UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|☑||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the Fiscal Year Ended September 30, 2022
|☐||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the Transition Period from to
Commission File Number 1-3880
National Fuel Gas Company
(Exact name of registrant as specified in its charter)
|(State or other jurisdiction of|
incorporation or organization)
|6363 Main Street|
|(Address of principal executive offices)||(Zip Code)|
(Registrant’s telephone number, including area code)
|Securities registered pursuant to Section 12(b) of the Act:|
|Title of Each Class||Trading Symbol|
Name of Each Exchange
on Which Registered
|Common Stock, par value $1.00 per share||NFG||New York Stock Exchange|
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|Large accelerated filer||☑||Accelerated filer||☐|
|Non-accelerated filer||☐||Smaller reporting company||☐|
|Emerging growth company||☐|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The aggregate market value of the voting stock held by nonaffiliates of the registrant amounted to $6,253,478,000 as of March 31, 2022.
Common Stock, par value $1.00 per share, outstanding as of October 31, 2022: 91,485,294 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for its 2023 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days of September 30, 2022, are incorporated by reference into Part III of this report.
Glossary of Terms
Frequently used abbreviations, acronyms, or terms used in this report:
National Fuel Gas Companies
Company The Registrant, the Registrant and its subsidiaries or the Registrant’s subsidiaries as appropriate in the context of the disclosure
Distribution Corporation National Fuel Gas Distribution Corporation
Empire Empire Pipeline, Inc.
Midstream Company National Fuel Gas Midstream Company, LLC
National Fuel National Fuel Gas Company
NFR National Fuel Resources, Inc.
Registrant National Fuel Gas Company
Seneca Seneca Resources Company, LLC
Supply Corporation National Fuel Gas Supply Corporation
CFTC Commodity Futures Trading Commission
EPA United States Environmental Protection Agency
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
IRS Internal Revenue Service
NYDEC New York State Department of Environmental Conservation
NYPSC State of New York Public Service Commission
PaDEP Pennsylvania Department of Environmental Protection
PaPUC Pennsylvania Public Utility Commission
PHMSA Pipeline and Hazardous Materials Safety Administration
SEC Securities and Exchange Commission
Bbl Barrel (of oil)
Bcf Billion cubic feet (of natural gas)
Bcfe (or Mcfe) — represents Bcf (or Mcf) Equivalent The total heat value (Btu) of natural gas and oil expressed as a volume of natural gas. The Company uses a conversion formula of 1 barrel of oil = 6 Mcf of natural gas.
Btu British thermal unit; the amount of heat needed to raise the temperature of one pound of water one degree Fahrenheit.
Capital expenditure Represents additions to property, plant, and equipment, or the amount of money a company spends to buy capital assets or upgrade its existing capital assets.
Cashout revenues A cash resolution of a gas imbalance whereby a customer pays Supply Corporation and/or Empire for gas the customer receives in excess of amounts delivered into Supply Corporation’s and Empire’s systems by the customer’s shipper.
CLCPA Legislation referred to as the "Climate Leadership & Community Protection Act," enacted by the State of New York on July 18, 2019.
Degree day A measure of the coldness of the weather experienced, based on the extent to which the daily average temperature falls below a reference temperature, usually 65 degrees Fahrenheit.
Derivative A financial instrument or other contract, the terms of which include an underlying variable (a price, interest rate, index rate, exchange rate, or other variable) and a notional amount (number of units, barrels, cubic feet, etc.). The terms also permit for the instrument or contract to be settled net and no initial net investment is required to enter into the financial instrument or contract. Examples include futures contracts, options, no cost collars and swaps.
Development costs Costs incurred to obtain access to proved oil and gas reserves and to provide facilities for extracting, treating, gathering and storing the oil and gas.
Development well A well drilled to a known producing formation in a previously discovered field.
Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer Protection Act.
Dth Decatherm; one Dth of natural gas has a heating value of 1,000,000 British thermal units, approximately equal to the heating value of 1 Mcf of natural gas.
Exchange Act Securities Exchange Act of 1934, as amended
Expenditures for long-lived assets Includes capital expenditures, stock acquisitions and/or investments in partnerships.
Exploitation Development of a field, including the location, drilling, completion and equipment of wells necessary to produce the commercially recoverable oil and gas in the field.
Exploration costs Costs incurred in identifying areas that may warrant examination, as well as costs incurred in examining specific areas, including drilling exploratory wells.
Exploratory well A well drilled in unproven or semi-proven territory for the purpose of ascertaining the presence underground of a commercial hydrocarbon deposit.
FERC 7(c) application An application to the FERC under Section 7(c) of the federal Natural Gas Act for authority to construct, operate (and provide services through) facilities to transport or store natural gas in interstate commerce.
Firm transportation and/or storage The transportation and/or storage service that a supplier of such service is obligated by contract to provide and for which the customer is obligated to pay whether or not the service is utilized.
GAAP Accounting principles generally accepted in the United States of America
Goodwill An intangible asset representing the difference between the fair value of a company and the price at which a company is purchased.
Hedging A method of minimizing the impact of price, interest rate, and/or foreign currency exchange rate changes, often times through the use of derivative financial instruments.
Hub Location where pipelines intersect enabling the trading, transportation, storage, exchange, lending and borrowing of natural gas.
ICE Intercontinental Exchange. An exchange which maintains a futures market for crude oil and natural gas.
Interruptible transportation and/or storage The transportation and/or storage service that, in accordance with contractual arrangements, can be interrupted by the supplier of such service, and for which the customer does not pay unless utilized.
LDC Local distribution company
LIBOR London Interbank Offered Rate
LIFO Last-in, first-out
Marcellus Shale A Middle Devonian-age geological shale formation that is present nearly a mile or more below the surface in the Appalachian region of the United States, including much of Pennsylvania and southern New York.
Mbbl Thousand barrels (of oil)
Mcf Thousand cubic feet (of natural gas)
MD&A Management’s Discussion and Analysis of Financial Condition and Results of Operations
MDth Thousand decatherms (of natural gas)
MMBtu Million British thermal units (heating value of one decatherm of natural gas)
MMcf Million cubic feet (of natural gas)
MMcfe Million cubic feet equivalent
NGA The Natural Gas Act of 1938, as amended; the federal law regulating interstate natural gas pipeline and storage companies, among other things, codified beginning at 15 U.S.C. Section 717.
NYMEX New York Mercantile Exchange. An exchange which maintains a futures market for crude oil and natural gas.
OPEB Other Post-Employment Benefit
Open Season A bidding procedure used by pipelines to allocate firm transportation or storage capacity among prospective shippers, in which all bids submitted during a defined time period are evaluated as if they had been submitted simultaneously.
PCB Polychlorinated Biphenyl
Precedent Agreement An agreement between a pipeline company and a potential customer to sign a service agreement after specified events (called “conditions precedent”) happen, usually within a specified time.
Proved developed reserves Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods.
Proved undeveloped (PUD) reserves Reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required to make those reserves productive.
PRP Potentially responsible party
Reliable technology Technology that a company may use to establish reserves estimates and categories that has been proven empirically to lead to correct conclusions.
Reserves The unproduced but recoverable oil and/or gas in place in a formation which has been proven by production.
Restructuring Generally referring to partial “deregulation” of the pipeline and/or utility industry by statutory or regulatory process. Restructuring of federally regulated natural gas pipelines resulted in the separation (or “unbundling”) of gas commodity service from transportation service for wholesale and large-volume retail markets. State restructuring programs attempt to extend the same process to retail mass markets.
Revenue decoupling mechanism A rate mechanism which adjusts customer rates to render a utility financially indifferent to throughput decreases resulting from conservation.
S&P Standard & Poor’s Ratings Service
SAR Stock appreciation right
Service Agreement The binding agreement by which the pipeline company agrees to provide service and the shipper agrees to pay for the service.
SOFR Secured Overnight Financing Rate
Spot gas purchases The purchase of natural gas on a short-term basis.
Stock acquisitions Investments in corporations.
Unbundled service A service that has been separated from other services, with rates charged that reflect only the cost of the separated service.
Utica Shale A Middle Ordovician-age geological formation lying several thousand feet below the Marcellus Shale in the Appalachian region of the United States, including much of Ohio, Pennsylvania, West Virginia and southern New York.
VEBA Voluntary Employees’ Beneficiary Association
WNC/WNA Weather normalization clause/adjustment; a clause in utility rates which adjusts customer rates to allow a utility to recover its normal operating costs calculated at normal temperatures. If temperatures during the measured period are warmer than normal, customer rates are adjusted upward in order to recover projected operating costs. If temperatures during the measured period are colder than normal, customer rates are adjusted downward so that only the projected operating costs will be recovered.
For the Fiscal Year Ended September 30, 2022
The Company and its Subsidiaries
National Fuel Gas Company (the Registrant), incorporated in 1902, is a holding company organized under the laws of the State of New Jersey. The Registrant owns directly or indirectly all of the outstanding securities of its subsidiaries. Reference to “the Company” in this report means the Registrant, the Registrant and its subsidiaries or the Registrant’s subsidiaries as appropriate in the context of the disclosure. Also, all references to a certain year in this report relate to the Company’s fiscal year ended September 30 of that year unless otherwise noted.
The Company is a diversified energy company engaged principally in the production, gathering, transportation, storage and distribution of natural gas. The Company operates an integrated business, with assets centered in western New York and Pennsylvania, being used for, and benefiting from, the production and transportation of natural gas from the Appalachian basin. Current natural gas production development activities are focused in the Marcellus and Utica shales, geological shale formations that are present nearly a mile or more below the surface in the Appalachian region of the United States. Pipeline development activities are designed to transport natural gas production to both existing and new markets. The common geographic footprint of the Company’s subsidiaries enables them to share management, labor, facilities and support services across various businesses and pursue coordinated projects designed to produce and transport natural gas from the Appalachian basin to markets in the eastern United States and Canada. The Company reports financial results for four business segments: Exploration and Production, Pipeline and Storage, Gathering, and Utility.
1. The Exploration and Production segment operations are carried out by Seneca Resources Company, LLC (Seneca), a Pennsylvania limited liability company. Seneca is engaged in the exploration for, and the development and production of, primarily natural gas in the Appalachian region of the United States. At September 30, 2022, Seneca had proved developed and undeveloped reserves of 4,170,662 MMcf of natural gas and 250 Mbbl of oil.
