National Fuel Gas Company — Form 10-Q Summary
Business context and reporting period
For the fiscal first quarter ended December 31, 2021, National Fuel Gas reported results across Exploration and Production, Pipeline and Storage, Gathering, and Utility. Its integrated operations focus principally on natural gas production, gathering, transportation, and distribution in the Appalachian region, with oil production primarily in California. This is an interim, unaudited report; management cautions that winter-season earnings should not be treated as a forecast for the full fiscal year.
Financial results and position
| Metric | Quarter ended Dec. 31, 2021 | Comparable 2020 quarter |
|---|---|---|
| Revenue | $546.6 million | $441.2 million |
| Operating income | $209.7 million | $143.5 million |
| Net income attributable to common stock | $132.4 million | $77.8 million |
| Diluted EPS | $1.44 | $0.85 |
| Operating cash flow | $171.5 million | $204.7 million |
| Capital expenditures, cash-flow statement | $213.5 million | $183.3 million |
| Dividends declared per share | $0.455 | $0.445 |
Operating margin was approximately 38.4% of revenue, versus 32.5% a year earlier; net margin was approximately 24.2%, versus 17.6%. These comparisons are affected by prior-year unusual items. Net cash used in investing activities was $169.7 million and net cash used in financing activities was $42.8 million. Cash and temporary cash investments ended the quarter at $79.1 million, down from $109.4 million at December 31, 2020.
At December 31, 2021, long-term debt was $2.630 billion and short-term bank notes and commercial paper were $166.0 million. Current assets were $567.2 million and current liabilities were $896.1 million. The Company had $1.0 billion of committed revolving credit facilities and a $500 million commercial paper program. Its debt-to-capitalization ratio under the credit agreements was 0.55, below the 0.65 covenant limit.
Material changes versus the prior comparable period
- Revenue increased 23.9% and net income increased 70.2%. The largest earnings improvement came from Exploration and Production, which earned $62.4 million versus a $29.6 million loss, reflecting higher realized commodity prices and production, as well as the absence of a prior-year impairment charge.
- Prior-year results included a $76.2 million pre-tax ($55.2 million after-tax) oil and gas property impairment and a $51.1 million pre-tax ($37.0 million after-tax) gain on timber-property sales. Their non-recurrence materially affects year-over-year comparisons.
- Utility revenue rose mainly because of higher gas costs passed through to customers; the Company stated that it does not profit from purchased-gas-cost fluctuations under its adjustment clauses. Utility earnings declined $0.9 million, partly due to Pennsylvania rate reductions and customer refunds.
- Gathering earnings rose $2.6 million, supported by higher gathered volumes. Pipeline and Storage earnings rose $1.0 million; the FM100 expansion entered service in December.
- Operating cash flow fell $33.3 million, primarily due to Utility cash-flow timing, including gas-cost recovery and Pennsylvania OPEB-related customer credits and refunds. Capital expenditures increased $30.2 million.
Outlook, commentary, risks, and contingencies
- Management expects fiscal 2022 operating cash flow to increase over fiscal 2021 and capital expenditures to be lower than in fiscal 2021. It expects cash on hand, operating cash flow, and short-term borrowing to fund fiscal 2022 needs; no long-term debt repayments are scheduled for the remainder of fiscal 2022.
- Based on current commodity prices, management expects operating cash flow to exceed capital expenditures in each of fiscal 2023 and 2024, potentially supporting additional investment, reduced borrowings, and a net reduction in long-term debt in 2023 while meeting dividends. These are forward-looking expectations, not earnings guidance.
- The FM100 project was fully placed in service in December 2021. Its estimated cost is approximately $230 million; management expects approximately $50 million of incremental annual transportation revenue.
- The Northern Access pipeline project remains subject to regulatory uncertainty. The Company sought a FERC extension of time to construct on January 28, 2022; it has not provided an updated project cost or in-service date. Approximately $55.7 million had been spent through December 31, 2021.
- Commodity-price exposure remains important. The Company uses gas and oil hedges; at quarter-end, net derivative liabilities were $290.7 million, down from $616.4 million at September 30, 2021. The filing expects $197.7 million of hedging losses ($145.1 million after tax) to be reclassified into earnings over the next 12 months as the hedged transactions occur. No hedging collateral was required at quarter-end.
- At December 31, 2021, the full-cost ceiling exceeded oil and gas property book value by approximately $1.3 billion; specified gas and oil price sensitivities would not have triggered an impairment. Future impairment remains dependent on commodity prices, reserves, and cost estimates.
- Key risks include commodity prices and production, regulatory and climate-policy changes, project permitting and construction, customer credit and collections, financing access and credit ratings, and ongoing COVID-19 effects. The Company estimates $3.1 million of remaining cleanup costs for former manufactured-gas-plant sites and expects rate recovery; it reported no currently known material additional environmental exposure. Other ordinary-course litigation and regulatory matters could affect earnings and cash flows, but a loss estimate was not available.
Important facts for investors to verify
- How much of the earnings increase reflects sustainable production, pricing, and segment performance versus prior-year impairment and timber-sale comparison effects.
- Actual fiscal 2022 cash flow and capital spending against management’s expectations, particularly given commodity prices, gas-cost recovery timing, and working-capital needs.
- FM100’s realized transportation revenue and costs after entering service, and any updated timing, costs, or approvals for Northern Access.
- Hedge positions, expected loss reclassifications, commodity-price exposure, and any resulting collateral or liquidity requirements.
- Final Pennsylvania regulatory action on the OPEB settlement and customer refunds, and developments in climate, emissions, and other permitting requirements.