National Fuel Gas Company — Form 10-Q
Reporting period: First quarter of fiscal 2023, the three months ended December 31, 2022; comparisons are with the three months ended December 31, 2021. Amounts are in U.S. dollars unless noted. The financial statements are unaudited.
Business context
National Fuel is an integrated natural gas company with Exploration and Production, Pipeline and Storage, Gathering, and Utility segments, principally serving the Appalachian Basin and western New York and Pennsylvania. The quarter reflected higher natural gas production and prices, increased winter utility demand and the continuing effects of the 2022 sale of Seneca’s California assets.
Financial results
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Operating revenue | $658.9 million | $546.6 million |
| Operating income | $254.4 million | $209.7 million |
| Net income available to common stock | $169.7 million | $132.4 million |
| Diluted earnings per share | $1.84 | $1.44 |
| Operating cash flow | $327.3 million | $171.5 million |
| Capital expenditures | $233.5 million cash expenditures | $213.5 million cash expenditures |
| Dividends declared per share | $0.475 | $0.455 |
Operating margin was approximately 38.6%, compared with 38.4%; net margin was approximately 25.8%, compared with 24.2%. Operating cash flow exceeded cash capital expenditures by approximately $93.9 million in the quarter.
At December 31, cash and temporary cash investments were $244.5 million, and cash, cash equivalents and restricted cash totaled $246.1 million. Current assets were $872.8 million and current liabilities were $1.535 billion. Long-term debt, including its current portion, had a carrying value of $2.483 billion; short-term bank borrowings were $250 million. The company reported a credit-agreement debt-to-capitalization ratio of 0.48, against a maximum of 0.65.
Changes versus the prior-year quarter
- Revenue rose 20.6% and net income rose 28.2%. Earnings increased in every reportable segment: Exploration and Production by $28.8 million, Pipeline and Storage by $4.3 million, Gathering by $1.6 million, and Utility by $1.7 million.
- Exploration and Production benefited from 8.8 Bcf higher gas production and a $0.50/Mcf increase in weighted average gas price after hedging. Oil revenue fell following the California asset sale.
- Utility revenue increased mainly because of higher gas costs passed through to customers and colder weather; the company states that it does not profit from purchased-gas cost fluctuations under its adjustment clauses.
- Pipeline and Storage results benefited from FM100 project demand charges and higher transportation volumes. Gathering revenue rose with higher gathered volumes.
- Operating cash flow increased by $155.9 million, primarily on higher cash receipts from Appalachian gas production and realized prices. Cash capital expenditures increased by $20.0 million.
Outlook, risks and notable items
- Management expects adequate liquidity for at least the next 12 months and expects operating cash flow to exceed capital expenditures in fiscal 2023 and 2024, based on current commodity prices. These are projections, not guaranteed outcomes.
- $399 million of long-term debt was due in March 2023. Management expected to repay it with cash on hand and short-term borrowings and did not anticipate long-term refinancing. The separate $250 million 364-day facility matures June 29, 2023.
- The company had 389.0 Bcf of natural gas commodity derivative contracts outstanding. Derivative liabilities were $331.5 million at December 31, down from $785.7 million at September 30. Net hedging losses in accumulated other comprehensive income were $327.8 million; $180.6 million before tax was expected to be reclassified into earnings within 12 months as hedged transactions occur. Commodity prices, collateral requirements and hedge accounting may affect results and liquidity.
- The oil and gas full-cost ceiling exceeded the related book value by approximately $3.3 billion at quarter-end; management stated a $0.25/MMBtu decline in the gas price assumption would leave an approximately $3.0 billion after-tax cushion, with no impairment indicated under that sensitivity.
- The Northern Access pipeline project remains subject to regulatory uncertainty. FERC extended the construction deadline to December 31, 2024; approximately $55.9 million had been spent, and the preliminary $500 million cost estimate and in-service date await greater regulatory clarity.
- Pennsylvania Distribution sought a $28.1 million annual base-revenue increase; the filing was suspended until July 27, 2023 and remains pending. A New York system-improvement tracker petition, proposed for an April 1, 2023 effective date, was also pending.
- Climate and emissions rules, including potential methane charges beginning with 2024 emissions, could increase costs, affect permitting or reduce natural gas demand. The filing also identifies commodity-price, financing, inflation, regulatory, operational and environmental risks.
- Estimated remaining cleanup costs for former manufactured gas plant sites were approximately $4.0 million; the company expected recovery through rates over about one year. Other routine litigation and regulatory matters could affect results, but the company said loss estimates could not be made for those matters.
Key facts for investors to verify
- Whether operating cash flow and commodity-price realizations support the stated FY2023–FY2024 expectation that cash flow will exceed capital expenditures.
- How the March 2023 debt maturities were repaid and how the $250 million facility maturing in June 2023 is managed.
- Actual hedge settlements, future collateral needs and the timing and earnings impact of hedge-loss reclassifications.
- Outcomes and timing of the Pennsylvania rate case, New York tracker petition and Northern Access approvals, costs and schedule.
- Changes in ceiling-test headroom, production, realized prices and emissions-related costs or regulation.