2. The Pipeline and Storage segment operations are carried out by National Fuel Gas Supply Corporation (Supply Corporation), a Pennsylvania corporation, and Empire Pipeline, Inc. (Empire), a New York corporation. Supply Corporation and Empire provide interstate natural gas transportation services for affiliated and nonaffiliated companies through integrated gas pipeline systems in Pennsylvania and New York. Supply Corporation also provides storage services through its underground natural gas storage fields, and Empire provides storage service (via lease with Supply Corporation) to a nonaffiliated company.
3. The Gathering segment operations are carried out by wholly-owned subsidiaries of National Fuel Gas Midstream Company, LLC (Midstream Company), a Pennsylvania limited liability company. Through these subsidiaries, Midstream Company builds, owns and operates natural gas processing and pipeline gathering facilities in the Appalachian region.
4. The Utility segment operations are carried out by National Fuel Gas Distribution Corporation (Distribution Corporation), a New York corporation. Distribution Corporation provides natural gas utility services to approximately 754,000 customers through a local distribution system located in western New York and northwestern Pennsylvania. The principal metropolitan areas served by Distribution Corporation include Buffalo, Niagara Falls and Jamestown, New York and Erie and Sharon, Pennsylvania.
Financial information about each of the Company’s business segments can be found in Item 7, MD&A and also in Item 8 at Note M — Business Segment Information.
Seneca’s Northeast Division is included in the Company's All Other category for 2021 and 2020. This division marketed timber from Appalachian land holdings. On August 5, 2020, the Company entered into a purchase and sale agreement to sell substantially all timber and other assets, which at September 30, 2020, accounted for the Company's ownership of approximately 95,000 acres of timber property and management of approximately 2,500 additional acres of timber cutting rights. The transaction closed on December 10, 2020.
For additional discussion of the purchase and sale agreement to sell these assets, see Item 8 at Note B — Asset Acquisitions and Divestitures.
Revenues from three customers of the Company's Exploration and Production segment, exclusive of hedging losses transacted with separate parties, represented approximately $850 million, or 38.9%, of the Company's consolidated revenue for the year ended September 30, 2022. These three customers were also customers of the Company's Pipeline and Storage segment, accounting for an additional $15 million, or 0.7%, of the Company's consolidated revenue for the year ended September 30, 2022.
Rates and Regulation
The Company’s businesses are subject to regulation under a wide variety of federal, state and local laws, regulations and policies. This includes federal and state agency regulations with respect to rate proceedings, project permitting and environmental requirements.
The Company is subject to the jurisdiction of the FERC with respect to Supply Corporation, Empire and some transactions performed by other Company subsidiaries. The FERC, among other things, approves the rates that Supply Corporation and Empire may charge to their gas transportation and/or storage customers. Those approved rates also impact the returns that Supply Corporation and Empire may earn on the assets that are dedicated to those operations. The operations of Distribution Corporation are subject to the jurisdiction of the NYPSC, the PaPUC and, with respect to certain transactions, the FERC. The NYPSC and the PaPUC, among other things, approve the rates that Distribution Corporation may charge to its utility customers. Those approved rates also impact the returns that Distribution Corporation may earn on the assets that are dedicated to those operations. If Supply Corporation, Empire or Distribution Corporation are unable to obtain approval from these regulators for the rates they are requesting to charge customers, particularly when necessary to cover increased costs, earnings may decrease. For additional discussion of the Pipeline and Storage and Utility segments’ rates, see Item 7, MD&A under the heading “Rate Matters” and Item 8 at Note A — Summary of Significant Accounting Policies (Regulatory Mechanisms) and Note F — Regulatory Matters.
The discussion under Item 8 at Note F — Regulatory Matters includes a description of the regulatory assets and liabilities reflected on the Company’s Consolidated Balance Sheets in accordance with applicable accounting standards. To the extent that the criteria set forth in such accounting standards are not met by the operations of the Utility segment or the Pipeline and Storage segment, as the case may be, the related regulatory assets and liabilities would be eliminated from the Company’s Consolidated Balance Sheets and such accounting treatment would be discontinued.
The FERC also exercises jurisdiction over the construction and operation of interstate gas transmission and storage facilities and possesses significant penalty authority with respect to violations of the laws and regulations it administers. The Company is also subject to the jurisdiction of the Pipeline and Hazardous Materials Safety Administration (PHMSA). PHMSA issues regulations and conducts evaluations, among other things, that set safety standards for pipelines and underground storage facilities. PHMSA may delegate this authority to a state, as it has in New York and Pennsylvania, and that state may choose to institute more stringent safety regulations for the construction, operation and maintenance of intrastate facilities. In addition to this state safety authority program, the NYPSC imposes additional requirements on the construction of certain utility facilities. Increased regulation by these agencies, and other regulators, or requested changes to construction projects, could lead to operational delays or restrictions and increase compliance costs that the Company may not be able to recover fully through rates or otherwise offset.
For additional discussion of the material effects of compliance with government environmental regulation, see Item 7, MD&A under the heading “Environmental Matters.”
The Exploration and Production Segment
The Exploration and Production segment contributed net income of $306.1 million in 2022.
Additional discussion of the Exploration and Production segment appears below in this Item 1 under the headings “Sources and Availability of Raw Materials” and “Competition: The Exploration and Production Segment,” in Item 7, MD&A and in Item 8, Financial Statements and Supplementary Data.
The Pipeline and Storage Segment
The Pipeline and Storage segment contributed net income of $102.6 million in 2022.
The Pipeline and Storage segment generated approximately 30% of its revenues in 2022 from services provided to the Utility segment or Exploration and Production segment.
Additional discussion of the Pipeline and Storage segment appears below under the headings “Sources and Availability of Raw Materials,” “Competition: The Pipeline and Storage Segment” and “Seasonality,” in Item 7, MD&A and in Item 8, Financial Statements and Supplementary Data.
The Gathering Segment
The Gathering segment contributed net income of $101.1 million in 2022.
The Gathering segment generated approximately 94% of its revenues in 2022 from services provided to the Exploration and Production segment.
Additional discussion of the Gathering segment appears below under the headings “Sources and Availability of Raw Materials” and “Competition: The Gathering Segment,” in Item 7, MD&A and in Item 8, Financial Statements and Supplementary Data.
The Utility Segment
The Utility segment contributed net income of $68.9 million in 2022.
Additional discussion of the Utility segment appears below under the headings “Sources and Availability of Raw Materials,” “Competition: The Utility Segment” and “Seasonality,” in Item 7, MD&A and in Item 8, Financial Statements and Supplementary Data.
All Other Category and Corporate Operations
The All Other category and Corporate operations incurred a net loss of $12.7 million in 2022.
Additional discussion of the All Other category and Corporate operations appears below in Item 7, MD&A and in Item 8, Financial Statements and Supplementary Data.
Sources and Availability of Raw Materials
The Exploration and Production segment seeks to discover and produce raw materials (natural gas and hydrocarbon liquids) as further described in this report in Item 7, MD&A and Item 8 at Note M — Business Segment Information and Note N — Supplementary Information for Oil and Gas Producing Activities.
The Pipeline and Storage segment transports and stores natural gas owned by its customers, whose gas primarily originates in the Appalachian region of the United States, as well as other gas supply regions in the United States and Canada. Additional discussion of proposed pipeline projects appears below under “Competition: The Pipeline and Storage Segment” and in Item 7, MD&A.
The Gathering segment gathers, processes and transports natural gas that is, in large part, produced by Seneca in the Appalachian region of the United States.
Natural gas is the principal raw material for the Utility segment. In 2022, the Utility segment purchased 76.0 Bcf of gas (including 74.2 Bcf for delivery to retail customers and 1.8 Bcf used in operations) pursuant to its purchase contracts with firm delivery requirements. Gas purchased from producers and suppliers in the United States under multi-month contracts accounted for 48% of these purchases. Purchases of gas in the spot market (contracts of one month or less) accounted for 52% of the Utility segment’s 2022 purchases. Purchases from DTE Energy Trading, Inc. (33%), Emera Energy Services, Inc. (12%), Chevron Natural Gas (8%), EQT Energy, LLC (7%), Vitol Inc. (6%), Tenaska Marketing Ventures (6%), and Shell Energy North America US (6%), accounted for nearly 78% of the Utility segment's 2022 gas purchases. No other producer or supplier provided the Utility segment with more than 5% of its gas requirements in 2022. The Utility segment does not directly purchase gas from affiliates.
Competition in the natural gas industry exists among providers of natural gas, as well as between natural gas and other sources of energy, such as fuel oil and electricity. Management believes that the reliability and affordability, along with the environmental advantages of natural gas have enhanced its competitive position relative to other fuels.
The Company competes on the basis of price, service and reliability, product performance and other factors. Sources and providers of energy, other than those described under this “Competition” heading, do not compete with the Company to any significant extent.
Competition: The Exploration and Production Segment
The Exploration and Production segment competes with other natural gas producers and marketers with respect to sales of natural gas. The Exploration and Production segment also competes, by competitive bidding and otherwise, with other natural gas producers with respect to exploration and development prospects and mineral leaseholds.
To compete in this environment, Seneca originates and acts primarily as operator on its prospects, seeks to minimize the risk of exploratory efforts through partnership-type arrangements, utilizes technology for both exploratory studies and drilling operations, and seeks prospect and partnership opportunities based on size, operating expertise and financial criteria.
Competition: The Pipeline and Storage Segment
Supply Corporation competes for market growth in the natural gas market with other pipeline companies transporting gas in the northeast United States and with other companies providing gas storage services. Supply Corporation has some unique characteristics which enhance its competitive position. Most of Supply Corporation’s facilities are in or near areas overlying the Marcellus and Utica shale production areas in Pennsylvania, and it has established interconnections with producers and other pipelines that provide access to these supplies and to premium off-system markets. Its facilities are also located adjacent to the Canadian border at the Niagara River providing access to markets in Canada and the northeastern and midwestern United States via the TC Energy pipeline system. Supply Corporation has developed and placed into service a number of pipeline expansion projects designed to transport natural gas to key markets in New York, Pennsylvania, the northeastern United States, Canada, and to long-haul pipelines with access to the U.S. Midwest and the Gulf Coast. For further discussion of Pipeline and Storage projects, refer to Item 7, MD&A under the heading “Investing Cash Flow.”
