National Fuel Gas pany(NFG) - 2023 Q4 - Annual Report

Part I Business National Fuel Gas Company is a diversified energy company with an integrated business model spanning natural gas production, gathering, transportation, storage, and distribution, primarily focused on the Appalachian Basin The Company and its Subsidiaries National Fuel Gas Company is a diversified energy holding company primarily engaged in the natural gas lifecycle, from production in the Appalachian Basin's Marcellus and Utica shales to distribution - The company's business is integrated across the natural gas value chain, with assets concentrated in western New York and Pennsylvania, focusing on production from the Marcellus and Utica shales[34] Key Subsidiaries and Operations | Segment | Subsidiary | Primary Operation | | :--- | :--- | :--- | | Exploration & Production | Seneca Resources Company, LLC | Natural gas exploration, development, and production in Appalachia | | Pipeline & Storage | National Fuel Gas Supply Corp., Empire Pipeline, Inc. | Interstate natural gas transportation and storage in PA and NY | | Gathering | National Fuel Gas Midstream Company, LLC | Natural gas processing and pipeline gathering facilities in Appalachia | | Utility | National Fuel Gas Distribution Corp. | Natural gas utility services to ~754,000 customers in western NY and northwestern PA | Rates and Regulation The company's Pipeline and Storage and Utility segments are extensively regulated by federal and state agencies, impacting rates, operations, and safety - The Pipeline and Storage segment (Supply Corporation, Empire) and the Utility segment (Distribution Corporation) are subject to rate regulation by FERC, NYPSC, and PaPUC, which approves the rates they can charge customers and impacts their return on assets[43] - The company is also subject to safety regulations from the Pipeline and Hazardous Materials Safety Administration (PHMSA) for its pipelines and storage facilities[45] Competition The company faces diverse competition across all its segments, including other natural gas providers, alternative energy sources, and regional infrastructure - The Exploration and Production segment competes with other producers for mineral leaseholds and natural gas sales, utilizing strategies like operating its own prospects and maintaining a portfolio of firm transportation and sales contracts[60][61] - The Pipeline and Storage segment's competitive position is enhanced by its strategic location near Marcellus and Utica shale production and its interconnections with other pipelines, providing access to markets in the U.S. and Canada[62] - The Utility segment faces growing competition from electrification alternatives, especially in New York due to the Climate Leadership & Community Protection Act (CLCPA), though natural gas currently maintains a competitive edge in reliability and affordability[67][69] Human Capital As of September 30, 2023, the company employed 2,240 full-time employees, focusing on safety, development, and diversity, with an 8.7% voluntary attrition rate Employee Metrics (as of FY 2023) | Metric | Value | | :--- | :--- | | Full-time Employees | 2,240 | | Workforce under Collective Bargaining | 47% | | Voluntary Attrition Rate (ex-retirements) | 8.7% | | Work Stoppages | 0 | - The company emphasizes safety, tying executive compensation to safety-related goals, and provides various employee development resources, including training programs and tuition aid[77][82] - Diversity, Equity, and Inclusion are key focuses, supported by non-discrimination policies, training, and multiple Employee Resource Groups for women, diverse employees, veterans, and LGBTQ+ individuals[83][84] - The company operates as a diversified and integrated energy company with four primary business segments: Exploration and Production, Pipeline and Storage, Gathering, and Utility[34] FY 2023 Net Income (Loss) by Segment | Segment | Net Income (Loss) (in millions) | | :--- | :--- | | Exploration and Production | $232.3 | | Pipeline and Storage | $100.5 | | Gathering | $99.7 | | Utility | $48.4 | | All Other and Corporate | ($4.0) | - A single customer in the Exploration and Production segment accounted for approximately 9.6% ($208 million) of the company's consolidated revenue in FY 2023[40] Risk Factors The company faces significant strategic, financial, operational, and regulatory risks that could materially impact its business and financial performance - Strategic Risk: Climate change regulations, such as New York's CLCPA and the federal Inflation Reduction Act's methane charge, could impose significant costs, reduce demand for natural gas, and impact access to capital[90][92][93] - Financial Risk: Volatility in natural gas prices materially affects the Exploration and Production