for uncollectible accounts to $30.1 million from $22.8 million at fiscal year-end.
• Other material exposures include climate and emissions regulation, commodity-price and reserve risks, access to capital and credit ratings, and regulatory approval and construction risks. The company reported approximately $3.3 million of remaining estimated cleanup costs for former manufactured-gas-plant sites. Other ordinary-course legal and regulatory matters could affect earnings when resolved, but management could not estimate potential losses.

Most important facts for investors to verify

• How much of the reported earnings improvement reflects recurring operating performance versus the prior-year impairment and tax allowance, the current-year impairment, and the timber-sale gain.
• Whether Appalachian production growth, realized prices after hedging, and gathering volumes persist, and how commodity prices could affect future ceiling-test impairments.
• FM100 construction cost and schedule, and the legal, permitting, cost, and timing outlook for Northern Access.
• Trends in customer collections, bad-debt expense, and regulatory recovery of COVID-related costs.
• Liquidity and covenant capacity, including the distinction between revolving-credit covenant headroom and the much lower additional long-term debt capacity under the indenture.