Empire competes for natural gas market growth with other pipeline companies transporting gas in the northeast United States and upstate New York in particular. Empire is well situated to provide transportation of Appalachian shale gas as well as gas supplies available at Empire’s interconnect with TC Energy at Chippawa. Empire’s geographic location provides it the opportunity to compete for service to its on-system LDC markets, as well as for a share of the gas transportation markets into Canada (via Chippawa) and into the northeastern United States. The Empire Connector, along with other subsequent projects, has expanded Empire’s footprint and capability, allowing Empire to serve new markets in New York and elsewhere in the Northeast, and to attach to prolific Marcellus and Utica supplies principally from Tioga and Bradford Counties in Pennsylvania. Like Supply Corporation, Empire’s expanded system facilitates transportation of natural gas to key markets within New York State, the northeastern United States and Canada.
Competition: The Gathering Segment
The Gathering segment provides gathering services for Seneca and, to a lesser extent, other producers. It competes with other companies that gather and process natural gas in the Appalachian region.
Competition: The Utility Segment
With respect to gas commodity service, in New York and Pennsylvania, both of which have implemented “unbundling” policies that allow customers to choose their gas commodity supplier, Distribution Corporation
has retained a substantial majority of small sales customers. In both New York and Pennsylvania, approximately 8% of Distribution Corporation’s small-volume residential and commercial customers purchase their supplies from unregulated marketers. In contrast, almost all large-volume load is served by unregulated retail marketers. However, retail competition for gas commodity service does not pose an acute competitive threat for Distribution Corporation, because in both jurisdictions, utility cost of service is recovered through rates and charges for gas delivery service, not gas commodity service.
Competition for transportation service to large-volume customers continues with local producers or pipeline companies attempting to sell or transport gas directly to end-users located within the Utility segment’s service territories without use of the utility’s facilities (i.e., bypass). In addition, while competition with fuel oil suppliers exists, natural gas retains its competitive position despite recent commodity pricing.
The Utility segment competes in its most vulnerable markets (the large commercial and industrial markets) by offering unbundled, flexible, high quality services. The Utility segment continues to advance programs promoting the efficient use of natural gas.
Legislative and regulatory measures to address climate change and greenhouse gas emissions are in various phases of discussion or implementation in jurisdictions that impact the Utility segment. In addition to the Inflation Reduction Act, New York, for example, adopted the Climate Leadership & Community Protection Act (CLCPA) in July 2019, which could ultimately result in increased competition from electric and geothermal forms of energy. However, given the extended time frames associated with the CLCPA's emission reduction mandates as discussed in Item 7, MD&A under the heading “Environmental Matters” and subheading “Environmental Regulation,” any meaningful competition resulting from the CLCPA cannot be determined.
Variations in weather conditions can materially affect the volume of natural gas delivered by the Utility segment, as virtually all of its residential and commercial customers use natural gas for space heating. The effect that this has on Utility segment margins in New York is largely mitigated by a weather normalization clause (WNC), which covers the eight-month period from October through May. Weather that is warmer than normal results in an upward adjustment to customers’ current bills, while weather that is colder than normal results in a downward adjustment, so that in either case projected delivery revenues calculated at normal temperatures will be largely recovered.
Volumes transported and stored by Supply Corporation and by Empire may vary significantly depending on weather, without materially affecting the revenues of those companies. Supply Corporation’s and Empire’s allowed rates are based on a straight fixed-variable rate design which allows recovery of fixed costs in fixed monthly reservation charges. Variable charges based on volumes are designed to recover only the variable costs associated with actual transportation or storage of gas.
A discussion of capital expenditures by business segment is included in Item 7, MD&A under the heading “Investing Cash Flow.”
A discussion of material environmental matters involving the Company is included in Item 7, MD&A under the heading “Environmental Matters” and in Item 8, Note L — Commitments and Contingencies.
The Utility segment has numerous municipal franchises under which it uses public roads and certain other rights-of-way and public property for the location of facilities. When necessary, the Utility segment renews such franchises.
The Company makes its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, available free of charge on the Company’s website, www.nationalfuelgas.com, as soon as reasonably practicable after they are electronically filed with or furnished
to the SEC. The information available at the Company’s website is not part of this Form 10-K or any other report filed with or furnished to the SEC.
The Company aims to attract the best employees, to retain those employees through offering competitive benefits, career development and training opportunities, while also prioritizing their safety and wellness, and to create a safe, inclusive and productive work environment for everyone. Human capital measures and objectives that the Company focuses on in managing its business include the safety of its employees, its voluntary attrition rate, the number of work stoppages, its employee benefits, employee development, and diversity and inclusion. Additional information regarding the Company’s human capital measures and objectives is contained in the Company’s recently published Corporate Responsibility Report, which is available on the Company’s website, www.nationalfuelgas.com. The information on the Company’s website is not, and will not be deemed to be, a part of this annual report on Form 10-K or incorporated into any of the Company’s other filings with the SEC.
Employees and Collective Bargaining Agreements
The Company and its wholly-owned subsidiaries had a total of 2,132 full-time employees at September 30, 2022.
As of September 30, 2022, 48% of the Company’s active workforce was covered under collective bargaining agreements. The Company has agreements in place with collective bargaining units in New York into February 2025, as well as with collective bargaining units in Pennsylvania into April 2026.
Safety is one of the Company’s guiding principles. In managing the business, the Company focuses on the safety of its employees and contractors and has implemented safety programs and management practices to promote a culture of safety. This includes required trainings for both field and office employees, as well as specific qualifications and certifications for field employees. The Company also ties executive compensation to safety related goals to emphasize the importance of and focus on safety at the Company.
Voluntary Attrition Rate
The Company measures the voluntary attrition rate of its employees in assessing the Company’s overall human capital. The Company's voluntary attrition rate (not including retirements and excluding the severance related to the sale of Seneca's assets in California) was 8%. Additionally, throughout the COVID-19 pandemic, the Company did not institute any furloughs or workforce reductions.
No Work Stoppages
During the Company’s fiscal year, the Company did not incur any work stoppages (strikes or lockouts) and therefore experienced zero idle days for the fiscal year.
To attract employees and meet the needs of the Company’s workforce, the Company offers market-competitive benefits packages to employees of its subsidiaries. The Company’s benefits package options may vary depending on type of employee and date of hire. Additionally, the Company continuously looks for ways to improve employee work-life balance and well-being.
The Company provides its employees with tools and development resources to enhance their skills and careers at the Company, including: (i) encouraging employees to discuss their professional development and identify interests or possible cross-training areas during annual performance reviews with their supervisors; (ii) offering corporate and technical training programs based on position, regulatory environment, and employee needs; (iii) providing a tuition aid program for educational pursuits related to present work or possible future positions; (iv) providing talent review and succession planning; (v) providing opportunities for on-the-job growth, through stretch assignments or temporary projects outside of an employee’s typical responsibilities; and
(vi) offering one-on-one meetings for supervisory employees at the Company’s subsidiaries to discuss career pathing and employee development.
Diversity, Equity and Inclusion
The Company recognizes that a diverse talent pool provides the opportunity to gain a diversity of perspectives, ideas and solutions to help the Company succeed. As such, the Company approaches diversity from the top-down, which is reflected in the makeup of our Board of Directors and senior leadership team: three out of eleven directors are diverse, and four of the Company’s eight designated executive officers are women. The Company's Corporate Governance Guidelines incorporate the “Rooney Rule.” As a result, when identifying independent director candidates for nomination to the Board, the Nominating/Corporate Governance Committee is committed to including in any initial candidate pool qualified racially, ethnically and/or gender diverse candidates. Beginning in fiscal 2021, the Compensation Committee adopted specific diversity and inclusion performance goals as part of the Company's Annual at Risk Compensation Incentive Plan and Executive Annual Compensation Incentive Program to link executive compensation to the Company's focus on diversity.
During fiscal 2022, the Company furthered numerous initiatives to increase the diversity of our workforce and create a more inclusive environment. The Company's Director of Diversity and Inclusion (“D&I Director”) continued to spearhead diversity and inclusion initiatives across the organization. Additional resources were added to the Diversity and Inclusion team with the creation of a Diversity and Inclusion Specialist ("D&I Specialist") role to assist and expand the Company’s proactive efforts of creating a more inclusive organization. These efforts include initiatives to focus on diversity when making hiring and promotional decisions. To attract diverse candidates, the Company works with community groups and organizations to help promote awareness of our job opportunities within diverse communities. The D&I Director maintains close partnerships with the employment teams, cultivates the Company’s relationships with community organizations, and focuses on initiatives to attract diverse candidates, vendors and suppliers. The executive team receives a monthly report about the composition of the Company’s salaried applicant pools to encourage the recruiting team to focus recruiting in diverse communities and identify resources needed to do so. The Company has also focused on encouraging diverse suppliers to receive the necessary certifications to participate in the industry and has added new diverse suppliers to its list of vendors in an effort to promote diversity.
The D&I Director and D&I Specialist also spearhead inclusion initiatives throughout the organization. To promote a more inclusive work environment, the Company has continued to provide training opportunities to employees relating to Unconscious Bias, Inclusivity, and Micro-aggressions. In addition, four new Employee Resource Groups, focused towards ethnically diverse, veteran, LGBTQ and female employees, were developed. These Employee Resource Groups provide an opportunity to engage and connect with underrepresented employees, and each group has an executive sponsor which helps facilitate communication directly to senior management. In addition, the Company has several policies that reinforce its commitment to diversity and inclusion within the workplace. The Company’s Employee Handbook Policy includes equal employment opportunity commitments and nondiscrimination and anti-harassment disclosures, which communicate the Company’s expectations with respect to maintaining a professional workplace free of harassment. The Company prohibits discrimination or harassment against any employee or applicant on the basis of sex, race/ethnicity, or the other protected categories listed within the Company’s Non-Discrimination and Anti-Harassment Policy. This policy is mailed to employees annually with an employee survey, and employees must acknowledge that they have received the policy. The Company reiterates its commitment to a harassment free workplace through this process, as well as through prevention training for employees. Annually, the Company’s Chief Executive Officer reinforces the Company’s commitment to harassment prevention and equal employment opportunity by signing corporate Equal Employment Opportunity and Non-Discrimination and Anti-Harassment policy statements. These statements are then displayed at Company locations, included in employee handbooks, and discussed with new hires during their onboarding process.