segment's profitability. The company uses hedging to mitigate this risk, but this can limit upside potential and create liquidity risks from margin calls in a rising price environment[104][109][110] - Operational Risk: The company's IT and operational technology systems are vulnerable to cybersecurity attacks, which could lead to business disruptions, data theft, and significant remediation costs[124] - Regulatory Risk: The company's regulated businesses (Utility, Pipeline & Storage) are subject to comprehensive oversight from FERC, NYPSC, and PaPUC. Failure to obtain approval for requested rates to cover increased costs could decrease earnings[132][135][136] Properties As of September 30, 2023, the company's net property, plant, and equipment totaled $7.3 billion, primarily in Appalachia, with proved natural gas reserves of 4,535 Bcf Net Property, Plant & Equipment by Segment (as of Sept 30, 2023) | Segment | Net Investment (in billions) | Percentage of Total | | :--- | :--- | :--- | | Exploration and Production | $2.6 | 35.0% | | Pipeline and Storage | $2.1 | ~28.8% | | Utility | $1.7 | ~23.3% | | Gathering | $0.9 | 12.2% | | Total | $7.3 | ~100% | - Seneca's proved developed and undeveloped natural gas reserves increased from 4,171 Bcf at September 30, 2022 to 4,535 Bcf at September 30, 2023, primarily due to extensions and discoveries of 670 Bcf[157] Appalachian Region Production Statistics (FY 2023) | Metric | Value | | :--- | :--- | | Average Sales Price per Mcf of Gas (after hedging) | $2.55 | | Average Production Cost per Mcfe | $0.68 | | Average Daily Production (MMcfe) | 1,020 | Legal Proceedings This section refers the reader to other parts of the report for discussions on environmental, rate, and other legal matters - For information on environmental and other legal matters, the report directs readers to Item 7, MD&A and Item 8, Note L[174] Mine Safety Disclosures This section is not applicable to the company's operations - The company reports that Mine Safety Disclosures are not applicable[174] Part II Market for Common Equity, Stockholder Matters and Issuer Purchases The company's common stock trades on the NYSE (NFG), with 8,751 shareholders as of September 30, 2023, and 40,942 shares purchased for 401(k) plans during the quarter - The company's common stock is listed on the New York Stock Exchange (Symbol: NFG), with 8,751 registered shareholders as of September 30, 2023[176] Issuer Purchases of Equity Securities (Quarter Ended Sept 30, 2023) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2023 | 14,954 | $51.00 | | Aug 2023 | 12,495 | $53.88 | | Sept 2023 | 13,493 | $51.42 | | Total | 40,942 | $52.10 | - No shares were purchased under the publicly announced share repurchase program during the quarter; the purchases were primarily for the company's 401(k) plans[178] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) The MD&A reviews the company's FY2023 financial performance, detailing decreased consolidated earnings, segment results, cash flows, and capital expenditures Critical Accounting Estimates The company's critical accounting estimates include oil and gas exploration and development costs, subject to a natural gas price-sensitive ceiling test, and regulation, involving judgment for deferring costs as regulatory assets - The company uses the full cost method of accounting for its Exploration and Production segment, which capitalizes all costs associated with property acquisition, exploration, and development[202] - A quarterly SEC full cost ceiling test is performed to limit capitalized costs. At September 30, 2023, the ceiling exceeded the book value of oil and gas properties by approximately $794.7 million, indicating no impairment[205] - A sensitivity analysis shows that if natural gas prices were $0.25 per MMBtu lower, the ceiling would still have exceeded the book value by approximately $442.9 million, and no impairment would have been recorded[205] Results of Operations Consolidated earnings decreased by $89.1 million in FY2023 to $476.9 million, primarily driven by lower Exploration & Production segment earnings due to asset sales and natural gas prices Earnings by Segment (FY 2023 vs. FY 2022) | Segment | 2023 Earnings (in millions) | 2022 Earnings (in millions) | Change (in millions) | | :--- | :--- | :--- | :--- | | Exploration and Production | $232.3 | $306.1 | ($73.8) | | Pipeline and Storage | $100.5 | $102.6 | ($2.1) | | Gathering | $99.7 | $101.1 | ($1.4) | | Utility | $48.4 | $68.9 | ($20.5) | | Total Consolidated | $476.9 | $566.0 | ($89.1) | Capital Resources and Liquidity In FY2023, net cash from operating activities increased to $1.24 billion, funding $1.01 billion in capital expenditures, with the company maintaining a $1.0 billion credit facility for liquidity Condensed Statement