NATIONAL FUEL GAS CO quarterly report, Q2 FY2022

National Fuel Gas Company — Q2 FY2022 Form 10-Q

Reporting period: Three and six months ended March 31, 2022; fiscal year ends September 30. Financial statements are unaudited. The company operates Exploration and Production, Pipeline and Storage, Gathering, and Utility businesses, primarily in Appalachia, with oil production also in California.

Financial performance

Metric	Three months ended March 31	Six months ended March 31
Revenue, 2022	$701.7 million	$1,248.3 million
Revenue, 2021	$551.1 million	$992.3 million
Net income, 2022	$167.3 million	$299.7 million
Net income, 2021	$112.4 million	$190.2 million
Diluted EPS, 2022	$1.82	$3.26
Diluted EPS, 2021	$1.23	$2.08
Operating income, 2022	$246.4 million	$456.0 million

• Revenue increased approximately 27% for both the quarter and six-month period. Net income rose 49% for the quarter and 58% year to date.
• Operating margins, calculated as operating income divided by revenue, were approximately 35.1% for the quarter and 36.5% year to date, versus 38.8% and 36.0%, respectively, in 2021. Revenue growth reflects, in part, higher gas costs passed through by the regulated Utility business.
• Quarterly segment earnings: Exploration and Production $71.1 million; Utility $53.0 million; Gathering $22.1 million; Pipeline and Storage $25.5 million. Year-to-date segment earnings were $133.5 million, $75.2 million, $45.2 million, and $50.6 million, respectively.
• Six-month operating cash flow was $425.6 million, compared with $417.1 million. Investing cash outflow was $358.2 million, including $415.4 million of capital expenditures; financing cash outflow was $32.6 million. Cash and restricted cash totaled $154.9 million at March 31.
• At March 31, long-term debt was $2.081 billion, with $549 million classified as current maturities; short-term bank notes and commercial paper totaled $218 million. The company reported a credit-agreement debt-to-capitalization ratio of 0.58.
• Quarterly dividends declared were $0.455 per share; six-month dividends were $0.91 per share, versus $0.445 and $0.89 in 2021.

Material changes and notable items

• Higher commodity prices and production drove Exploration and Production earnings growth. Six-month gas production increased 7.8 Bcf; the average realized gas price after hedging rose to $2.56/Mcf from $2.21/Mcf. The after-hedging oil price rose to $67.30/Bbl from $53.50/Bbl, while oil volumes declined.
• Utility revenue increased substantially as gas costs and throughput rose, but purchased gas adjustment clauses generally prevent the company from profiting from gas-cost fluctuations. Utility earnings also included a $14.6 million after-tax benefit from a Pennsylvania OPEB regulatory adjustment.
• Pipeline and Storage benefited from the FM100 expansion entering service in December 2021; management expects approximately $50 million of incremental annual transportation revenue from the project.
• Prior-year comparisons include a $76.2 million pretax oil-and-gas impairment and a $51.1 million pretax timber-property sale gain, neither of which recurred in the first half of FY2022. Their nonrecurrence affects segment comparisons.
• Long-term debt expense declined from the prior year, partly because the company replaced $500 million of 4.90% notes with $500 million of 2.95% notes in 2021 and recorded an early-redemption premium in the prior-year period.
• Unrealized commodity hedge losses increased accumulated other comprehensive loss to $654.3 million. Net derivative liabilities were $802.1 million, and the company had posted $102.4 million of hedge collateral. Management expects $550.4 million of pretax hedge losses to be reclassified into earnings within 12 months as the hedged transactions occur.

Outlook, liquidity, and risks

• Management expects adequate liquidity. It anticipates higher operating cash flow in the remainder of FY2022 versus the comparable 2021 period, to fund capital spending, dividends, and potentially reduce short-term borrowings. For 2023–2024, management expects operating cash flow to exceed capital expenditures at current commodity prices.
• FY2022 capital expenditure guidance: Exploration and Production $475–$550 million; Utility $100–$110 million. The company entered a new $1.0 billion unsecured revolving credit facility maturing February 2027. Management may issue long-term debt to refinance some or all of the $549 million of March 2023 maturities.
• On May 1, 2022, the company agreed to sell its California oil and gas assets for $280 million cash at closing plus up to $30 million in contingent payments, subject to closing conditions. The transaction was expected to close June 30, 2022; substantially all closing proceeds were expected to reduce capitalized oil-and-gas costs.
• The Northern Access pipeline project remains dependent on regulatory approvals and timing. The company requested a FERC construction extension; $55.8 million had been spent, and the project cost estimate and in-service date were to be updated when approvals become clearer.
• Key risks include commodity-price and hedge-liquidity exposure, production and reserve uncertainty, rising interest rates and refinancing costs, inflation, climate and emissions regulation, possible reduced natural-gas demand, and project permitting or cost delays. A Pennsylvania collective bargaining agreement expired April 12, 2022, and negotiations were ongoing.
• Environmental cleanup liabilities for former manufactured-gas-plant sites were estimated at $3.8 million, with recovery expected through rates. Other litigation and regulatory matters could affect results, though the company said loss estimates were not currently available.

Important facts for investors to verify

• Whether commodity prices, hedge settlements, and production volumes sustain Exploration and Production earnings—and the timing and liquidity effects of collateral requirements.
• Progress on refinancing the $549 million of March 2023 debt maturities, short-term borrowing levels, and compliance with credit and indenture covenants.
• Actual capital spending and cash flow versus guidance, including the expected contribution from FM100.
• Completion and final proceeds from the California asset sale, including contingent payments and closing conditions.
• Regulatory and permitting developments for Northern Access, emissions requirements, and Pennsylvania OPEB refunds and rate effects.
• Whether quarterly earnings trends persist after accounting for the $14.6 million after-tax OPEB benefit and prior-year impairment and timber-sale comparables. The filing cautions that first-half earnings are not a forecast for the full fiscal year because Utility earnings are seasonal.