National Fuel Gas Company — Form 10-Q Summary
Business context and reporting period. Unaudited results cover the three months ended December 31, 2023, the first quarter of fiscal 2024; comparisons are with the three months ended December 31, 2022. National Fuel is an integrated natural gas company with Exploration and Production, Pipeline and Storage, Gathering, and Utility segments. Dollar figures below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Revenue | $525.4 | $658.9 | Down 20.3% |
| Operating income | $207.1 | $254.4 | Down 18.6% |
| Net income available to common shareholders | $133.0 | $169.7 | Down 21.6% |
| Diluted EPS | $1.44 | $1.84 | Down $0.40 |
| Operating margin | 39.4% | 38.6% | Up 0.8 percentage points |
| Cash from operations | $270.9 | $327.3 | Down $56.4 |
| Cash capital expenditures | $246.9 | $233.5 | Up $13.5 |
| Cash, cash equivalents and restricted cash at period end | $41.7 | $246.1 | Down $204.4 |
Cash from operations less cash capital expenditures was approximately $24.0 million, compared with $93.9 million in the prior-year quarter. The company declared dividends of $0.495 per share, versus $0.475.
At December 31, 2023, long-term debt was $2.386 billion and short-term borrowings/commercial paper were $300 million. The $1.0 billion revolving credit facility supported a $500 million commercial paper program. The company reported a 0.45 debt-to-capitalization ratio under its credit agreement. No long-term debt matured within the following 12 months. Current assets were $453.6 million and current liabilities were $807.2 million.
Material changes and segment results
- Exploration and Production: earnings fell $38.7 million to $52.5 million. Gas production rose 10.2 Bcf to 100.8 Bcf, but average realized gas price after hedging declined to $2.51/Mcf from $3.02/Mcf. Lower prices and higher depletion and operating costs more than offset increased production.
- Pipeline and Storage: earnings declined $5.4 million to $24.1 million, primarily reflecting lower transportation revenue from contract expirations and revisions.
- Gathering: earnings increased $4.1 million to $28.8 million, supported by a 16.2 Bcf increase in gathered volumes.
- Utility: earnings increased $2.7 million to $26.6 million. Lower retail gas revenue largely reflected lower gas costs and throughput; purchased-gas adjustment clauses generally pass gas-cost changes through to customers rather than affecting earnings. New Pennsylvania rates supported results.
Consolidated revenue fell mainly because of lower Utility retail sales revenue and lower Exploration and Production revenue. Operating income declined less than revenue, and the operating margin expanded modestly. Net income also reflected higher other interest expense and lower other income.
Outlook, risks and unusual items
- Management expects cash from operations in the remainder of fiscal 2024 to be lower than in fiscal 2023, but more than sufficient to fund capital expenditures. Based on current commodity prices, it expects 2025 operating cash flow to exceed capital expenditures. The company expects to fund two 2025 debt maturities totaling $500 million with cash and borrowings as needed. No specific full-year EPS guidance is provided in the filing.
- Management cites inflation and volatile interest rates as potential pressures on the cost and availability of capital, while stating it expects to meet financing needs. The credit facility maturity was extended after quarter-end: on February 7, 2024, participating lenders extended it to February 25, 2028; commitments fall to $940 million from February 26, 2027.
- The oil and gas full-cost ceiling exceeded the relevant book value by approximately $84.4 million at quarter-end. Management disclosed that gas prices $0.25/MMBtu below the test-period average, holding other factors constant, would have resulted in an estimated after-tax impairment of approximately $250.8 million. The test is sensitive to commodity prices, reserves and cost estimates.
- The proposed Tioga Pathway pipeline project is estimated to cost approximately $90 million, with a targeted late-2026 in-service date; a FERC application was expected in the second half of 2024. The Northern Access project remains subject to litigation and regulatory uncertainty, with a FERC construction extension through December 31, 2024. Approximately $56 million had been spent on it by quarter-end.
- Regulatory matters include a New York utility rate filing seeking approximately $88 million in annual revenue increases, proposed for October 1, 2024, and a Supply Corporation FERC rate case with rates effective subject to refund from February 1, 2024. Final outcomes could affect revenues or require refunds.
- Environmental risks include evolving methane and greenhouse-gas rules, potential compliance costs and permitting impacts. Estimated remaining cleanup costs for former manufactured-gas-plant sites were $3.2 million; the company said it was not aware of material additional exposure. Other routine litigation and regulatory matters have no estimable loss range in the filing.
- Other unusual items included $2.0 million of business-interruption insurance proceeds related to a pipeline outage, a negative $4.2 million fair-value adjustment to California-asset-sale contingent consideration, and higher depletion expense. The contingent payment tied to 2023 oil prices expired without payment.
Important facts for investors to verify
- Whether lower realized gas prices, production growth and hedge settlements support the company’s expected cash generation and avoid a ceiling-test impairment.
- Progress and final outcomes of the New York utility and FERC pipeline rate proceedings, including any refund exposure.
- Regulatory, legal and construction milestones for Northern Access, particularly the December 31, 2024 extension deadline, and for the Tioga Pathway project.
- Capital-spending, liquidity and refinancing plans, including the $500 million of 2025 debt maturities and the reduced revolving-facility commitments after February 2027.
- Actual compliance costs and business effects from climate, methane and other environmental rules.