National Fuel Gas pany(NFG) - 2022 Q4 - Annual Report

Business Overview National Fuel Gas Company operates integrated natural gas segments in the Appalachian basin, with significant E&P customer revenue concentration Company and Business Segments National Fuel Gas Company is a diversified energy company with integrated natural gas operations across four segments in the Appalachian basin - The company operates as an integrated energy business with assets focused on the production and transportation of natural gas from the Appalachian basin[39] - The Exploration and Production segment had three customers that represented approximately 38.9% ($850 million) of the company's consolidated revenue for FY2022[48] - The Gathering segment is highly dependent on the Exploration and Production segment, generating approximately 94% of its revenues from services provided to it in FY2022[57] FY2022 Net Income by Segment | Segment | Net Income (Millions) | | :--- | :--- | | Exploration and Production | $306.1 | | Pipeline and Storage | $102.6 | | Gathering | $101.1 | | Utility | $68.9 | | All Other and Corporate | ($12.7) | Rates and Regulation The company's operations are extensively regulated by federal and state authorities, impacting rates and safety - The Pipeline and Storage segment (Supply Corporation, Empire) is regulated by FERC, which approves rates for gas transportation and storage[50] - The Utility segment (Distribution Corporation) is regulated by the NYPSC and PaPUC, which approve rates for utility customers[50] - The Pipeline and Hazardous Materials Safety Administration (PHMSA) sets safety standards for the company's pipelines and underground storage facilities[52] Competition The company faces competition across all segments, with increasing long-term pressure from alternative energy sources - The Pipeline and Storage segment's competitive position is enhanced by its facilities' proximity to the Marcellus and Utica shale production areas and interconnections that provide access to premium markets[68] - In the Utility segment, retail competition for gas commodity service does not pose an acute threat as cost of service is recovered through delivery charges, not commodity sales; however, almost all large-volume load is served by unregulated marketers[71] - Climate legislation, such as New York's CLCPA, could increase competition for the Utility segment from electric and geothermal energy sources over the long term[74] Human Capital The company employs 2,132 full-time staff, with nearly half under collective bargaining, focusing on safety and DEI - At fiscal year-end 2022, the company had 2,132 full-time employees, with 48% of the active workforce covered by collective bargaining agreements[82] - The voluntary attrition rate for FY2022 was 8% (excluding retirements and specific severance); the company experienced zero work stoppages[84][85] - The company has linked executive compensation to diversity and inclusion performance goals and has established four new Employee Resource Groups to support an inclusive environment[89][91] Risk Factors Strategic risks include capital market dependence, climate change regulations, and opposition to natural gas, impacting costs and growth Strategic Risks Strategic risks include capital market dependence, climate change regulations, and opposition to natural gas, impacting costs and growth - The company relies on capital markets for financing; its ability to issue long-term debt is contingent on meeting an interest coverage test and a debt-to-assets ratio of not more than 60% under its 1974 indenture[94][95] - Climate change regulations, such as the federal Inflation Reduction Act's methane charge and New York's CLCPA, could impose significant costs, mandate system changes, and reduce demand for natural gas[97][99][100] - Organized opposition to the natural gas industry may lead to increased regulatory initiatives, operational delays, and litigation, potentially impacting the competitive position of natural gas[103][105] Financial Risks Financial risks include holding company dependence, natural gas price volatility, hedging liquidity risk, and potential full cost impairment - As a holding company, NFG is dependent on dividends and loan repayments from its operating subsidiaries to meet its financial obligations[107] - The