National Fuel Reports First Quarter Earnings

WILLIAMSVILLE, N.Y., Jan. 30, 2020 (GLOBE NEWSWIRE) -- National Fuel Gas Company (“National Fuel” or the “Company”) (NYSE:NFG) today announced consolidated results for the first quarter of its 2020 fiscal year.

FISCAL 2020 FIRST QUARTER SUMMARY

• GAAP earnings of $86.6 million, or $1.00 per share, compared to $102.7 million, or $1.18 per share, in the prior year
• Adjusted operating results of $87.4 million, or $1.01 per share, compared to $97.5 million, or $1.12 per share, in the prior year (see non-GAAP reconciliation below)
  
• Adjusted EBITDA of $222.9 million, an increase of $3.5 million from $219.4 million in the prior year (non-GAAP reconciliation on page 21)
  
• E&P segment net production of 58.4 Bcfe, an increase of 19% from the prior year
  
• Average natural gas prices, after the impact of hedging, of $2.32 per Mcf, down $0.29 per Mcf from the prior year
  
• Average oil prices, after the impact of hedging, of $62.92 per Bbl, up $1.22 per Bbl from the prior year
  
• Gathering revenues of $34.8 million, an increase of $5.1 million, or 17%, on higher throughput from E&P segment
• Due to low natural gas prices, the Company is reducing drilling activity; E&P segment completed the planned drop of a drilling rig in Appalachia in January and intends to drop an additional drilling rig in the summer of 2020
  
• Revising fiscal 2020 earnings guidance to a range of $2.95 to $3.15 per share to reflect lower natural gas prices

MANAGEMENT COMMENTS

David P. Bauer, President and Chief Executive Officer of National Fuel Gas Company, stated: “Though low natural gas prices weighed on National Fuel’s first quarter earnings, the Company saw strong operational results across our integrated, diversified business that position us well for future success.  At the Utility, our ongoing system modernization program continues to enhance the safety and reliability of our distribution system, while at the same time modestly growing rate base and earnings.  Our Pipeline and Storage business is focused on the execution of our significant expansion opportunities, including the Line N project placed into service in November and the Empire North project, which is on schedule for a late summer in-service date.  Lastly, our Exploration and Production business continues to successfully develop its assets in Pennsylvania and California at a steady pace while navigating the headwinds in the commodity markets.”

FISCAL 2020 GUIDANCE AND BUSINESS UPDATE

National Fuel is revising its fiscal 2020 earnings guidance to reflect the results of the first quarter and updated forecast assumptions and projections.  The Company is now projecting that earnings will be within the range of $2.95 to $3.15 per share, or $3.05 per share at the midpoint of the range.  Substantially all of the decrease in expected earnings is due to the decline in natural gas prices that has occurred since the Company’s guidance was updated in November 2019, which is expected to lower the price realizations on Seneca’s Appalachian production.  The Company’s other earnings guidance assumptions, including production, remain largely unchanged from the previous guidance.

The revised earnings guidance now assumes that NYMEX natural gas prices will average $2.05 per MMBtu for the remaining nine months of fiscal 2020, a decrease of $0.35 per MMBtu from the $2.40 per MMBtu assumed in the previous guidance. The Company is also lowering its Appalachian spot price forecast to $1.70 per MMBtu for the remainder of the fiscal year. These price assumptions are intended to reflect the current NYMEX forward markets for natural gas and oil and consider the impact of local sales point differentials. The Company currently has financial hedges and fixed price physical firm sales contracts in place on approximately 60% of Seneca’s remaining expected fiscal 2020 natural gas production that, on average, lock-in a price realization after the cost of transportation of $2.28 per Mcf.

As planned, the Company dropped a rig in January after completing its latest development pad in Tioga County, Pa. In response to the sustained decline in NYMEX pricing and regional pricing basis, the Company plans to further reduce its development activity level in Appalachia by dropping down to a single drilling rig during the summer of 2020 and deferring some completion activity in the Eastern Development Area to fiscal 2021.  Coupled with lower service costs, Seneca’s reduced activity level is expected to result in lower capital expenditures in fiscal 2020 and going forward. The Company now expects Exploration and Production capital expenditures in fiscal 2020 to be in the range of $375 to $410 million, at the midpoint a reduction of $42.5 million from the previous guidance. The reduction in activity level is not expected to have a material impact on Seneca’s production in fiscal 2020.