Executive Officers of the Company as of November 15, 2022(1)
Name and Age (as of
November 15, 2022)
|Current Company Positions and|
Other Material Business Experience
During Past Five Years
David P. Bauer
|Chief Executive Officer of the Company since July 2019. President of Supply Corporation from February 2016 through June 2019. Treasurer and Principal Financial Officer of the Company from July 2010 through June 2019. Treasurer of Seneca from April 2015 through June 2019. Treasurer of Distribution Corporation from April 2015 through June 2019. Treasurer of Midstream Company from April 2013 through June 2019. Treasurer of Supply Corporation from June 2007 through June 2019. Treasurer of Empire from June 2007 through June 2019. |
Donna L. DeCarolis
|President of Distribution Corporation since February 2019. Ms. DeCarolis previously served as Vice President of Business Development of the Company from October 2007 through January 2019.|
Ronald C. Kraemer
|Chief Operating Officer of the Company since March 2021, President of Supply Corporation since July 2019 and President of Empire since August 2008. Mr. Kraemer previously served as Senior Vice President of Supply Corporation from June 2016 through June 2019.|
Karen M. Camiolo
|Treasurer and Principal Financial Officer of the Company since July 2019. Treasurer of Seneca Resources Company since July 2019. Ms. Camiolo previously served as Treasurer of Distribution Corporation, Supply Corporation, Empire and Midstream Company from July 2019 through June 2021. Ms. Camiolo previously served as Controller and Principal Accounting Officer of the Company from April 2004 through June 2019. Vice President of Distribution Corporation from April 2015 through June 2019. Controller of Midstream Company from April 2013 through June 2019. Controller of Empire from June 2007 through June 2019. Controller of Distribution Corporation and Supply Corporation from April 2004 through June 2019.|
Elena G. Mendel
|Controller and Principal Accounting Officer of the Company since July 2019. Controller of Distribution Corporation, Supply Corporation, Empire, and Midstream Company since July 2019. Assistant Controller of Distribution Corporation, Supply Corporation and Empire from February 2017 through June 2019. |
Martin A. Krebs
|Chief Information Officer of the Company since December 2018. Prior to joining the Company, Mr. Krebs served as Chief Information Officer and Chief Information Security Officer of Fidelis Care, a health insurance provider for New York State residents, from January 2012 to June 2018. Centene Corporation acquired Fidelis Care in July 2018, and Mr. Krebs served as the Chief Information Officer of the Fidelis Plan and Senior Vice President of Information Technology and Security from the acquisition to November 2018. Mr. Krebs' prior employers are not subsidiaries or affiliates of the Company.|
Sarah J. Mugel
Corporate Responsibility Officer of the Company since April 2022. General Counsel of the Company since May 2020 and Secretary of the Company since July 2018. Ms. Mugel has been Vice President of Supply Corporation since April 2015 and General Counsel and Secretary of Supply Corporation since April 2016. Ms. Mugel has been Secretary of Empire Pipeline and Secretary of Midstream Company, and has served as the General Counsel of both entities, since April 2016. Ms. Mugel previously served as Assistant Secretary of the Company from June 2016 through June 2018.
Justin I. Loweth
|President of Midstream Company since April 2022 and President of Seneca Resources Company since May 2021. Mr. Loweth previously served as Senior Vice President of Seneca Resources Company from October 2017 through April 2021.|
(1)The executive officers serve at the pleasure of the Board of Directors. The information provided relates to the Company and its principal subsidiaries. Many of the executive officers also have served, or currently serve, as officers or directors of other subsidiaries of the Company.
The Company is dependent on capital and credit markets to successfully execute its business strategies.
The Company relies upon short-term bank borrowings, commercial paper markets and longer-term capital markets to finance capital requirements not satisfied by cash flow from operations. The Company is dependent on these capital sources to provide capital to its subsidiaries to fund operations, acquire, maintain and develop properties, and execute growth strategies. The availability and cost of credit sources may be cyclical and these capital sources may not remain available to the Company. Turmoil in credit markets may make it difficult for the Company to obtain financing on acceptable terms or at all for working capital, capital expenditures and other investments, or to refinance existing debt. These difficulties could adversely affect the Company's growth strategies, operations and financial performance.
The Company's ability to borrow under its credit facilities and commercial paper agreements, and its ability to issue long-term debt under its indentures, depend on the Company's compliance with its obligations under the facilities, agreements and indentures. For example, to issue incremental long-term debt, the Company must meet an interest coverage test under its 1974 indenture. In general, the Company’s operating income, subject to certain adjustments, over a consecutive 12-month period within the 15 months preceding the debt issuance, must be not less than two times the total annual interest charges on the Company’s long-term debt, taking into account the incremental issuance. In addition, taking into account the incremental issuance, and using a pro forma balance sheet as of the last day of the 12-month period used in the interest coverage test, the Company must maintain a ratio of long-term debt to consolidated assets (as defined under the 1974 indenture) of not more than 60%. The 1974 indenture defines consolidated assets as total assets less a number of items, including current and accrued liabilities. Depending on their magnitude, factors that reduce the Company’s operating income and/or total assets, including impairments (i.e., write-downs) of the Company’s natural gas properties, or that increase current and accrued liabilities, like short-term borrowings and "out of the money" derivative financial instruments, could contribute to the Company’s inability to meet the interest coverage test or debt-to-assets ratio.
In addition, the Company's short-term bank loans and commercial paper are in the form of floating rate debt or debt that may have rates fixed for very short periods of time, resulting in exposure to interest rate fluctuations in the absence of interest rate hedging transactions. The cost of long-term debt, the interest rates on the Company's short-term bank loans and commercial paper and the ability of the Company to issue commercial paper are affected by its credit ratings published by S&P, Moody's Investors Service, Inc. and Fitch Ratings, Inc. A downgrade in the Company's credit ratings could increase borrowing costs, restrict or eliminate access to commercial paper markets, negatively impact the availability of capital from uncommitted sources, and require the Company’s subsidiaries to post letters of credit, cash or other assets as collateral with certain counterparties. Additionally, $1.1 billion of the Company’s outstanding long-term debt would be subject to an interest rate increase if certain fundamental changes occur that involve a material subsidiary and result in a downgrade of a credit rating assigned to the notes below investment grade. In addition to the $1.1 billion, another $500 million of the Company’s outstanding long-term debt would be subject to an interest rate increase based solely on a downgrade of a credit rating assigned to the notes below investment grade, regardless of any additional fundamental changes.
Climate change, and the regulatory, legislative, consumer behaviors and capital access developments related to climate change, may adversely affect operations and financial results.
Climate change, and the laws, regulations and other initiatives to address climate change, may impact the Company’s financial results. In early 2021, the U.S. rejoined the Paris Agreement, the international effort to establish emissions reduction goals for signatory countries. Under the Paris Agreement, signatory countries are expected to submit their nationally determined contributions to curb greenhouse gas emissions and meet the agreed temperature objectives every five years. On April 22, 2021, the federal administration announced the U.S. nationally determined contribution to achieve a fifty to fifty-two percent reduction from 2005 levels in economy-wide net greenhouse gas pollution by 2030. In addition to the federal reentry into the Paris
Agreement, state and local governments, non-governmental organizations, investment firms, and financial institutions have made, and will likely continue to make, more aggressive efforts to reduce emissions and advance the objectives of the Paris Agreement. Executive orders from the federal administration, in addition to federal, state and local legislative and regulatory initiatives proposed or adopted in an attempt to limit the effects of climate change, including greenhouse gas emissions, could have significant impacts on the energy industry including government-imposed limitations, prohibitions or moratoriums on the use and/or production of gas, establishment of a carbon tax and/or methane fee, lack of support for system modernization, as well as accelerated depreciation of assets and/or stranded assets.
Federal and state legislatures have from time to time considered bills that would establish a cap-and-trade program, methane fee or carbon tax to incent the reduction of greenhouse gas emissions. For example, in August 2022, the federal Inflation Reduction Act was signed into law, which includes a methane charge that is expected to be applicable to the reported annual methane emissions of certain oil and gas facilities, above specified methane intensity thresholds, starting in calendar year 2024. In addition, the New York State legislature, in early 2021, proposed a bill known as the Climate and Community Investment Act, which proposed an escalating fee starting at $55 per short ton of carbon dioxide equivalent on any carbon-based fuels sold, used or brought into the state. That bill did not pass, but similar legislation may be proposed in the future. If the Company becomes subject to new or revised cap-and-trade programs, methane charges, fees for carbon-based fuels or other similar costs or charges, the Company may experience additional costs and incremental operating expenses, which would impact our future earnings and cash flows.
A number of states have also adopted energy strategies or plans with goals that include the reduction of greenhouse gas emissions. For example, Pennsylvania has a methane reduction framework for the natural gas industry which has resulted in permitting changes with the stated goal of reducing methane emissions from well sites, compressor stations and pipelines. In addition, the NYPSC initiated a proceeding to consider climate-related financial disclosures at the utility operating level, and in 2019, the New York State legislature passed the CLCPA, which created emission reduction and electric generation mandates, and could ultimately impact the Utility segment’s customer base and business. Pursuant to the CLCPA, New York's Climate Action Council issued for comment a draft scoping plan that includes recommendations to decommission substantial portions of the natural gas system and curtail use of natural gas and natural gas appliances.
Legislation or regulation that aims to reduce greenhouse gas emissions could also include natural gas bans, greenhouse gas emissions limits and reporting requirements, carbon taxes and/or similar fees on carbon dioxide, methane or equivalent emissions, restrictive permitting, increased efficiency standards requiring system remediation and/or changes in operating practices, and incentives or mandates to conserve energy or use renewable energy sources. NYDEC finalized its Part 203 Oil and Gas Sector Rule in March 2022, which significantly increases leak detection and repair inspections, recordkeeping, reporting, and notification requirements for multiple sources along city gates, transmission pipelines, compressor stations, storage facilities, and gathering lines.
Additionally, the trend toward increased energy conservation, change in consumer behaviors, competition from renewable energy sources, and technological advances to address climate change may reduce the demand for natural gas. For further discussion of the risks associated with environmental regulation to address climate change, refer to Item 7, MD&A under the heading “Environmental Matters.”