Exploration and Production segment's financial results are highly dependent on volatile natural gas prices; the company hedges a significant portion of its production, but this can limit upside potential and create liquidity risk from margin calls if prices rise significantly[112][116][117] - The company uses the full cost method of accounting, which requires a quarterly "ceiling test"; a significant drop in the 12-month average commodity price could trigger a non-cash impairment charge, reducing earnings and potentially restricting the ability to issue new debt[124] Operational Risks Operational risks include inherent hazards, cybersecurity threats, drilling uncertainties, and physical climate change impacts - Operations are subject to inherent hazards like fires, explosions, and pipeline ruptures, which could lead to personal injury, property damage, and business interruption losses that may not be fully covered by insurance or indemnification[126] - The company relies on information and operational technology systems that are vulnerable to cyber-attacks, which could lead to business disruptions, data theft, and significant remediation costs[129][131] - Physical risks from climate change, such as more frequent and severe weather events, could disrupt supply chains, damage facilities, and lead to reduced revenues and increased operational costs[135] Regulatory Risks Regulatory risks include extensive federal and state oversight, environmental laws, and hydraulic fracturing regulations, impacting costs and revenue - The company is subject to extensive regulation by FERC, NYPSC, and PaPUC; unfavorable rate case outcomes or inability to recover increased costs could decrease earnings[141][142] - Environmental laws regarding emissions, waste disposal, and remediation can lead to material losses, unexpected capital expenditures, and operational shutdowns or delays[143][144] - Increased regulation of exploration and production activities, including hydraulic fracturing, could result in operational delays, additional compliance costs, and increased litigation risk[145][147] Properties The company's property, plant, and equipment investment totaled $6.6 billion in FY2022, primarily in the Appalachian region General Information on Facilities As of FY2022, the company's net PP&E investment was $6.6 billion, primarily in the Appalachian region, with Pipeline and Storage holding the largest share Net Investment in Property, Plant & Equipment (FY2022) | Segment | Net Investment (Billions) | % of Total | | :--- | :--- | :--- | | Pipeline and Storage | $2.0 | 30.3% | | Exploration and Production | $2.1 | 31.8% | | Utility | $1.7 | 25.8% | | Gathering | $0.8 | 12.1% | | Total | $6.6 | 100% | - The Pipeline and Storage segment's assets include 2,301 miles of transmission pipeline and 30 storage fields with a combined working gas level of 77.2 Bcf[156] - The Utility segment's assets include 15,040 miles of distribution pipeline[159] Exploration and Production Activities The company's E&P activities focus on Appalachian natural gas, with proved reserves increasing to 4,172 Bcfe in FY2022 due to extensions and discoveries - On a Bcfe basis, proved developed and undeveloped reserves increased from 3,853 Bcfe at Sept 30, 2021 to 4,172 Bcfe at Sept 30, 2022[164] - The increase in natural gas reserves was driven by extensions and discoveries of 838 Bcf, partially offset by production of 343 Bcf and divestitures of 50 Bcf[162] Average Sales Price (after hedging) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Avg Gas Price per Mcf | $2.71 | $2.25 | $2.07 | | Avg Oil Price per Barrel | $70.80 | $56.54 | $56.96 | Developed and Undeveloped Acreage (at Sept 30, 2022) | Acreage Type | Appalachian Region (Net) | | :--- | :--- | | Developed | 643,381 | | Undeveloped | 636,523 | | Total | 1,279,904 | Management's Discussion and Analysis (MD&A) This section provides management's perspective on the company's financial condition, results of operations, and liquidity Overview and FY2022 Highlights FY2022 highlights include California asset sale, FM100 pipeline launch, 8% E&P proved reserve growth, and new credit facilities - Completed the sale of Seneca's California assets for $253.5 million, consisting of $240.9 million in cash and $12.6 million in contingent consideration, to strategically