Mr. Bauer added: “Facing the continued deterioration of natural gas prices, we are slowing down our development pace in Appalachia and intend to move to a single-rig drilling program this summer.   This lower activity level will allow us to reduce our capital expenditures at Seneca by approximately $100 million from fiscal 2019 levels, maintaining our focus on the balance sheet.  Overall, we remain steadfast in our commitment to the responsible development of our integrated Appalachian asset base, with responsible capital allocation at the heart of our financial decisions.”

Additional details on the Company's updated forecast assumptions and business segment guidance for fiscal 2020 are outlined in the table on page 7.

DISCUSSION OF FIRST QUARTER RESULTS BY SEGMENT

The following earnings discussion of each operating segment for the quarter ended December 31, 2019, is summarized in a tabular form on pages 8 and 9 of this report.  It may be helpful to refer to those tables while reviewing this discussion.  As of the quarter ended September 30, 2019, the Company is no longer reporting the Energy Marketing operations as a reportable segment.  The Energy Marketing operations have been included in the All Other category in the disclosures and tables that follow below.  Prior year segment information has been restated to reflect this change in presentation.

Note that management defines Adjusted Operating Results as reported GAAP earnings adjusted for items impacting comparability, and Adjusted EBITDA as reported GAAP earnings before the following items: interest expense, income taxes, depreciation, depletion and amortization, other income and deductions, impairments, and other items reflected in operating income that impact comparability.

Upstream Business

Exploration and Production Segment

The Exploration and Production segment operations are carried out by Seneca Resources Company, LLC ("Seneca").  Seneca explores for, develops and produces natural gas and oil reserves, primarily in Pennsylvania and California.

Seneca’s first quarter GAAP earnings decreased $14.2 million versus the prior year, which includes the net impact of non-cash mark-to-market adjustments recorded in the prior year relating to hedge ineffectiveness and the impact of a remeasurement in Seneca’s deferred income taxes under 2017 Tax Reform that lowered income tax expense and benefited earnings in the prior year (see table above).  Excluding these items, Seneca’s first quarter earnings decreased $8.1 million as the positive impacts of higher production and better realized crude oil prices were more than offset by the negative impacts of lower realized natural gas prices, higher operating expenses, higher interest expense, and a higher effective tax rate.

Seneca produced 58.4 Bcfe during the first quarter, an increase of 9.1 Bcfe, or 19%, from the prior year. Natural gas production increased 9.0 Bcf, or 20%, due primarily to production from new Marcellus and Utica wells completed and connected to sales in Appalachia. Net production increased 3.8 Bcf to 24.9 Bcf in Seneca’s Western Development Area and increased 5.2 Bcf to 29.3 Bcf in the Eastern Development Area during the first quarter. Oil production for the first quarter increased 29,000 Bbls from the prior year as new production continues to come online from Seneca’s development of the Pioneer and 17N assets in the Midway Sunset area of California.

Seneca's average realized natural gas price, after the impact of hedging and transportation costs, was $2.32 per Mcf, a decrease of $0.29 per Mcf from the prior year. This decline was largely due to lower NYMEX prices and lower spot pricing at local sales points in Pennsylvania. Seneca's average realized oil price, after the impact of hedging, was $62.92 per Bbl, an increase of $1.22 per Bbl over the prior year.  The improvement in oil price realizations was due primarily to stronger hedge prices on Brent oil swaps that settled during the quarter when compared to the prior year.

The $16.8 million increase in Seneca’s total operating expenses was largely due to the higher production during the quarter.  Lease operating and transportation (“LOE”) expense, which increased $8.2 million, includes the fees paid to the Company’s Gathering segment for gathering and compression services used to connect Seneca’s Marcellus and Utica production to sales points along interstate pipelines. In addition to higher production, the $9.4 million increase in depreciation, depletion and amortization (“DD&A”) expense was also due to a higher DD&A rate, which was driven by an increase in capitalized costs in Seneca’s full cost pool. Other taxes decreased $1.7 million in large part due to lower impact fees in Pennsylvania.  The Pennsylvania impact fee, which is assessed on a per well basis, increases and decreases along with the changes in historical NYMEX natural gas prices. Additionally, Seneca’s general and administrative (“G&A”) costs have remained relatively flat as it has increased production. On a unit of production basis, G&A expenses during the quarter decreased $0.05 per Mcfe to $0.26 per Mcfe.