of Cash Flows (in millions) | Activity | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $1,237.1 | $812.5 | | Net Cash Used in Investing Activities | ($1,112.3) | ($518.7) | | Net Cash Used in Financing Activities | ($207.0) | ($276.2) | Capital Expenditures by Segment (FY 2023) | Segment | Capital Expenditures (in millions) | | :--- | :--- | | Exploration and Production | $737.7 | | Pipeline and Storage | $141.9 | | Gathering | $103.3 | | Utility | $139.9 | | Total | $1,122.8 | - The company maintains a $1.0 billion unsecured committed revolving credit facility maturing in February 2027. As of September 30, 2023, the debt-to-capitalization ratio was 0.46, well below the 0.65 covenant limit[290][294] Consolidated Earnings Comparison | Fiscal Year | Net Earnings (in millions) | | :--- | :--- | | 2023 | $476.9 | | 2022 | $566.0 | - Key activities in FY2023 included the acquisition of upstream assets from SWN Production Company for $124.8 million, continued development of the Tioga Pathway pipeline project, and rate case proceedings in Pennsylvania and New York[192][193][194] - Cash from operations increased to $1.24 billion in 2023 from $812.5 million in 2022, driven by higher cash receipts in the Exploration & Production and Utility segments[252][258] - Capital expenditures are projected to be approximately $920 million in FY2024, with the largest allocation to the Exploration and Production segment for well drilling and completion[276] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal years 2021-2023, along with detailed notes and the independent auditor's report Consolidated Financial Highlights (FY 2023 vs FY 2022) | Metric (in thousands) | Sept 30, 2023 | Sept 30, 2022 | | :--- | :--- | :--- | | Income Statement | | | | Operating Revenues | $2,173,771 | $2,186,046 | | Operating Income | $755,147 | $814,516 | | Net Income | $476,866 | $566,021 | | Diluted EPS | $5.17 | $6.15 | | Balance Sheet | | | | Total Assets | $8,280,260 | $7,896,262 | | Total Long-Term Debt (Net) | $2,384,485 | $2,083,409 | | Total Comprehensive Shareholders' Equity | $2,963,376 | $2,079,896 | - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting. A critical audit matter identified was the impact of proved natural gas reserve estimates on the valuation of natural gas properties[356][363] Controls and Procedures Management and the independent auditor concluded that the company's disclosure controls and internal control over financial reporting were effective as of September 30, 2023 - The CEO and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2023[684] - Management's assessment, based on the COSO framework, concluded that the company maintained effective internal control over financial reporting as of September 30, 2023[686] Part III Directors, Executive Officers and Corporate Governance Information regarding directors and corporate governance is incorporated by reference from the definitive Proxy Statement to be filed later - Information regarding directors and corporate governance is incorporated by reference from the definitive Proxy Statement to be filed later[692] Executive Compensation Information concerning executive compensation is incorporated by reference from the company's definitive Proxy Statement for its 2024 Annual Meeting of Stockholders - Details on executive compensation are incorporated by reference from the definitive Proxy Statement[695] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section incorporates information regarding equity compensation plans and security ownership of beneficial owners and management by reference from the company's definitive Proxy Statement for its 2024 Annual Meeting of Stockholders - Information on equity compensation plans and security ownership is incorporated by reference from the definitive Proxy Statement[696][697][698] Certain Relationships and Related Transactions, and Director Independence Information regarding related person transactions and director independence is incorporated by reference from the company's definitive Proxy Statement for its 2024 Annual Meeting of Stockholders - Details on related party transactions and director independence are incorporated by reference from the definitive Proxy Statement[700] Principal Accountant Fees and Services Information concerning principal accountant fees and services is incorporated by reference from the company's definitive Proxy Statement for its 2024 Annual Meeting of Stockholders - Information on principal accountant fees and services is incorporated by reference from the definitive Proxy Statement[702] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K report - This section provides an index of all exhibits filed with the 10-K, including governance documents, material contracts, and required certifications[706]