focus on the Appalachian Basin[197] - The FM100 Project was placed into service in December 2021, adding 330,000 Dth/day of transportation capacity and expected to generate approximately $50 million in incremental annual transportation revenues[198] - Exploration and Production segment proved reserves grew by 8% to 4,172 Bcfe, and production increased by 25.1 Bcfe to 352.5 Bcfe for the fiscal year[199] - Entered into a new $1.0 billion unsecured committed revolving credit facility maturing in 2027 and a new $250.0 million 364-Day Credit Agreement[201][202] Critical Accounting Estimates Critical accounting estimates involve oil and gas properties using the full cost method, requiring proved reserve estimates for depletion and the SEC ceiling test - The company uses the full cost method of accounting for oil and gas properties, where estimates of proved reserves are critical for calculating depletion and the quarterly SEC full cost ceiling test[205][206][207] - The ceiling test compares capitalized costs to the present value of future net cash flows from proved reserves, using a 10% discount rate and a 12-month historical average commodity price; an excess of costs over the ceiling results in a non-reversible impairment charge[207][208] - At September 30, 2022, the calculated ceiling exceeded the book value of oil and gas properties by approximately $3.2 billion, resulting in no impairment[208] - For its regulated Utility and Pipeline and Storage segments, the company defers costs as regulatory assets and credits as regulatory liabilities based on the expected recovery from or pass-through to customers in future rates[211] Results of Operations Consolidated earnings increased significantly in FY2022 to $566.0 million, driven by higher earnings across all segments, especially E&P Earnings by Segment (in thousands) | Segment | 2022 | 2021 | | :--- | :--- | :--- | | Exploration and Production | $306,064 | $101,916 | | Pipeline and Storage | $102,557 | $92,542 | | Gathering | $101,111 | $80,274 | | Utility | $68,948 | $54,335 | | All Other & Corporate | ($12,659) | $34,580 | | Total Consolidated | $566,021 | $363,647 | Exploration and Production Segment Results E&P segment earnings surged to $306.1 million in 2022, driven by higher realized gas prices and increased production, partially offset by crude oil hedge losses E&P Segment Financial Highlights | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Earnings (Millions) | $306.1 | $101.9 | | Gas Production (Bcf) | 342.9 | 314.0 | | Avg. Gas Price After Hedging ($/Mcf) | $2.71 | $2.25 | | Oil Production (Mbbl) | 1,604 | 2,235 | - The increase in earnings was primarily driven by higher natural gas prices after hedging (+$126.3M) and higher natural gas production (+$51.3M)[226] - Earnings were positively impacted by a $28.6 million reversal of a deferred tax valuation allowance and a $16.2 million benefit from a Pennsylvania state corporate income tax rate reduction[226] Pipeline and Storage Segment Results Pipeline and Storage segment earnings increased to $102.6 million in 2022, primarily due to new demand charges from the FM100 Project P&S Segment Financial Highlights | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Earnings (Millions) | $102.6 | $92.5 | | Operating Revenues (Millions) | $377.0 | $343.6 | | Firm Transportation Throughput (Bcf) | 790.4 | 770.3 | - The increase in transportation revenues was primarily attributable to new demand charges from Supply Corporation's FM100 Project[232] Gathering Segment Results Gathering segment earnings grew to $101.1 million in 2022, driven by a 14.6% increase in gathered volumes and a state tax benefit Gathering Segment Financial Highlights | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Earnings (Millions) | $101.1 | $80.3 | | Operating Revenues (Millions) | $214.8 | $193.3 | | Gathered Volume (Bcf) | 419.3 | 366.0 | - The increase in earnings was primarily attributable to higher gathering revenues driven by a 53.3 Bcf increase in gathered volume[238][239] Utility Segment Results Utility segment earnings increased to $68.9 million in 2022, primarily due to a one-time OPEB regulatory liability reduction and higher customer usage Utility Segment Financial Highlights | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Earnings (Millions) | $68.9 | $54.3 | | Operating Revenues (Millions) | $898.2 | $667.3 | | Total Throughput (Bcf) | 140.2 | 136.3 | - The earnings increase was primarily attributable to the conclusion of a regulatory proceeding in Pennsylvania, which resulted in the reduction of an OPEB-related regulatory liability, increasing earnings by $14.6 million after-tax[246] - The weather normalization clause (WNC) in New York contributed approximately $4.8 million to earnings in 2022 due to warmer-than-normal weather[248] Capital Resources and Liquidity In FY2022, operating cash flow of $812.5 million covered capital expenditures, supported by asset sales and new credit facilities, maintaining strong liquidity Condensed Statement of Cash Flows (in millions) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $812.5 | $791.6 | | Capital Expenditures | ($811.8) | ($751.7) | | Net Proceeds from Asset Sales | $254.4 | $104.6 | | Change in Short-Term Debt | ($98.5) | $128.5 | | Dividends Paid | ($168.1) | ($163.1) | - The company expects cash from operations to exceed capital expenditures in fiscal 2023 and 2024, providing options for growth investments, debt reduction, or increased shareholder returns[258] Investing Activities and Capital Expenditures Total capital expenditures for FY2022 were $829.4 million, primarily for E&P activities, with $254.4 million in net proceeds from asset sales Capital Expenditures by Segment (in millions) | Segment | 2022 | 2021 | | :--- | :--- | :--- | | Exploration and Production | $565.8 | $381.4 | | Pipeline and Storage | $95.8 | $252.3 | | Gathering | $55.5 | $34.7 | | Utility | $111.0 | $100.8 | | Total | $829.4 | $769.9 | Estimated Capital Expenditures (in millions) | Segment | 2023 | 2024 | 2025 | | :--- | :--- | :--- | :--- | | Exploration and Production | $550 | $525 | $515 | | Pipeline and Storage | $120 | $105 | $90 | | Gathering | $95 | $110 | $95 | | Utility | $120 | $135 | $135 | | Total | $885 | $875 | $835 | Financing Activities and Liquidity The company enhanced financial flexibility in FY2022 with new credit facilities, reduced short-term debt, and plans to repay $549 million in long-term debt - Replaced previous credit agreements with a new $1.0 billion unsecured committed revolving credit facility maturing in February 2027[296] - Entered a new $250.0 million 364-Day Credit Agreement maturing in June 2023, with proceeds intended for general corporate purposes, including repayment of maturing debt[297] - The current portion of long-term debt at September 30, 2022, is $549.0 million, consisting of notes maturing in March 2023, which the company does not anticipate refinancing with new long-term debt[305][543] - At September 30, 2022, the company's debt-to-capitalization ratio was 0.49, significantly below the 0.65 covenant limit in its credit agreements[301] Market Risk and Hedging The company manages energy commodity price risk using derivatives, primarily natural gas swaps and collars, which represented a significant liability of approximately $783 million at FY2022 Outstanding Natural Gas Hedges (at Sept 30, 2022) | Instrument | Notional Quantity (Bcf) | Weighted Avg. Fixed/Floor Price ($/Mcf) | Weighted Avg. Ceiling Price ($/Mcf) | | :--- | :--- | :--- | :--- | | Price Swaps | 207.3 | $2.98 | N/A | | No Cost Collars | 213.5 | $3.40 | $4.24 | - At September 30, 2022, the company would have paid approximately $512.3 million to terminate its natural gas price swap agreements and $270.5 million to terminate its no cost collars[325][328] Rate Matters The company is actively engaged in regulatory rate proceedings, including a $28.1 million base rate increase filing in Pennsylvania and upcoming FERC rate filings - In its Pennsylvania jurisdiction, Distribution Corporation filed for a $28.1 million increase in annual base rate revenues on October 28, 2022[339] - In its New York jurisdiction, a pension and OPEB surcredit became effective October 1, 2022, to offset amounts being collected in base rates, as future costs are projected to be satisfied with existing reserve funds[336] - Supply Corporation must file for new FERC rates to be effective by February 1, 2025, and Empire must file for new rates no later than May 1, 2025[341][342] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements and related supplementary information Consolidated Financial