Business context and reporting period
National Fuel Gas Company (NYSE: NFG) filed this unaudited Form 10-Q for its fiscal third quarter and nine months ended June 30, 2023. Its integrated businesses span natural gas production, gathering, pipeline transportation and storage, and utility distribution, primarily in the Appalachian region.
Key financial results
| Metric | Three months ended June 30, 2023 | Nine months ended June 30, 2023 |
|---|---|---|
| Operating revenue | $428.7 million, down 14.7% | $1.805 billion, up 3.1% |
| Operating income | $154.1 million, down 14.7% | $629.8 million, down 1.1% |
| Net income attributable to common stock | $92.6 million, down 14.4% | $403.2 million, down 1.1% |
| Diluted EPS | $1.00, versus $1.17 | $4.37, versus $4.43 |
| Operating cash flow | Not presented as a quarterly figure | $1.055 billion, versus $654.0 million |
| Capital expenditures | Not presented as a quarterly figure | $727.7 million cash-flow statement amount; $804.1 million total long-lived-asset expenditures including acquisitions |
| Cash and temporary cash investments | $53.4 million at June 30, 2023 | |
| Debt | $2.384 billion long-term debt, net of current portion and issuance costs, plus $138.5 million commercial paper; no long-term debt maturities due within 12 months |
Dividends declared were $0.495 per share for the quarter and $1.445 per share for the nine months. Total assets were $8.107 billion and shareholders’ equity was $2.936 billion at June 30, 2023.
Material changes versus comparable periods
- Quarterly earnings fell $15.5 million. Exploration and Production earnings declined $13.2 million, while Utility earnings fell to less than $0.1 million from $4.6 million. Pipeline and Storage and Gathering earnings also declined.
- Nine-month earnings decreased $4.7 million. Utility earnings fell $24.2 million, partly offset by improved Exploration and Production and Gathering results.
- Quarterly revenue was lower largely because lower natural gas prices reduced Exploration and Production revenue and lower gas costs reduced Utility sales revenue. Nine-month revenue increased chiefly from higher Utility retail gas revenue, reflecting higher gas costs passed through to customers.
- Appalachian gas production rose 23.5 Bcf, or about 9%, to 278.6 Bcf for the nine months. The average gas price after hedging was $2.62/Mcf, versus $2.67/Mcf.
- Operating cash flow increased by $401.1 million, principally due to higher cash receipts from gas production and timing of Utility gas-cost recovery and customer receivables. Investing cash outflow increased as capital spending rose and the prior-year period included proceeds from the California asset sale.
- Accumulated other comprehensive loss narrowed to $49.4 million from $625.7 million at September 30, 2022, largely reflecting changes in derivative values.
Outlook, commentary, risks and unusual items
- Management expects adequate liquidity for at least the next 12 months and beyond. It expects operating cash flow in the remainder of fiscal 2023 to increase versus the comparable 2022 period and expects operating cash flow to exceed capital expenditures in 2024. The company expects to use cash on hand, operating cash flow and short-term borrowing as needed.
- The company’s $1.0 billion revolving credit facility matures in February 2027; the commercial-paper program has a $500 million capacity. Its covenant debt-to-capitalization ratio was 0.45 against a 0.65 limit, with reported capacity for approximately $3.27 billion of additional debt under that test.
- In May 2023, the company issued $300 million of 5.50% notes due October 2026, using proceeds for general corporate purposes, including repayment of a $250 million delayed-draw loan. It redeemed $549 million of notes due in March 2023. Management cited inflation, rising interest rates and possible effects on capital costs and availability.
- In June, the company acquired about 34,000 net acres in Tioga County, Pennsylvania, for $124.8 million. It also acquired approximately 1,145 net acres in Lycoming County for $11.5 million in April.
- Pennsylvania regulators approved a $23 million annual increase in Utility base-rate revenue effective August 1, 2023. Separately, Supply Corporation filed a FERC rate case on July 31, 2023, proposing rates effective February 1, 2024; the outcome is pending and could involve refunds of rates collected subject to refund.
- The Northern Access pipeline project remains subject to regulatory uncertainty. FERC extended the construction deadline to December 31, 2024; approximately $55.8 million had been spent by June 30, 2023, and the company has not updated its preliminary $500 million cost estimate or in-service timing.
- Commodity prices, production, hedge results and the full-cost ceiling test are significant risks. At June 30, the ceiling exceeded oil and gas property book value by about $1.8 billion; a $0.25/MMBtu lower gas-price assumption would reduce that cushion to about $1.5 billion after tax, without triggering impairment under that sensitivity.
- Climate and environmental regulation may raise compliance costs or affect demand and access to capital. The filing notes the Inflation Reduction Act methane charge is expected to apply to qualifying reported emissions starting in 2024. Estimated remaining cleanup costs for former manufactured-gas-plant sites were $3.6 million; other ordinary-course litigation and regulatory matters could affect results, but loss estimates were not available.
- Prior-year comparisons include unusual California divestiture-related hedge termination, transaction and severance costs, a $12.7 million pretax asset-sale gain, and a Pennsylvania OPEB regulatory adjustment that increased earnings by $14.6 million after tax. The Enhanced Oil Recovery tax credit also benefited 2022 results and did not recur.
- Management cautioned that interim results are seasonal, particularly for Utility operations, and nine-month earnings should not be treated as a full-year forecast. Disclosure controls were assessed as effective, with no material internal-control changes reported for the quarter.
Important facts for investors to verify
- How lower gas prices, realized regional differentials, production growth and hedge settlements affect Exploration and Production earnings and cash flow.
- Progress and final allowed rates in the FERC case, including the potential for refunds, and the impact of the Pennsylvania Utility rate increase.
- Capital spending, funding needs and debt levels, including use of commercial paper and compliance with credit-agreement and indenture covenants.
- Regulatory approvals, cost estimates and schedule for Northern Access, and whether project spending remains recoverable or productive.
- Potential effects of climate rules, methane fees, utility decarbonization policies and environmental requirements on demand, costs and asset values.
- Commodity-price and reserve changes that could reduce the full-cost ceiling cushion and lead to a noncash impairment.