Further, recent trends directed toward a low-carbon economy could shift funding away from, or limit or restrict certain sources of funding for, companies focused on fossil fuel-related development or carbon-intensive investments. To the extent financial markets view climate change and greenhouse gas emissions as a financial risk, the Company’s cost of and access to capital could be negatively impacted.
Organized opposition to the natural gas industry could have an adverse effect on Company operations.
Organized opposition to the natural gas industry, including exploration and production activity, pipeline expansion and replacement projects, and the extension and continued operation of natural gas distribution systems, may continue to increase as a result of, among other things, safety incidents involving natural gas facilities, and concerns raised by politicians, financial institutions and advocacy groups about greenhouse gas
emissions, hydraulic fracturing, or fossil fuels generally. This opposition may lead to increased regulatory and legislative initiatives that could place limitations, prohibitions or moratoriums on the use of natural gas, impose costs tied to carbon emissions, provide cost advantages to alternative energy sources, or impose mandates that increase operational costs associated with new natural gas infrastructure and technology. There are also increasing litigation risks associated with climate change concerns and related disclosures. Increased litigation could cause operational delays or restrictions, and increase the Company’s operating costs. In turn, these factors could impact the competitive position of natural gas, ultimately affecting the Company’s results of operations and cash flows.
Delays or changes in plans or costs with respect to Company projects, including regulatory delays or denials with respect to necessary approvals, permits or orders, could delay or prevent anticipated project completion and may result in asset write-offs and reduced earnings.
Construction of planned distribution, gathering, and transmission pipeline and storage facilities, as well as the expansion and replacement of existing facilities, and the development of new natural gas wells, is subject to various regulatory, environmental, political, legal, economic and other development risks, including the ability to obtain necessary approvals and permits from regulatory agencies on a timely basis and on acceptable terms, or at all. Existing or potential third-party opposition, such as opposition from landowner and environmental groups, which are beyond our control, could materially affect the anticipated construction of a project. In addition, third parties could impede the Company’s acquisition, expansion or renewal of rights-of-way or land rights on a timely basis and on acceptable terms. Any delay in project development or construction may prevent a planned project from going into service when anticipated, which could cause a delay in the receipt of revenues from those facilities, result in asset write-offs and materially impact operating results or anticipated results. Additionally, delays in pipeline construction projects or gathering facility completion could impede the Exploration and Production segment's ability to transport its production to premium markets, or to fulfill obligations to sell at contracted delivery points.
As a holding company, the Company depends on its operating subsidiaries to meet its financial obligations.
The Company is a holding company with no significant assets other than the stock of its operating subsidiaries. In order to meet its financial needs, the Company relies exclusively on repayments of principal and interest on intercompany loans made by the Company to its operating subsidiaries and income from dividends. Such operating subsidiaries may not generate sufficient net income to pay dividends to the Company or generate sufficient cash flow to make payments of principal or interest on such intercompany loans.
The Company may be adversely affected by economic conditions and their impact on our suppliers and customers.
Periods of slowed economic activity generally result in decreased energy consumption, particularly by industrial and large commercial companies. As a consequence, national or regional recessions or other downturns in economic activity could adversely affect the Company’s revenues and cash flows or restrict its future growth. Additionally, supply chain disruptions, and the associated costs and inflation related thereto, could have an impact on the Company's operations. Economic conditions in the Company’s utility service territories, along with legislative and regulatory prohibitions and/or limitations on terminations of service, also impact its collections of accounts receivable. Customers of the Company’s Utility segment may have particular trouble paying their bills during periods of declining economic activity, high inflation, or high commodity prices, potentially resulting in increased bad debt expense and reduced earnings. Similarly, if reductions were to occur in funding of the federal Low Income Home Energy Assistance Program, bad debt expense could increase and earnings could decrease. In addition, oil and natural gas exploration and production companies that are customers of the Company’s Pipeline and Storage segment may decide not to renew contracts for the same transportation capacity. Certain customers of the Company's Exploration and Production segment can represent a concentrated risk during times of high commodity prices and high hedge losses. Any of these events
or circumstances could have or contribute to a material adverse effect on the Company’s results of operations, financial condition and cash flows.
Changes in interest rates may affect the Company’s financing and its regulated businesses’ rates of return.
Rising interest rates may impair the Company’s ability to cost-effectively finance capital expenditures and to refinance maturing debt. In addition, the Company’s authorized rate of return in its regulated businesses is based upon certain assumptions regarding interest rates. If interest rates are lower than assumed rates, the Company’s authorized rate of return could be reduced. If interest rates are higher than assumed rates, the Company’s ability to earn its authorized rate of return may be adversely impacted.
Loans to the Company under its committed credit facilities may be alternate base rate loans or term SOFR loans. SOFR is a reference rate (the Secured Overnight Financing Rate) published by the Federal Reserve Bank of New York. SOFR is one available replacement for LIBOR (the London Interbank Offered Rate), which the U.K.’s Financial Conduct Authority is phasing out as a benchmark. The change from LIBOR to SOFR could expose the Company’s borrowings to less favorable rates. If the change to SOFR results in increased interest rates or if the Company's lenders have increased costs due to the change, then the Company's debt that uses benchmark rates could be affected and, in turn, the Company's cash flows and interest expense could be adversely impacted.
Fluctuations in natural gas prices could adversely affect revenues, cash flows and profitability.
Financial results in the Company’s Exploration and Production segment are materially dependent on prices received for its natural gas production. Both short-term and long-term price trends affect the economics of exploring for, developing, producing, and gathering natural gas. Natural gas prices can be volatile and can be affected by various factors, including weather conditions, natural disasters, the level of consumer product demand, national and worldwide economic conditions, economic disruptions caused by terrorist activities, acts of war or major accidents, political conditions in foreign countries, the price and availability of alternative fuels, the proximity to, and availability of, sufficient capacity on transportation and liquefaction facilities, regional and global levels of supply and demand, energy conservation measures, and government regulations. The Company sells the natural gas that it produces at a combination of current market prices, indexed prices or through fixed-price contracts. The Company hedges a significant portion of future sales that are based on indexed prices utilizing the physical sale counter-party and/or the financial markets. The prices the Company receives depend upon factors beyond the Company’s control, including the factors affecting price mentioned above. The Company believes that any prolonged reduction in natural gas prices could restrict its ability to continue the level of exploration and production activity the Company otherwise would pursue, which could have a material adverse effect on its future revenues, cash flows and results of operations.
In the Company’s Pipeline and Storage segment, significant changes in the price differential between equivalent quantities of natural gas at different geographic locations could adversely impact the Company. For example, if the price of natural gas at a particular receipt point on the Company’s pipeline system increases relative to the price of natural gas at other locations, then the volume of natural gas received by the Company at the relatively more expensive receipt point may decrease, or the Company may need to discount the approved tariff rate for that transportation path in the future in order to maintain the existing volumes on its system. Changes in price differentials can cause shippers to seek alternative lower priced natural gas supplies and, consequently, alternative transportation routes. In some cases, shippers may decide not to renew transportation contracts due to changes in price differentials. While much of the impact of lower volumes under existing contracts would be offset by the straight fixed-variable rate design, this rate design does not protect Supply Corporation or Empire where shippers do not contract for expiring capacity at the same quantity and rate. If contract renewals were to decrease, revenues and earnings in this segment may decrease. Significant changes in the price differential between futures contracts for gas having different delivery dates could also adversely impact the Company. For example, if the prices of natural gas futures contracts for winter deliveries to locations served by the Pipeline and Storage segment decline relative to the prices of such contracts for summer deliveries (as a result, for instance, of increased production of gas within the segment’s geographic area or other
factors), then demand for the Company’s natural gas storage services driven by that price differential could decrease. These changes could adversely affect future revenues, cash flows and results of operations.
In the Company’s Utility segment, during periods when natural gas prices are significantly higher than historical levels, customers may have trouble paying the resulting higher bills, which could increase bad debt expenses and ultimately reduce earnings. Additionally, increases in the cost of purchased gas affect cash flows and can therefore impact the amount or availability of the Company’s capital resources.
The Company has significant transactions involving price hedging of its natural gas production as well as its fixed price sale commitments.
To protect itself to some extent against price volatility and to lock in fixed pricing on natural gas production for certain periods of time, the Company’s Exploration and Production segment regularly enters into commodity price derivatives contracts (hedging arrangements) with respect to a portion of its expected production. These contracts may extend over multiple years, covering a substantial majority of the Company’s expected energy production over the course of the current fiscal year, and lesser percentages of subsequent years' expected production. These contracts reduce exposure to subsequent price drops but can also limit the Company’s ability to benefit from increases in commodity prices.
The nature of these hedging contracts could lead to potential liquidity impacts in scenarios of significantly increased natural gas prices if the Company has hedged its current production at prices below the current market price. Hedging collateral deposits represent the cash, letters of credit, or other eligible instruments held in Company funded margin accounts to serve as collateral for hedging positions used in the Company’s Exploration and Production segment. A significant increase in natural gas prices may cause the Company’s outstanding derivative instrument contracts to be in a liability position creating margin calls on the Company’s hedging arrangements, which could require the Company to temporarily post significant amounts of cash collateral with our hedge counterparties. That collateral could be in excess of the Company’s available short-term liquidity under its committed credit facility and other uncommitted sources of capital, leading to potential default under certain of its hedging arrangements. That interest-bearing cash collateral is returned to us in whole or in part upon a reduction in forward market prices, depending on the amount of such reduction, or in whole upon settlement of the related derivative contract.
Use of energy commodity price hedges also exposes the Company to the risk of nonperformance by a contract counterparty. These parties might not be able to perform their obligations under the hedge arrangements.
In the Exploration and Production segment, under the Company’s hedging guidelines, commodity derivatives contracts must be confined to the price hedging of existing and forecast production. The Company maintains a system of internal controls to monitor compliance with its policy. However, unauthorized speculative trades, if they were to occur, could expose the Company to substantial losses to cover positions in its derivatives contracts. In addition, in the event the Company’s actual production of natural gas falls short of hedged forecast production, the Company may incur substantial losses to cover its hedges.
