National Fuel Gas Company — FY2023 Form 10-K
Reporting period: Fiscal year ended September 30, 2023. The filing is an annual report, not a standalone fourth-quarter report. National Fuel is an integrated natural gas company with Exploration and Production, Pipeline and Storage, Gathering, and Utility segments, primarily in Appalachia, western New York, and Pennsylvania.
Financial performance and position
| Metric | FY2023 | FY2022 |
|---|---|---|
| Operating revenue | $2.174 billion | $2.186 billion |
| Operating income | $755.1 million | $814.5 million |
| Net income | $476.9 million | $566.0 million |
| Diluted earnings per share | $5.17 | $6.15 |
| Cash provided by operations | $1.237 billion | $812.5 million |
| Capital expenditures | $1.010 billion cash; $1.124 billion including non-cash additions | $811.8 million cash |
Operating margin was approximately 34.7% versus 37.3% in FY2022; net margin was approximately 21.9% versus 25.9%. Operating cash flow rose substantially, principally due to higher cash receipts from gas production and changes in utility gas-cost recovery and customer collections. Cash and temporary cash investments were $55.4 million at year-end.
At September 30, 2023, long-term debt principal was $2.4 billion and commercial paper outstanding was $287.5 million. The company had a $1.0 billion committed revolving credit facility, with a February 2027 maturity, and reported a 0.46 debt-to-capitalization ratio under its credit agreement. Total assets were $8.28 billion and shareholders’ equity was $2.96 billion.
Segment net income: Exploration and Production $232.3 million; Pipeline and Storage $100.5 million; Gathering $99.7 million; Utility $48.4 million. Corporate and All Other recorded a combined loss of approximately $4.0 million.
Material changes versus FY2022
- Net income declined $89.2 million, while revenue fell modestly. Lower earnings in all reportable segments contributed to the decline.
- Exploration and Production earnings fell $73.8 million. Appalachian gas production increased, but the realized gas price after hedging decreased, and the 2022 sale of California assets reduced oil-related earnings in FY2023. FY2022 also included tax benefits and other sale-related items that did not recur.
- Utility earnings decreased $20.6 million, partly because a one-time Pennsylvania OPEB-related benefit recognized in FY2022 did not recur and interest and operating costs increased. Pennsylvania base rates rose by $23 million annually effective August 1, 2023.
- Pipeline and Storage and Gathering earnings declined slightly. Gathering revenue increased with higher volumes, but higher maintenance and other costs, among other items, offset much of the benefit.
- Cash from operations increased, but cash capital expenditures and total capital additions also rose. The company acquired upstream assets in Tioga County, Pennsylvania, for $124.8 million.
Outlook, management commentary, and risks
- Management expects FY2024 cash from operations to be lower than FY2023, primarily because of less favorable working-capital sources, but sufficient to fund capital expenditures. Estimated capital expenditures are $920 million for FY2024, $915 million for FY2025, and $935 million for FY2026.
- Production reached 372.5 Bcfe in FY2023, up from FY2022, and management expects production to increase again in FY2024. Proved reserves increased 9% to 4,536 Bcfe.
- The proposed Tioga Pathway pipeline project is estimated to cost approximately $90 million, with a target in-service date in late 2026; it requires FERC approval. The Northern Access project remains subject to ongoing litigation and regulatory uncertainty. Approximately $55.9 million had been spent on Northern Access by year-end.
- Distribution Corporation filed a New York rate case seeking an $88.8 million annual revenue increase, proposed for October 2024. Supply Corporation filed a FERC rate case proposing higher rates effective February 2024; rates collected above final approved levels may be refundable.
- Major risks include natural gas price volatility and hedging-related liquidity needs; reserve and production-estimate uncertainty; project delays or permit denials; climate and emissions rules that could increase costs or reduce gas demand; interest rates, credit-market access, and refinancing; pipeline safety, environmental liability, and cybersecurity. A single Exploration and Production customer represented 9.6% of consolidated revenue, excluding hedging losses with separate parties.
- The SEC full-cost ceiling exceeded oil and gas property book value by approximately $794.7 million at year-end, and there was no FY2023 ceiling-test impairment. The independent auditor identified proved gas reserve estimates and their effect on natural gas properties as a critical audit matter; the financial statements and internal controls received unqualified audit opinions.
Important facts for investors to verify
- Whether production growth and realized gas prices support management’s FY2024 cash-flow and capital-spending expectations.
- Progress and final outcomes in the New York utility and FERC pipeline rate cases, including any refunds or changes to approved returns.
- FERC approval, litigation status, cost estimates, and timing for Tioga Pathway and Northern Access.
- Liquidity and borrowing costs under changing interest rates, including commercial-paper refinancing and any collateral requirements on hedges.
- Reserve additions, PUD development schedules, and sensitivity of the ceiling-test cushion to gas prices, reserves, and development costs.
- Potential effects of climate regulation, methane charges, environmental obligations, and changes in demand for natural gas.