National Fuel Gas Company — Q2 Fiscal 2024 Form 10-Q
Reporting period: Three and six months ended March 31, 2024; the financial statements are unaudited. The company operates natural gas production, gathering, pipeline and storage, and utility businesses, primarily in western New York and Pennsylvania. Amounts below are in U.S. dollars.
Key financial results
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Operating revenue | $629.9 million, down from $717.3 million | $1,155.3 million, down from $1,376.1 million |
| Operating income | $250.6 million, up from $221.4 million | $457.7 million, down from $475.7 million |
| Net income | $166.3 million, up from $140.9 million | $299.3 million, down from $310.6 million |
| Diluted EPS | $1.80, up from $1.53 | $3.24, down from $3.37 |
| Operating margin | 39.8%, versus 30.9% | 39.6%, versus 34.6% |
| Operating cash flow | Not separately presented for the quarter | $586.3 million, down from $711.2 million |
Revenue fell largely because lower natural gas costs reduced Utility retail sales revenue; the company says purchased-gas adjustment clauses generally mean gas-cost fluctuations do not affect Utility earnings. Operating income and margins rose despite lower revenue, in part as purchased-gas expense fell. For the six-month period, lower Exploration and Production earnings outweighed gains in Utility, Gathering, and Pipeline and Storage.
Six-month cash used in investing activities was $483.1 million, including $482.0 million of cash capital expenditures. Cash and temporary cash investments were $50.8 million at March 31, 2024. Long-term debt was $2.387 billion and short-term borrowings, entirely commercial paper at period-end, were $278.9 million. The company reported a 0.44 debt-to-capitalization ratio under its credit agreements, against a maximum of 0.65. It declared dividends of $0.495 per share for the quarter, versus $0.475 a year earlier.
Material changes and segment performance
- Exploration and Production: Six-month earnings declined $37.6 million to $114.5 million, mainly from lower realized gas prices after hedging and higher depletion and operating costs. Production rose 19.8 Bcf for the six-month period; average gas price after hedging fell to $2.53/Mcf from $2.80/Mcf.
- Pipeline and Storage: Six-month earnings increased $1.5 million to $54.8 million. Interim Supply Corporation rates effective February 1, 2024 supported revenue; transportation volumes declined 33.9 Bcf year over year.
- Gathering: Six-month earnings rose $8.5 million to $57.5 million, supported by a 32.0 Bcf increase in gathered volume.
- Utility: Six-month earnings increased $15.8 million to $71.3 million, helped by Pennsylvania base rates, New York tracking mechanisms, and lower income tax expense. Warmer-than-normal weather reduced throughput; weather normalization mechanisms mitigated some earnings impact.
Outlook, risks, and unusual items
- Management expects an oil and gas full-cost ceiling-test impairment in each of the June 30 and September 30, 2024 quarters, following low April 2024 Henry Hub pricing of $1.56/MMBtu. No impairment was recorded at March 31, when the ceiling exceeded the relevant book value by only about $3.1 million. A $0.25/MMBtu decline from the period’s average ceiling-test prices would have produced an estimated $329.9 million after-tax impairment, based on price change alone.
- Management expects adequate liquidity for at least the next 12 months and beyond. It expects to use operating cash flow and short-term borrowings for remaining fiscal 2024 capital needs; based on current commodity prices, it expects operating cash flow to exceed capital expenditures in 2025. Two 2025 debt maturities total $500 million.
- In April 2024, after the reporting date, the company drew $300 million under a delayed-draw term loan maturing in February 2026 and used the proceeds for general corporate purposes, including redeeming commercial paper. The revolving credit facility maturity was extended to February 2028, with commitments declining from $1.0 billion to $940 million after February 26, 2027.
- A New York utility rate filing seeks approximately $88 million in annual revenue increases, with proposed rates from October 1, 2024; it remains subject to regulatory review. Supply Corporation’s FERC rate settlement, estimated to increase annual revenue by about $56 million at current contract levels, also awaits final approval.
- The Northern Access project remains uncertain: FERC’s construction deadline extension to December 31, 2024 was affirmed by the D.C. Circuit, and the company is evaluating approvals, cost estimate, and timing. The preliminary cost estimate is $500 million; $55 million had been spent by March 31, 2024.
- Other notable items include $2.0 million of business-interruption insurance proceeds during the six months and a $3.7 million loss from revaluing contingent consideration tied to the 2022 California asset sale. The board authorized up to $200 million of share repurchases; $5.0 million had been repurchased under the program by March 31.
- Risks highlighted include gas-price volatility and ceiling-test impairments, interest rates and access to capital, climate and methane regulation, possible reduced demand for natural gas, project permitting and costs, and counterparty credit exposure. The company says ordinary-course litigation and regulatory matters could affect results when resolved, but does not currently expect a material adverse effect on financial condition.
Important facts for investors to verify
- Potential impairment amounts and effects on earnings, debt covenants, and capacity to issue additional long-term debt.
- Final FERC action on Supply Corporation’s settlement and NYPSC action on the requested New York utility rates.
- Northern Access project approvals, updated cost estimate, and whether the project proceeds.
- Actual funding needs and cash flow against capital spending, 2025 maturities, and the April 2024 term-loan draw.
- Changes in production, realized gas prices after hedging, and the size and timing of derivative gains or losses.