The Dodd-Frank Act increased federal oversight and regulation of the over-the-counter derivatives markets and certain entities that participate in those markets. Although regulators have issued certain regulations, other rules that may be relevant to the Company have yet to be finalized. For discussion of the risks associated with the Dodd-Frank Act, refer to Item 7, MD&A under the heading “Market Risk Sensitive Instruments.”
You should not place undue reliance on reserve information because such information represents estimates.
This Form 10-K contains estimates of the Company’s proved natural gas reserves and the future net cash flows from those reserves, which the Company’s petroleum engineers prepared and independent petroleum engineers audited. Petroleum engineers consider many factors and make assumptions in estimating natural gas reserves and future net cash flows. These factors include: historical production from the area compared with production from other producing areas; the assumed effect of governmental regulation; and assumptions
concerning natural gas prices, production and development costs, severance and excise taxes, and capital expenditures. Changes in natural gas prices impact the quantity of economic natural gas reserves. Estimates of reserves and expected future cash flows prepared by different engineers, or by the same engineers at different times, may differ substantially. Ultimately, actual production, revenues and expenditures relating to the Company’s reserves will vary from any estimates, and these variations may be material. Accordingly, the accuracy of the Company’s reserve estimates is a function of the quality of available data and of engineering and geological interpretation and judgment.
If conditions remain constant, then the Company is reasonably certain that its reserve estimates represent economically recoverable natural gas reserves and future net cash flows. If conditions change in the future, then subsequent reserve estimates may be revised accordingly. You should not assume that the present value of future net cash flows from the Company’s proved reserves is the current market value of the Company’s estimated natural gas reserves. In accordance with SEC requirements, the Company bases the estimated discounted future net cash flows from its proved reserves on a 12-month average of historical prices for natural gas (based on first day of the month prices and adjusted for hedging) and on costs as of the date of the estimate, which are all discounted at the SEC mandated discount rate. Actual future prices and costs may differ materially from those used in the net present value estimate. Any significant price changes will have a material effect on the present value of the Company’s reserves.
Petroleum engineering is a subjective process of estimating underground accumulations of natural gas and other hydrocarbons that cannot be measured in an exact manner. The process of estimating natural gas reserves is complex. The process involves significant assumptions in the evaluation of available geological, geophysical, engineering and economic data for each reservoir. Future economic and operating conditions are uncertain, and changes in those conditions could cause a revision to the Company’s reserve estimates in the future. Estimates of economically recoverable natural gas reserves and of future net cash flows depend upon a number of variable factors and assumptions, including historical production from the area compared with production from other comparable producing areas, and the assumed effects of regulations by governmental agencies. Because all reserve estimates are to some degree subjective, each of the following items may differ materially from those assumed in estimating reserves: the quantities of natural gas that are ultimately recovered, the timing of the recovery of natural gas reserves, the production and operating costs to be incurred, the amount and timing of future development and abandonment expenditures, and the price received for the production.
Financial accounting requirements regarding exploration and production activities may affect the Company's profitability.
The Company accounts for its exploration and production activities under the full cost method of accounting. Each quarter, the Company must perform a "ceiling test" calculation, comparing the level of its unamortized investment in oil and natural gas properties to the present value of the future net revenue projected to be recovered from those properties according to methods prescribed by the SEC. In determining present value, the Company uses a 12-month historical average price for oil and natural gas (based on first day of the month prices and adjusted for hedging) as well as the SEC mandated discount rate. If, at the end of any quarter, the amount of the unamortized investment exceeds the net present value of the projected future cash flows, such investment may be considered to be "impaired," and the full cost authoritative accounting and reporting guidance require that the investment must be written down to the calculated net present value. Such an instance would require the Company to recognize an immediate expense in that quarter, and its earnings would be reduced. Depending on the magnitude of any decrease in average prices, that charge could be material. Under the Company's existing indenture covenants, an impairment could restrict the Company's ability to issue incremental long-term unsecured indebtedness for a period of time, beginning with the fourth calendar month following the impairment. In addition, because an impairment results in a charge to retained earnings, it lowers the Company's total capitalization, all other things being equal, and increases the Company's debt to capitalization ratio. As a result, an impairment can impact the Company's ability to maintain compliance with the debt to capitalization covenant set forth in its credit facilities. For example, for the fiscal year ended September 30, 2020 and the quarter ended December 31, 2020, the Company recognized non-cash, pre-tax impairment charges on its oil and natural gas properties of $449.4 million and $76.2 million, respectively.
The nature of the Company’s operations presents inherent risks of loss that could adversely affect its results of operations, financial condition and cash flows.
The Company’s operations in its various reporting segments are subject to inherent hazards and risks such as: fires; natural disasters; explosions; blowouts during well drilling; collapses of wellbore casing or other tubulars; pipeline ruptures; spills; and other hazards and risks that may cause personal injury, death, property damage, environmental damage or business interruption losses. Additionally, the Company’s facilities, machinery, and equipment may be subject to sabotage. These events, in turn, could lead to governmental investigations, recommendations, claims, fines or penalties. As protection against operational hazards, the Company maintains insurance coverage against some, but not all, potential losses. The Company also seeks, but may be unable, to secure written indemnification agreements with contractors that adequately protect the Company against liability from all of the consequences of the hazards described above. The occurrence of an event not fully insured or indemnified against, the imposition of fines, penalties or mandated programs by governmental authorities, the failure of a contractor to meet its indemnification obligations, or the failure of an insurance company to pay valid claims could result in substantial losses to the Company. In addition, insurance may not be available, or if available may not be adequate, to cover any or all of these risks. It is also possible that insurance premiums or other costs may rise significantly in the future, so as to make such insurance prohibitively expensive.
Hazards and risks faced by the Company, and insurance and indemnification obtained or provided by the Company, may subject the Company to litigation or administrative proceedings from time to time. Such litigation or proceedings could result in substantial monetary judgments, fines or penalties against the Company or be resolved on unfavorable terms, the result of which could have a material adverse effect on the Company’s results of operations, financial condition and cash flows.
Our businesses depend on natural gas gathering, storage, and transmission facilities, which, if unavailable, could adversely affect the Company’s results of operations, financial condition, and cash flows.
Our businesses depend on natural gas gathering, storage, and transmission facilities, including third-party midstream facilities that are not within our control. Our Exploration and Production and Utility segments have entered into long-term agreements with midstream providers for natural gas gathering, storage, and/or transportation services. The disruption or unavailability of the midstream facilities required to provide these services, due to maintenance, mechanical failures, accidents, weather, regulatory requirements and/or other operational hazards, could negatively impact our ability to market and/or deliver our products, especially if such disruption were to last for an extended period of time. In addition, any substantial disruptions to the services provided by our midstream providers could cause us to curtail a significant amount of our production or could impair our ability to deliver natural gas to our utility customers and could have a material adverse effect on the Company’s results of operations, financial condition, and cash flows. Furthermore, as substantially all of our production is transported from the well pad to interconnections with various FERC-regulated pipelines though our affiliated gathering facilities, such a production curtailment could result in significantly reduced throughput on those facilities, adversely affecting revenues and cash flows of our Gathering business.
The disruption of the Company's information technology and operational technology systems, including third party attempts to breach the Company’s network security, could adversely affect the Company's financial results.
The Company relies on information technology and operational technology systems to process, transmit, and store information, to manage and support a variety of business processes and activities, and to comply with regulatory, legal, and tax requirements. The Company's information technology and operational technology systems, some of which are dependent on services provided by third parties, may be vulnerable to damage, interruption, or shutdown due to any number of causes outside of our control such as catastrophic events, natural disasters, fires, power outages, systems failures, telecommunications failures, and employee error or malfeasance. In addition, the Company's information technology and operational technology systems are subject to attempts by others to gain unauthorized access, or to otherwise introduce malicious software. These
attempts might be the result of industrial or other espionage, or actions by hackers seeking to harm the Company, its services or customers. These more sophisticated cyber-related attacks, as well as cybersecurity failures resulting from human error, pose a risk to the security of the Company’s systems and networks and the confidentiality, availability and integrity of the Company’s and its customers’ data. That data may be considered sensitive, confidential, or personal information that is subject to privacy and security laws, regulations and directives. While the Company employs reasonable and appropriate controls to maintain and protect its information technology and operational technology systems, the Company may be vulnerable to material disruptions, material security breaches, lost or corrupted data, programming errors and employee errors and/or malfeasance that could lead to interruptions to the Company's business operations or the unauthorized access, use, disclosure, modification or destruction of sensitive, confidential or personal information. Attempts to breach the Company’s network security may result in disruption of the Company’s business operations and services, delays in production, theft of sensitive and valuable data, damage to our physical systems, and reputational harm. Significant expenditures may be required to remedy system disruptions or breaches, including restoration of customer service and enhancement of information technology and operational technology systems.
The Company seeks to prevent, detect and investigate security incidents, but in some cases the Company might be unaware of an incident or its magnitude and effects. In addition to existing risks, the adoption of new technologies may also increase the Company’s exposure to data breaches or the Company’s ability to detect and remediate effects of a breach. The Company has experienced attempts to breach its network security and has received notifications from third-party service providers who have experienced disruptions to services or data breaches where Company data was potentially impacted. Although the scope of such incidents is sometimes unknown, they could prove to be material to the Company. Even though insurance coverage is in place for cyber-related risks, if a material disruption or breach were to occur, the Company’s operations, earnings, cash flows and financial condition could be adversely affected to the extent not fully covered by such insurance.
The amount and timing of actual future natural gas production and the cost of drilling are difficult to predict and may vary significantly from reserves and production estimates, which may reduce the Company’s earnings.
There are many risks in developing natural gas, including numerous uncertainties inherent in estimating quantities of proved natural gas reserves and in projecting future rates of production and timing of development expenditures. The future success of the Company’s Exploration and Production and Gathering segments depends on its ability to develop additional natural gas reserves that are economically recoverable, and its failure to do so may reduce the Company’s earnings. The total and timing of actual future production may vary significantly from reserves and production estimates. The Company’s drilling of development wells can involve significant risks, including those related to timing, success rates, and cost overruns, and these risks can be affected by lease and rig availability, completion crew and related equipment availability, geology, and other factors. Drilling for natural gas can be unprofitable, not only from non-productive wells, but from productive wells that do not produce sufficient revenues to return a profit. Also, title problems, competition and cost to acquire mineral rights, weather conditions, governmental requirements, including completion of environmental impact analyses and compliance with other environmental laws and regulations, and shortages or delays in the delivery of equipment and services can delay drilling operations or result in their cancellation. The cost of drilling, completing, and operating wells is significant and often uncertain, and new wells may not be productive or the Company may not recover all or any portion of its investment. Production can also be delayed or made uneconomic if there is insufficient gathering, processing and transportation capacity available at an economic price to get that production to a location where it can be profitably sold. Without continued successful exploitation or acquisition activities, the Company’s reserves and revenues will decline as a result of its current reserves being depleted by production. The Company cannot make assurances that it will be able to find or acquire additional reserves at acceptable costs.
