National Fuel Gas Company (NFG) — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2023; unaudited. National Fuel’s fiscal year ends September 30. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Business context
National Fuel is an integrated natural gas company with four reportable segments: Exploration and Production, Pipeline and Storage, Gathering, and Utility. Its operations are concentrated in western New York and Pennsylvania, with upstream development focused on the Marcellus and Utica shales.
Key financial metrics
| Metric | Three months ended March 31, 2023 | Prior-year quarter | Six months ended March 31, 2023 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $717.3 million | $701.7 million | $1,376.1 million | $1,248.3 million |
| Operating income | $221.4 million | $246.4 million | $475.7 million | $456.0 million |
| Net income available to common shareholders | $140.9 million | $167.3 million | $310.6 million | $299.7 million |
| Diluted EPS | $1.53 | $1.82 | $3.37 | $3.26 |
| Operating margin, derived | 30.9% | 35.1% | 34.6% | 36.5% |
- Cash flow and investment: Six-month operating cash flow was $711.2 million, versus $425.6 million a year earlier. Cash capital expenditures were $496.4 million, compared with $415.4 million. Cash and temporary cash investments were $71.5 million at March 31, 2023.
- Debt and liquidity: Long-term debt, net of current portion, was $2.085 billion; short-term bank notes and commercial paper totaled $410 million. No long-term debt was due within the following 12 months. The company reported a 0.45 debt-to-capitalization ratio under its credit agreements, against a 0.65 covenant limit, and said it had $3.20 billion of additional debt capacity under that test.
- Shareholder distributions: Dividends declared were $0.475 per share for the quarter and $0.95 per share for the six-month period, up from $0.455 and $0.91, respectively, in the prior-year periods.
Material changes versus prior periods
- Quarterly net income declined $26.4 million, while six-month net income increased $10.9 million. The quarterly decline reflected lower earnings in Exploration and Production, Pipeline and Storage, and Utility; the six-month increase was led by Exploration and Production, with Utility weakness partly offsetting gains elsewhere.
- Quarterly revenue increased 2.2%, but operating income fell 10.1%. Six-month revenue increased 10.2% and operating income rose 4.3%. Utility revenue growth largely reflected higher gas costs passed through to customers; the filing says the Utility does not profit from fluctuations in purchased-gas costs.
- Exploration and Production’s six-month earnings increased $18.7 million, supported by higher Appalachian gas production and realized gas prices after hedging. Quarterly segment earnings fell $10.1 million, with lower oil production following the 2022 California asset sale and lower gas prices among the cited factors.
- Utility earnings fell $21.3 million for the quarter and $19.6 million for the six months. A key comparison effect was the nonrecurrence of a prior-year $18.5 million pre-tax OPEB regulatory adjustment, which had increased 2022 earnings by $14.6 million after tax. Warmer weather, higher interest and operating costs, and reduced New York base-rate recovery also weighed on results.
- Cash flow from operations rose $285.6 million year over year, primarily from higher cash receipts from Appalachian gas production and higher realized gas prices after hedging. The company redeemed $549 million of long-term debt during the six months, financed with short-term borrowings and cash on hand; short-term debt consequently increased $350 million from September 30, 2022.
Outlook, commentary, risks and unusual items
- Outlook: Management expects adequate cash for short- and long-term requirements for at least the next 12 months. It expects operating cash flow in the remainder of fiscal 2023 to increase versus the comparable 2022 period and, based on current commodity prices, expects 2024 operating cash flow to exceed capital expenditures. The filing provides no specific EPS or revenue guidance.
- Acquisition: The company agreed to acquire upstream assets in Potter and Tioga counties, Pennsylvania, for $127 million, subject to closing adjustments. It paid a $12.7 million deposit and expected the transaction to close before the end of June 2023; remaining consideration was expected to be financed with borrowings.
- Rates and regulation: A proposed Pennsylvania rate-case settlement would increase annual base-rate operating revenues by $23 million from August 1, 2023, subject to PaPUC approval. A New York system-improvement tracker was approved, subject to a condition restricting an earlier base-rate case. A separate New York arrears-relief cost recovery proposal remained pending.
- Major project: The Northern Access pipeline project remains subject to regulatory approvals. FERC extended the construction deadline to December 31, 2024. Approximately $55.9 million had been spent by March 31, 2023; the company said it would update the preliminary $500 million cost estimate and in-service date when regulatory timing becomes clearer.
- Commodity and hedging exposure: The company had 462.9 Bcf of natural gas derivative contracts outstanding. It reported $37.4 million of after-tax unrealized hedge gains expected to be reclassified into income within 12 months. Commodity prices, regional differentials, production, and hedge outcomes can affect earnings and cash flow.
- Impairment and other risks: At March 31, 2023, the full-cost ceiling exceeded the book value of oil and gas properties by approximately $2.7 billion; management noted that lower prices, reserve changes, or higher costs could reduce this cushion. The filing also cites inflation, rising interest rates, financing availability, climate and methane regulation, and environmental and permitting requirements as risks.
- Contingencies: Estimated remaining cleanup costs for former manufactured gas plant sites were $3.8 million, which the company expected to recover through rates in less than one year. Other ordinary-course litigation and regulatory matters could affect earnings or cash flows, but management could not estimate possible losses. No material additional environmental exposure was identified.
Most important facts for investors to verify
- Whether the Pennsylvania rate settlement and New York cost-recovery proposals receive regulatory approval, and the timing and amount of customer recovery.
- Closing terms and financing for the $127 million Pennsylvania upstream acquisition.
- Progress, approvals, updated cost estimates, and construction timing for Northern Access.
- Natural gas prices, production volumes, hedge settlements, and the company’s ability to fund capital spending while managing short-term debt and refinancing needs.
- Whether the oil and gas ceiling-test cushion remains adequate as commodity prices, reserves, and development costs change.
- Potential financial effects of methane and greenhouse-gas rules, environmental compliance, and other regulatory or legal proceedings.