Statements The consolidated financial statements report FY2022 total revenues of $2.19 billion, net income of $566.0 million, and total assets of $7.90 billion Consolidated Statement of Income Highlights (in thousands) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Operating Revenues | $2,186,046 | $1,742,659 | $1,546,291 | | Operating Income | $814,516 | $639,924 | $29,858 | | Net Income (Loss) | $566,021 | $363,647 | ($123,772) | | Diluted EPS | $6.15 | $3.97 | ($1.41) | Consolidated Balance Sheet Highlights (in thousands) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Total Assets | $7,896,262 | $7,464,825 | | Total Long-Term Debt | $2,083,409 | $2,628,687 | | Total Comprehensive Shareholders' Equity | $2,079,896 | $1,786,206 | | Total Capitalization and Liabilities | $7,896,262 | $7,464,825 | Consolidated Statement of Cash Flows Highlights (in thousands) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net Cash from Operating Activities | $812,521 | $791,553 | $740,809 | | Net Cash Used in Investing Activities | ($518,704) | ($633,217) | ($1,223,616) | | Net Cash (Used in) Provided by Financing Activities | ($276,237) | ($58,739) | $476,088 | Notes to Consolidated Financial Statements The notes detail accounting policies, segment information, financial instruments, and debt, including the 2022 California asset sale and 2020 Shell asset acquisition Note B: Asset Acquisitions and Divestitures This note details the $253.5 million sale of California assets in 2022 and the $506.3 million acquisition of Pennsylvania assets from Shell in 2020 - On June 30, 2022, the company completed the sale of Seneca's California assets for a total price of $253.5 million, including $240.9 million in cash and contingent consideration valued at $12.6 million[437] - On July 31, 2020, the company acquired upstream and midstream assets in Pennsylvania from Shell for total consideration of $506.3 million[438] Note H: Capitalization and Short-Term Borrowings This note outlines the company's capital structure, including $2.65 billion in long-term debt, $549 million current portion, and $1.25 billion in credit facilities Long-Term Debt (in thousands) | Description | Sept 30, 2022 | Sept 30, 2021 | | :--- | :--- | :--- | | Medium-Term Notes | $99,000 | $99,000 | | Notes (2.95% to 5.50%) | $2,550,000 | $2,550,000 | | Total Long-Term Debt | $2,649,000 | $2,649,000 | | Less: Current Portion | ($549,000) | $0 | | Net Long-Term Debt | $2,083,409 | $2,628,687 | - The company has a $1.0 billion unsecured committed revolving credit facility maturing in 2027 and a $250.0 million 364-Day Credit Agreement maturing in 2023[549][550] Note N: Supplementary Oil and Gas Information (Unaudited) This note provides unaudited oil and gas information, including $1.95 billion in capitalized costs, 4,171 Bcf proved gas reserves, and a $5.45 billion standardized measure of discounted future net cash flows Proved Reserve Quantities (Gas - Bcf) | Year | Appalachian Region | Total Company | | :--- | :--- | :--- | | Sept 30, 2021 | 3,693 | 3,723 | | Sept 30, 2022 | 4,171 | 4,171 | Standardized Measure of Discounted Future Net Cash Flows (in thousands) | Year | Amount | | :--- | :--- | | 2022 | $5,448,330 | | 2021 | $2,353,572 | | 2020 | $1,222,470 | - Proved undeveloped (PUD) reserves were 858 Bcf at Sept 30, 2022, representing 20.6% of total proved reserves; the company plans to invest approximately $308 million in 2023 to develop these PUD reserves[684][691] Corporate Governance and Other Information This section covers the company's internal controls, procedures, and corporate governance practices Controls, Procedures, and Corporate Governance Management concluded disclosure controls and internal control over financial reporting were effective as of September 30, 2022, with governance information incorporated by reference - Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2022[699] - Based on the COSO framework, management concluded that the company maintained effective internal control over financial reporting as of September 30, 2022[701] - Information regarding directors, executive officers, corporate governance, executive compensation, and security ownership is incorporated by reference from the definitive Proxy Statement to be filed within 120 days of the fiscal year-end[706][710][711][712]