National Fuel Gas Company (NFG) — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2022; comparative periods ended June 30, 2021. Amounts are U.S. dollars unless noted.
Business context
NFG is an integrated natural gas company with Exploration and Production, Pipeline and Storage, Gathering, and Utility segments, primarily operating in western New York and Pennsylvania. Development is focused on the Appalachian Basin.
Financial performance
| Metric | Three months ended June 30, 2022 | Prior year | Nine months ended June 30, 2022 | Prior year |
|---|---|---|---|---|
| Revenue | $502.6 million | $394.4 million | $1.751 billion | $1.387 billion |
| Operating income | $180.7 million | $150.1 million | $636.7 million | $507.7 million |
| Net income | $108.2 million | $86.5 million | $407.9 million | $276.7 million |
| Diluted EPS | $1.17 | $0.94 | $4.43 | $3.02 |
| Operating cash flow | Not reported for the quarter | Not reported for the quarter | $654.0 million | $671.8 million |
- Nine-month revenue grew 26% and net income grew 47% year over year. Higher Appalachian gas production and prices, together with improved results across reportable segments, drove earnings growth.
- Quarterly operating margin was approximately 36.0%, versus 38.1% a year earlier; nine-month operating margin was approximately 36.4%, versus 36.6%. Revenue includes derivative hedge effects, so reported margins should be interpreted in that context.
- Cash capital expenditures were $592.5 million for the nine months. Operating cash flow exceeded this amount by approximately $61.5 million. Dividends paid were $124.7 million; dividends declared were $1.385 per share for the nine months.
Balance sheet, debt and liquidity
- At June 30, 2022, cash and temporary cash investments were $432.6 million; restricted hedging collateral deposits were $154.5 million. Cash, cash equivalents and restricted cash totaled $587.0 million.
- Debt comprised $2.082 billion of long-term debt, $549.0 million of current maturities, and $400.0 million of short-term bank borrowings—approximately $3.031 billion in total. The $549.0 million current portion includes notes due March 2023.
- The company had a $1.0 billion revolving credit facility maturing in 2027 and a separate $250 million delayed-draw facility maturing in June 2023. Its covenant debt-to-capitalization ratio was 0.53, with stated capacity for approximately $1.99 billion of additional debt before reaching the 0.65 limit.
- Derivative liabilities were $703.8 million. NFG had posted $154.5 million in collateral at quarter-end, with maximum margin posted during the nine months of $464.2 million. Commodity-price moves can change collateral needs and near-term borrowing requirements.
Material changes and unusual items
- NFG completed the sale of Seneca’s California assets on June 30 for $253.5 million, including $240.9 million in cash and $12.6 million of estimated contingent consideration. The sale reflected the company’s strategic focus on the Appalachian Basin.
- Sale-related items included a $12.7 million pretax gain on certain assets, a $44.6 million loss from terminating crude-oil hedges, and $9.7 million of transaction and severance costs. The hedge loss and costs reduced earnings; the gain increased them.
- Nine-month 2022 results included a $18.5 million pretax benefit from a Pennsylvania OPEB regulatory adjustment. The prior-year period included a $76.2 million pretax oil-and-gas impairment and a $51.1 million pretax gain on timber-property sales.
- The FM100 pipeline expansion entered service in December 2021 and is expected to generate approximately $50 million in incremental annual transportation revenue.
- No oil-and-gas ceiling-test impairment was recorded at June 30; the ceiling exceeded the carrying value by approximately $2.4 billion. A $0.25/MMBtu decrease in the specified gas-price assumption would still leave approximately $2.1 billion of headroom, based on management’s sensitivity analysis.
Outlook, risks and contingencies
- Management said liquidity should be adequate for at least the next 12 months. It expected second-half fiscal 2022 operating cash flow to exceed the comparable prior-year period and, based on then-current commodity prices, operating cash flow to exceed capital expenditures in each of 2023 and 2024.
- Fiscal 2022 capital expenditure expectations were $525–$550 million for Exploration and Production and $100–$110 million for Utility. The filing provides no consolidated earnings or EPS guidance.
- The Northern Access project remains subject to regulatory uncertainty. FERC extended its construction deadline to December 31, 2024; approximately $55.8 million had been spent. The company’s approximately $500 million cost estimate and expected in-service date await greater clarity on approvals.
- Key risks include commodity prices and hedging, natural-gas demand and climate regulation, project permitting and costs, inflation, customer collections, credit ratings and collateral requirements, and labor negotiations. Approximately half of the active workforce is represented by unions.
- The company estimated $3.8 million of remaining cleanup costs for former manufactured-gas-plant sites, expects rate recovery over about one year, and said it was not aware of material additional environmental exposure. Other ordinary-course legal and regulatory matters could affect earnings and cash flows, but a loss range was not estimable.
- Pennsylvania enacted a corporate tax-rate reduction after quarter-end; management expected a $25–$30 million income-tax benefit in fiscal fourth quarter 2022.
Important facts for investors to verify
- How much of earnings growth reflects recurring segment performance versus the California sale, hedge termination, and Pennsylvania OPEB adjustment.
- Near-term refinancing and repayment plans for the $549 million of debt due in March 2023, alongside short-term borrowings and collateral needs.
- Actual cash generation, capital spending, and production versus management’s fiscal 2022 expectations, particularly under changing gas prices and hedge settlements.
- Progress on Northern Access permits, updated project economics, and any resulting changes to cost or timing estimates.
- Whether the stated ceiling-test cushion, covenant capacity, and liquidity remain adequate if commodity prices, reserves, or financing conditions deteriorate.