National Fuel Gas Company — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2021; filed August 6, 2021. Amounts below are in millions of dollars unless noted. National Fuel is an integrated natural gas producer, gathering and pipeline operator, and regulated utility.
Financial performance and liquidity
| Metric | Three months ended June 30, 2021 | Nine months ended June 30, 2021 |
|---|---|---|
| Revenue | $394.4, versus $323.0 in 2020 | $1,386.7, versus $1,258.3 in 2020 |
| Operating income | $150.1, versus $80.4 | $507.7, versus $203.8 |
| Net income | $86.5, versus $41.3 | $276.7, versus $21.8 |
| Diluted EPS | $0.94, versus $0.47 | $3.02, versus $0.25 |
| Comprehensive income (loss) | $(50.0), versus $18.4 | $153.0, versus $32.1 |
| Cash provided by operations | $671.8 for nine months, versus $623.9 |
Revenue increased 22% for the quarter and 10% year to date. Nine-month earnings benefited from lower oil-and-gas impairment charges than in 2020 and a $51.1 million pre-tax gain on timber-property sales. Results also included a $76.2 million pre-tax oil-and-gas impairment charge in the first quarter of fiscal 2021. These items affect comparability.
At June 30, 2021, cash and temporary cash investments were $118.0 million; long-term debt, net, was $2.63 billion; and shareholders’ equity was $2.01 billion. No short-term bank debt or commercial paper was outstanding. The company reported $1.0 billion of committed revolving credit access and a 0.54 debt-to-capitalization ratio under its credit-facility calculation. Cash flow from operations exceeded reported capital expenditures of $512.8 million by approximately $159 million.
The company declared dividends of $0.455 per share for the quarter. Nine-month capital expenditures were $509.7 million. Cash from investing activities also included $104.6 million of net timber-sale proceeds.
Material changes versus prior comparable periods
- Exploration and Production: Nine-month segment earnings were $46.2 million, compared with a $157.7 million loss in 2020. Higher Appalachian production and gas prices, plus much lower impairment charges, drove the improvement. Gas production rose to 237.7 Bcf from 163.4 Bcf, primarily reflecting the Shell asset acquisition and new wells.
- Gathering: Nine-month earnings increased to $61.7 million from $51.1 million, with gathered volume up 44% to 275.3 Bcf, largely following the Shell gathering-asset acquisition.
- Pipeline and Storage: Nine-month earnings rose to $71.1 million from $62.8 million, helped by Empire North project demand charges and rate changes.
- Utility: Nine-month earnings declined to $59.9 million from $64.3 million. Higher operating costs, bad-debt provisions, depreciation, and regulatory true-ups more than offset revenue growth.
- Corporate and other: Nine-month results included the timber-sale gain. Energy-marketing activity also declined after the company sold commercial and industrial contracts and related assets in August 2020.
Outlook, commentary, risks and unusual items
- Management said cash on hand, operating cash flow, and short-term borrowing were expected to meet fiscal 2021 financing needs; the filing provides no specific earnings or EPS guidance.
- The FM100 pipeline project was under construction, with approximately $122.5 million capitalized by June 30, an estimated total cost of about $280 million, and a target in-service date in late calendar 2021. A companion Seneca capacity project was also expected to add production beginning in early fiscal 2022.
- The Northern Access project remains subject to legal and regulatory uncertainty. Although the Second Circuit upheld FERC’s waiver orders and a state court found certain permits preempted, the company said it would update the project’s cost estimate and schedule when there is more clarity.
- Oil-and-gas properties are subject to quarterly full-cost ceiling tests. At June 30, the ceiling exceeded book value by approximately $409.8 million; management reported that specified price sensitivities would not have triggered an additional impairment. Commodity-price and reserve changes could still affect future tests.
- Hedge-market movements produced a $123.7 million nine-month other comprehensive loss. Net derivative liabilities were $205.5 million at June 30, and $166.3 million of pre-tax unrealized hedge losses were expected to be reclassified into income over the following 12 months as hedged transactions occur.
- COVID-19-related customer nonpayment and restrictions on service terminations may increase bad-debt expense; recovery of related utility costs through regulation remained uncertain. Climate legislation and emissions regulation may raise compliance costs or affect permits and markets.
- Financing items included issuing $500 million of 2.95% notes due 2031 and redeeming $500 million of 4.90% notes due 2021, with a $15.7 million early-redemption premium recorded as interest expense. A Pennsylvania utility tariff filing proposed a $7.7 million base-rate reduction and a $50 million customer refund, subject to regulator approval.
- Environmental cleanup liabilities for former manufactured-gas-plant sites were estimated at approximately $3.0 million. Other ordinary-course litigation and regulatory matters could affect results when resolved, but management did not expect them to materially change current liquidity.
Key facts for investors to verify
- How much of earnings growth is supported by recurring production and pipeline operations versus the timber gain, impairment comparisons, and other nonrecurring items.
- Future production, realized commodity prices, hedging effects, and any resulting full-cost ceiling-test impairments.
- FM100 construction cost and schedule, and the legal, permitting, cost, and timing outlook for Northern Access.
- Utility receivable collections, COVID-related bad debt, and regulatory decisions on cost recovery and the proposed Pennsylvania customer refund.
- Debt capacity and financing needs as capital spending proceeds, including compliance with credit-facility and indenture covenants.