The physical risks associated with climate change may adversely affect the Company’s operations and financial results.
Climate change could create acute and/or chronic physical risks to the Company’s operations, which may adversely affect financial results. Acute physical risks include more frequent and severe weather events, which may result in adverse physical effects on portions of U.S. natural gas infrastructure, and could disrupt the Company’s supply chain and ultimately its operations. Disruption of production activities, as well as natural gas transportation and distribution systems, could result in reduced operational efficiency, and customer service interruption. Severe weather events could also cause physical damage to facilities, all of which could lead to reduced revenues, increased insurance premiums or increased operational costs. To the extent the Company’s regulated businesses are unable to recover those costs, or if the recovery of those costs results in higher rates and reduced demand for Company services, the Company’s future financial results could be adversely impacted. Chronic physical risks include long-term shifts in climate patterns resulting in new storm patterns or chronic increased temperatures, which could cause demand for gas to increase or decrease as a result of warmer weather and less degree days, and adversely impact the Company's future financial results.
Disputes with collective bargaining units representing the Company’s workforce, and work stoppage (e.g. strike or lockout), could adversely affect the Company’s operations as well as its financial results.
Approximately half of the Company’s active workforce is represented by collective bargaining units in New York and Pennsylvania. These labor agreements are negotiated periodically, and therefore, the Company is subject to the risk that such agreements may not be able to be renewed on reasonably satisfactory terms, on anticipated timelines, or at all. In connection with the negotiation of such collective bargaining agreements, or in future matters involving collective bargaining units representing the Company’s workforce, the Company could experience, among other things, strikes, work stoppages, slowdowns or lockouts, which could cause a disruption of the Company's operations and have a material adverse effect on the Company's results of operations and financial condition.
The Company’s need to comply with comprehensive, complex, and the sometimes unpredictable enforcement of government regulations may increase its costs and limit its revenue growth, which may result in reduced earnings.
The Company’s businesses are subject to regulation under a wide variety of federal and state laws, regulations and policies. Existing statutes and regulations, including current tax rates, may be revised or reinterpreted and new laws and regulations may be adopted or become applicable to the Company, which may increase the Company's costs, require refunds to customers or affect its business in ways that the Company cannot predict. Administrative agencies may apply existing laws and regulations in unanticipated, inconsistent or legally unsupportable ways, making it difficult to develop and complete projects, and harming the economic climate generally.
Various aspects of the Company's operations are subject to regulation by a variety of federal and state agencies with respect to permitting and environmental requirements. In some areas, the Company’s operations may also be subject to locally adopted ordinances. Administrative proceedings or increased regulation by these agencies could lead to operational delays or restrictions and increased expense for one or more of the Company’s subsidiaries.
The Company is subject to the jurisdiction of the Pipeline and Hazardous Materials Safety Administration (PHMSA). The PHMSA issues regulations and conducts evaluations, among other things, that set safety standards for pipelines and underground storage facilities. If as a result of these or similar new laws or regulations the Company incurs material compliance costs that it is unable to recover fully through rates or otherwise offset, the Company's financial condition, results of operations, and cash flows could be adversely affected.
The Company is subject to the jurisdiction of the FERC with respect to Supply Corporation, Empire and some transactions performed by other Company subsidiaries. The FERC, among other things, approves the rates
that Supply Corporation and Empire may charge to their gas transportation and/or storage customers. Those approved rates also impact the returns that Supply Corporation and Empire may earn on the assets that are dedicated to those operations. Pursuant to the petition of a customer or state commission, or on the FERC's own initiative, the FERC has the authority to investigate whether Supply Corporation's and Empire's rates are still "just and reasonable" as required by the NGA, and if not, to adjust those rates prospectively. If Supply Corporation or Empire is required in a rate proceeding to adjust the rates it charges its gas transportation and/or storage customers, or if either Supply Corporation or Empire is unable to obtain approval for rate increases, particularly when necessary to cover increased costs, Supply Corporation's or Empire's earnings may decrease. In addition, the FERC exercises jurisdiction over the construction and operation of interstate natural gas transmission and storage facilities and also possesses significant penalty authority with respect to violations of the laws and regulations it administers.
The operations of Distribution Corporation are subject to the jurisdiction of the NYPSC, the PaPUC and, with respect to certain transactions, the FERC. The NYPSC and the PaPUC, among other things, approve the rates that Distribution Corporation may charge to its utility customers. Those approved rates also impact the returns that Distribution Corporation may earn on the assets that are dedicated to those operations. If Distribution Corporation is unable to obtain approval from these regulators for the rates it is requesting to charge utility customers, particularly when necessary to cover increased costs, earnings and/or cash flows may decrease.
Environmental regulation significantly affects the Company’s business.
The Company’s business operations are subject to federal, state, and local laws, regulations and agency policies relating to environmental protection including obtaining and complying with permits, leases, approvals, consents and certifications from various governmental and permit authorities. These laws, regulations and policies concern the generation, storage, transportation, disposal, emission or discharge of pollutants, contaminants, hazardous substances and greenhouse gases into the environment, the reporting of such matters, and the general protection of public health, natural resources, wildlife and the environment. For example, currently applicable environmental laws and regulations restrict the types, quantities and concentrations of materials that can be released into the environment in connection with regulated activities, limit or prohibit activities in certain protected areas, and may require the Company to investigate and/or remediate contamination at certain current and former properties regardless of whether such contamination resulted from the Company’s actions or whether such actions were in compliance with applicable laws and regulations at the time they were taken. Moreover, spills or releases of regulated substances or the discovery of currently unknown contamination could expose the Company to material losses, expenditures and environmental, health and safety liabilities. Such liabilities could include penalties, sanctions or claims for damages to persons, property or natural resources brought on behalf of the government or private litigants that could cause the Company to incur substantial costs or uninsured losses.
Costs of compliance and liabilities could negatively affect the Company’s results of operations, financial condition and cash flows. In addition, compliance with environmental laws, regulations or permit conditions could require unexpected capital expenditures at the Company’s facilities, temporarily shut down the Company’s facilities or delay or cause the cancellation of expansion projects or natural gas drilling activities. Because the costs of such compliance are significant, additional regulation could negatively affect the Company’s business.
Increased regulation of exploration and production activities, including hydraulic fracturing, could adversely impact the Company.
Various state legislative and regulatory initiatives regarding the exploration and production business have been proposed or adopted in the northeast United States affecting the Marcellus and Utica Shale gas plays. These initiatives include potential new or updated statutes and regulations governing the drilling, casing, cementing, testing, monitoring and abandonment of wells, the protection of water supplies and restrictions on water use and water rights, hydraulic fracturing operations, surface owners’ rights and damage compensation, the spacing of wells, use and disposal of potentially hazardous materials, and environmental and safety issues regarding gas pipelines. New permitting fees and/or severance taxes for natural gas production are also possible.
Additionally, legislative initiatives in the U.S. Congress and regulatory studies, proceedings or rule-making initiatives at federal, state or local agencies focused on the hydraulic fracturing process, the use of underground injection control wells for produced water disposal, and related operations could result in operational delays or prohibitions and/or additional permitting, compliance, reporting and disclosure requirements, which could lead to increased operating costs and increased risks of litigation for the Company.
The Company could be adversely affected by the delayed recovery or disallowance of purchased gas costs incurred by the Utility segment.
Tariff rate schedules in each of the Utility segment’s service territories contain purchased natural gas adjustment clauses which permit Distribution Corporation to file with state regulators for rate adjustments to recover increases in the cost of purchased natural gas. Assuming those rate adjustments are granted, increases in the cost of purchased natural gas have no direct impact on profit margins. Distribution Corporation is required to file an accounting reconciliation with the regulators in each of the Utility segment’s service territories regarding the costs of purchased natural gas. Extreme weather events, variations in seasonal weather, and other events disrupting supply and/or demand could cause the Company to experience unforeseeable and unprecedented increases in the costs of purchased natural gas. Any prudently incurred natural gas costs could be subject to deferred recovery if regulators determine such costs are detrimental to customers in the short-term. Furthermore, there is a risk of disallowance of full recovery of these costs if regulators determine that Distribution Corporation was imprudent in making its natural gas purchases. Any material delayed recovery or disallowance of purchased natural gas costs could have a material adverse effect on cash flow and earnings.
The Company’s credit ratings may not reflect all the risks of an investment in its securities.
The Company’s credit ratings are an independent assessment of its ability to pay its obligations. Consequently, real or anticipated changes in the Company’s credit ratings will generally affect the market value of the specific debt instruments that are rated, as well as the market value of the Company’s common stock. The Company’s credit ratings, however, may not reflect the potential impact on the value of its common stock of risks related to structural, market or other factors discussed in this Form 10-K.
The increasing costs of certain employee and retiree benefits could adversely affect the Company’s results.
The Company’s earnings and cash flow may be impacted by the amount of income or expense it expends or records for employee benefit plans. This is particularly true for pension and other post-retirement benefit plans, which are dependent on actual plan asset returns and factors used to determine the value and current costs of plan benefit obligations. In addition, if medical costs rise at a rate faster than the general inflation rate, the Company might not be able to mitigate the rising costs of medical benefits. Increases to the costs of pension, other post-retirement and medical benefits could have an adverse effect on the Company’s financial results.
Significant shareholders or potential shareholders may attempt to effect changes at the Company or acquire control over the Company, which could adversely affect the Company’s results of operations and financial condition.
