NATIONAL FUEL GAS CO annual report, FY2020

National Fuel Gas Company — FY2020 Form 10-K

Reporting period: Fiscal year ended September 30, 2020. Although the request refers to 2020 Q4, this filing reports the full fiscal year; selected fourth-quarter results are noted below. National Fuel is an integrated natural gas producer, gatherer, transporter, distributor and storage operator, with oil production primarily in California.

Financial performance

Metric	FY2020	FY2019
Revenue	$1,546.3 million	$1,693.3 million
Operating income	$29.9 million	$511.8 million
Net income (loss) available to common shareholders	$(123.8) million	$304.3 million
Diluted EPS	$(1.41)	$3.51
Cash provided by operating activities	$740.8 million	$694.5 million
Capital expenditures, cash basis	$716.2 million	$788.9 million
Long-term debt, net of discounts and costs	$2,629.6 million	$2,133.7 million
Cash and temporary cash investments	$20.5 million	$20.4 million
Dividends declared per share	$1.76	$1.72

Revenue declined approximately 8.7%. The operating-income and earnings decline was principally driven by a $449.4 million pre-tax noncash oil-and-gas property impairment ($326.3 million after tax), plus a $63.2 million year-end valuation allowance against certain state deferred tax assets. The impairment followed lower commodity prices and the full-cost accounting ceiling test. The company recorded a consolidated net loss despite higher operating cash flow, which included $85.0 million of AMT credit refunds received during the year.

Segment net income (loss): Exploration and Production $(326.9) million; Pipeline and Storage $78.9 million; Gathering $68.6 million; Utility $57.4 million; All Other $(0.3) million; and Corporate $(1.5) million. Pipeline and Storage benefited from rate settlements and new project capacity; Gathering benefited from higher volumes, including acquired assets. Utility earnings decreased $3.5 million.

Fourth quarter: The quarter ended September 30, 2020 had operating revenue of $288.0 million, operating loss of $174.0 million and net loss of $145.5 million, or $(1.60) per diluted share. Results included a $253.4 million pre-tax impairment charge ($183.7 million after tax).

Cash flow, debt and liquidity

• Cash from operations was $740.8 million. Investing cash use was $1,223.6 million, including $716.2 million of cash capital expenditures and $506.3 million for the Shell asset acquisition. Financing provided $476.1 million, including net debt proceeds of $493.0 million and net equity proceeds of $161.6 million, partly offset by $153.3 million in dividends paid.
• The Shell acquisition was funded with a combination of debt and equity. The company issued $500 million of 5.50% notes due 2026 and 4.37 million shares, generating net proceeds of $493.0 million and $165.8 million, respectively. It also added a $200 million 364-day revolving facility to its existing $750 million committed facility.
• At September 30, short-term bank debt and commercial paper totaled $30 million. The company reported a 0.55 debt-to-capitalization ratio under its credit-facility calculation and stated that the facilities would permit a further $1.30 billion of borrowing before that covenant limit, subject to other restrictions.
• Impairment-related indenture restrictions are expected to prevent issuance of incremental long-term unsecured debt for several quarters in FY2021, beginning January 2021. The restriction does not prevent refinancing maturing debt. The company stated that expected timber-sale proceeds, operating cash flow and short-term borrowings should meet FY2021 financing needs.

Material changes and significant events

• On July 31, 2020, the company acquired upstream and gathering assets from Shell in Pennsylvania for $506.3 million, including more than 400,000 net acres and 684 Bcf of proved developed and undeveloped gas reserves. Total proved reserves rose 12% to 3,458 Bcfe, substantially reflecting the acquisition.
• On August 5, the company agreed to sell substantially all timber and related assets for $115.7 million, subject to adjustments; closing was expected before the end of calendar 2020. The assets were classified as held for sale at year-end. NFR sold commercial and industrial contracts and certain assets on August 1 and is winding down.
• Supply Corporation’s rate settlement increased FY2020 earnings by $14.9 million. Empire North facilities entered service by September 15, adding 205,000 Dth/day of capacity; estimated project cost was $129 million.
• FY2020 gas production increased to 227.4 Bcf from 197.9 Bcf, while the weighted average gas price after hedging fell to $2.07/Mcf from $2.44/Mcf. Oil production was 2.348 million barrels, versus 2.323 million.

Outlook, risks and contingencies

• Management expects FY2021 capital expenditures of approximately $775 million: $370 million in Exploration and Production, $275 million in Pipeline and Storage, $35 million in Gathering and $95 million in Utility. Seneca expects higher FY2021 gas production and planned to add a second Appalachian drilling rig in early calendar 2021.
• The FM100 pipeline upgrade, estimated at approximately $280 million, targets late calendar 2021 service. The Northern Access project remains subject to unresolved permitting litigation; its prior $500 million cost estimate and service date are to be updated when the legal path is clearer. Delays, permit outcomes and project economics could affect expected returns.
• Management said COVID-19 had not materially affected the company to date, but flagged possible weaker commodity demand and prices, customer payment deterioration, supply-chain disruption and tighter financing. New York and Pennsylvania restrictions on utility service terminations and changing customer protections create uncertainty about collections and recovery of pandemic-related costs.
• Commodity-price risk remains significant: further declines could trigger additional noncash ceiling-test impairments. At September 30, a further $0.25/MMBtu gas-price decrease was estimated to cause $265.0 million of additional after-tax impairment, and a $5/barrel oil-price decrease $39.2 million, based on the stated sensitivity assumptions.
• Other material risks include the company’s BBB- S&P rating (stable outlook after a prior negative outlook), access to capital, interest costs, regulatory rate recovery, climate legislation including New York’s CLCPA, environmental and pipeline-safety compliance, and reserve-estimate uncertainty. The company is appealing permit actions concerning Northern Access. It estimated $6.4 million of remaining cleanup costs for former manufactured gas plant sites; other ordinary-course legal and regulatory matters could affect earnings, but management did not expect them to materially impair liquidity or financial condition.
• The independent auditor issued an unqualified opinion on the financial statements and internal controls. Proved oil and gas reserve estimates and their impact on impairment and depletion were identified as a critical audit matter.

Key facts for investors to verify

1. Whether commodity prices, production and subsequent ceiling-test calculations result in further impairments or extend the restriction on incremental unsecured debt issuance.
2. Completion and net proceeds of the timber sale, and the use of proceeds in the Shell reverse like-kind exchange and FY2021 funding plan.
3. Delivery of forecast FY2021 production and capital spending, including the second-rig plan, FM100 schedule and costs, and expected benefits from the Shell acquisition.
4. Resolution and timing of Northern Access permitting litigation, and whether the project remains economically viable under updated costs and schedules.
5. Utility customer arrears, bad-debt expense and regulatory recovery of COVID-related costs, alongside the impact of climate-policy developments on long-term gas demand and assets.