Shareholders of the Company may from time to time engage in proxy solicitations, advance shareholder proposals or otherwise attempt to effect changes or acquire control over the Company. Campaigns by shareholders to effect changes at publicly traded companies are sometimes led by investors seeking to increase short-term shareholder value through actions such as financial restructuring, increased debt, special dividends, stock repurchases or sales of assets or the entire company. Additionally, activist shareholders may submit proposals to promote an environmental, social, and/or governance position. Responding to proxy contests and other actions by activist shareholders can be costly and time-consuming, disrupting the Company’s operations and diverting the attention of the Company’s Board of Directors and senior management from the pursuit of business strategies. As a result, shareholder campaigns could adversely affect the Company’s results of operations and financial condition.
|Item 1B||Unresolved Staff Comments|
General Information on Facilities
The net investment of the Company in property, plant and equipment was $6.6 billion at September 30, 2022. The Exploration and Production segment constitutes 31.2% of this investment, and is primarily located in the Appalachian region of the United States. Approximately 56.1% of the Company's investment in net property, plant and equipment was in the Utility and Pipeline and Storage segments, whose operations are located primarily in western and central New York and western Pennsylvania. The Gathering segment constitutes 12.6% of the Company’s investment in net property, plant and equipment, and is located in northwestern and central Pennsylvania. The remaining 0.1% of the Company's net investment in property, plant and equipment falls within All Other and Corporate operations. During the past five years, the Company has made significant additions to property, plant and equipment in order to expand its exploration and production and gathering operations in the Appalachian region of the United States and to expand and modernize transmission and distribution facilities for customers in New York and Pennsylvania. Net property, plant and equipment has increased $1.9 billion, or 40.5%, since September 30, 2017. The five year increase is net of impairments of oil and gas producing properties recorded in 2020 and 2021 ($449 million and $76 million, respectively).
The Exploration and Production segment had a net investment in property, plant and equipment of $2.1 billion at September 30, 2022.
The Pipeline and Storage segment had a net investment of $2.0 billion in property, plant and equipment at September 30, 2022. Transmission pipeline represents 37% of this segment’s total net investment and includes 2,301 miles of pipeline utilized to move large volumes of gas throughout its service area. Storage facilities represent 13% of this segment’s total net investment and consist of 387 miles of pipeline, as well as 30 storage fields operating at a combined working gas level of 77.2 Bcf, three of which are jointly owned and operated with other interstate gas pipeline companies. Net investment in storage facilities includes $79.7 million of gas stored underground-noncurrent, representing the cost of the gas utilized to maintain pressure levels for normal operating purposes as well as gas maintained for system balancing and other purposes, including that needed for no-notice transportation service. The Pipeline and Storage segment has 34 compressor stations with 262,393 installed horsepower that represent 32% of this segment’s total net investment in property, plant and equipment.
The Pipeline and Storage segment's facilities provided the capacity to meet Supply Corporation’s 2022 peak day sendout for transportation service of 2,092 MMcf, which occurred on January 10, 2022. Withdrawals from storage of 718 MMcf provided approximately 34% of the requirements on that day.
The Gathering segment had a net investment of $0.8 billion in property, plant and equipment at September 30, 2022. Gathering lines and related compressor stations represent substantially all of this segment’s total net investment, including 368 miles of pipelines utilized to move Appalachian production (including Marcellus and Utica shales) to various transmission pipeline receipt points. The Gathering segment has 25 compressor stations with 119,980 installed horsepower.
The Utility segment had a net investment in property, plant and equipment of $1.7 billion at September 30, 2022. The net investment in its gas distribution network (including 15,040 miles of distribution pipeline) and its service connections to customers represent approximately 49% and 32%, respectively, of the Utility segment’s net investment in property, plant and equipment at September 30, 2022.
Company maps are included in Exhibit 99.2 of this Form 10-K and are incorporated herein by reference.
Exploration and Production Activities
The Company is engaged in the exploration for and the development of natural gas reserves in the Appalachian region of the United States. The Company's development activities in the Appalachian region are
focused primarily in the Marcellus and Utica shales. Further discussion of oil and gas producing activities is included in Item 8, Note N — Supplementary Information for Oil and Gas Producing Activities. Note N sets forth proved developed and undeveloped reserve information for Seneca. The September 30, 2022, 2021 and 2020 reserves shown in Note N are valued using an unweighted arithmetic average of the first day of the month oil and gas prices for each month within the twelve-month period prior to the end of the reporting period. The reserves were estimated by Seneca’s petroleum engineers and were audited by independent petroleum engineers from Netherland, Sewell & Associates, Inc. Note N discusses the qualifications of the Company's petroleum engineers, internal controls over the reserve estimation process and audit of the reserve estimates and changes in proved developed and undeveloped oil and natural gas reserves year over year.
Seneca's proved developed and undeveloped natural gas reserves increased from 3,723 Bcf at September 30, 2021 to 4,171 Bcf at September 30, 2022. This increase is attributed to extensions and discoveries of 838 Bcf and revisions of previous estimates of 3 Bcf, partially offset by production of 343 Bcf. Upward revisions included 3 Bcf of price-related revisions and 13 Bcf of revisions related to positive performance improvements including reduced operating expenses. The additions and upward revisions were partially offset by divestures of 50 Bcf as well as downward revisions of 13 Bcf from the removal of 1 PUD location related to pad layout changes. The Company has no near term plans to develop the reserves at this PUD location.
Seneca’s proved developed and undeveloped oil reserves decreased from 21,537 Mbbl at September 30, 2021 to 250 Mbbl at September 30, 2022. The decrease of 21,287 Mbbl is attributed to production of 1,604 Mbbl and the sale of Seneca's West Coast region (i.e., California assets) of 20,766 Mbbl. These decreases were partially offset by positive performance revisions of 787 Mbbl and extensions and discoveries of 296 Mbbl.
On a Bcfe basis, Seneca’s proved developed and undeveloped reserves increased from 3,853 Bcfe at September 30, 2021 to 4,172 Bcfe at September 30, 2022. This increase is attributed to extensions and discoveries of 839 Bcfe and upward revisions of previous estimates of 8 Bcfe, partially offset by production of 353 Bcfe and divestures, primarily from the sale of the West Coast region (i.e., California assets), of 175 Bcfe.
Seneca's proved developed and undeveloped natural gas reserves increased from 3,325 Bcf at September 30, 2020 to 3,723 Bcf at September 30, 2021. This increase was attributed to extensions and discoveries of 689 Bcf and revisions of previous estimates of 23 Bcf, partially offset by production of 314 Bcf. Upward revisions included 74 Bcf of price-related revisions and 29 Bcf of revisions related to positive performance improvements including reduced operating expenses. Downward revisions of 80 Bcf from the removal of 8 PUD locations were due to continued integration of the Tioga assets acquired in July 2020, as well as other operational optimizations that resulted in pad layout and development schedule changes.
Seneca’s proved developed and undeveloped oil reserves decreased from 22,100 Mbbl at September 30, 2020 to 21,537 Mbbl at September 30, 2021. The decrease of 563 Mbbl was attributed to production of 2,235 Mbbl and downward revisions of previous estimates of 579 Mbbl, partially offset by positive price-related revisions of 1,210 Mbbl and extensions and discoveries of 1,041 Mbbl, primarily occurring in the West Coast region.
On a Bcfe basis, Seneca’s proved developed and undeveloped reserves increased from 3,458 Bcfe at September 30, 2020 to 3,853 Bcfe at September 30, 2021. This increase was attributed to extensions and discoveries of 696 Bcfe and upward revisions of previous estimates of 26 Bcfe, partially offset by production of 327 Bcfe.
At September 30, 2022, the Company’s Exploration and Production segment had delivery commitments for natural gas production of 2,390 Bcf. The Company expects to meet those commitments through the future production of reserves that are currently classified as proved reserves and future extensions and discoveries.
The following is a summary of certain oil and gas information taken from Seneca’s records. All monetary amounts are expressed in U.S. dollars.
| ||For The Year Ended September 30|| |
| ||2022|| ||2021|| ||2020|| |
|Average Sales Price per Mcf of Gas||$||5.03 ||(1)||$||2.46 ||(1)||$||1.75 ||(1)|
|Average Sales Price per Barrel of Oil||$||97.82 || ||$||48.02 || ||$||45.69 || |
|Average Sales Price per Mcf of Gas (after hedging)||$||2.69 || ||$||2.22 || ||$||2.05 || |
|Average Sales Price per Barrel of Oil (after hedging)||$||97.82 || ||$||48.02 || ||$||45.69 || |
Average Production (Lifting) Cost per Mcf Equivalent of Gas and Oil Produced
|$||0.68 ||(1)||$||0.67 ||(1)||$||0.68 ||(1)|
Average Production per Day (in MMcf Equivalent of Gas and Oil Produced)
|936 ||(1)||856 ||(1)||616 ||(1)|
|West Coast Region|
|Average Sales Price per Mcf of Gas||$||10.03 || ||$||6.34 || ||$||3.82 || |
|Average Sales Price per Barrel of Oil||$||94.06 || ||$||60.50 || ||$||45.94 || |
|Average Sales Price per Mcf of Gas (after hedging)||$||10.03 || ||$||6.34 || ||$||3.82 || |
|Average Sales Price per Barrel of Oil (after hedging)||$||70.53 || ||$||56.55 || ||$||56.97 || |
Average Production (Lifting) Cost per Mcf Equivalent of Gas and Oil Produced
|$||4.83 || ||$||3.74 || ||$||3.14 || |
Average Production per Day (in MMcf Equivalent of Gas and Oil Produced)
|39 ||(2)||41 || ||44 || |
|Average Sales Price per Mcf of Gas||$||5.05 || ||$||2.49 || ||$||1.77 || |
|Average Sales Price per Barrel of Oil||$||94.10 || ||$||60.49 || ||$||45.94 || |
|Average Sales Price per Mcf of Gas (after hedging)||$||2.71 || ||$||2.25 || ||$||2.07 || |
|Average Sales Price per Barrel of Oil (after hedging)||$||70.80 || ||$||56.54 || ||$||56.96 || |
Average Production (Lifting) Cost per Mcf Equivalent of Gas and Oil Produced
|$||0.81 || ||$||0.82 || ||$||0.84 || |
Average Production per Day (in MMcf Equivalent of Gas and Oil Produced)
|966 || ||897 || ||660 || |
(1)Average sales prices per Mcf of gas reflect sales of gas in the Marcellus and Utica Shale fields. The Marcellus Shale fields (which exceed 15% of total reserves at September 30, 2022, 2021 and 2020) contribut