The increase in Seneca’s effective tax rate, excluding the impact of the prior year remeasurement of deferred income taxes discussed above, was largely driven by the prior year impact of the Enhanced Oil Recovery tax credit, which was not available in the current year.

Midstream Businesses

Pipeline and Storage Segment

The Pipeline and Storage segment’s operations are carried out by National Fuel Gas Supply Corporation (“Supply Corporation”) and Empire Pipeline, Inc. (“Empire”).  The Pipeline and Storage segment provides natural gas transportation and storage services to affiliated and non-affiliated companies through an integrated system of pipelines and underground natural gas storage fields in western New York and Pennsylvania.

The Pipeline and Storage segment’s first quarter GAAP earnings decreased $7.0 million versus the prior year as lower operating revenues, higher property taxes, and the impact of a higher effective income tax rate were only partially offset by lower operation and maintenance (“O&M”) expenses.  The $4.8 million decrease in operating revenues was due largely to the expiration of a significant firm transportation contract on the Empire system in December 2018.  Property, franchise and other taxes increased $1.0 million due primarily to the scheduled phase out of tax incentives in certain jurisdictions along the Empire system. The increase in the effective income tax rate, which lowered first quarter earnings by $2.5 million, was largely due to differences in the book and tax treatment of stock compensation.  O&M expense decreased $0.7 million due primarily to lower personnel expenses and lower compressor and facility maintenance costs.

Gathering Segment

The Gathering segment’s operations are carried out by National Fuel Gas Midstream Company, LLC’s limited liability companies. The Gathering segment constructs, owns and operates natural gas gathering pipelines and compression facilities in the Appalachian region, which currently deliver Seneca’s gross Appalachian production to the interstate pipeline system.

The Gathering segment’s first quarter GAAP earnings increased $1.8 million versus the prior year, which includes the impact of a remeasurement in the Gathering segment’s deferred income taxes under 2017 Tax Reform that lowered income tax expense and benefited earnings in the prior year (see table above).  Excluding this item, the Gathering segment’s earnings increased $2.3 million. The increase was driven primarily by higher operating revenues, which were partially offset by higher O&M expense and a modest increase in DD&A expense.  Operating revenues increased $5.1 million, or 17%, due primarily to a 9.7 Bcf increase in gathered volumes from Seneca’s Appalachian natural gas production. The $1.6 million increase in O&M expense was due to an increase in compressor station operating and preventative maintenance activity during the quarter. The $0.5 million increase in DD&A expense was due primarily to higher average plant assets in-service versus the prior year.

Downstream Businesses

Utility Segment

The Utility segment operations are carried out by National Fuel Gas Distribution Corporation (“Distribution”), which sells or transports natural gas to customers located in western New York and northwestern Pennsylvania.

The Utility segment’s first quarter GAAP earnings increased $0.9 million over the prior year as an increase in customer margin (operating revenues less purchased gas sold) was partially offset by the impact of a higher effective income tax rate.  The $1.3 million increase in customer margin was due primarily to higher revenues earned through the Company’s system modernization tracking mechanism and the positive impact of adjustments related to regulatory rate and cost recovery mechanisms subject to annual reconciliation. Warmer weather in the Utility segment’s service territories was not a significant driver of customer margin or earnings for the quarter. In New York, which represented 73% of the Utility segment’s residential and commercial customer throughput during the quarter, the impact of weather variations on customer margin and earnings is largely mitigated by that jurisdiction’s weather normalization clause (“WNC”). The modest earnings impact of warmer weather in Pennsylvania, which does not have a WNC, was partially offset by the impact of customer growth in New York.  The increase in the effective income tax rate was largely due to differences in the book and tax treatment of stock compensation.

Corporate and All Other

The Company’s operations that are included in Corporate and All Other, which now include the Company’s energy marketing business, generated combined earnings of $2.0 million in the current year first quarter, which was a $2.5 million increase over the combined loss of $0.5 million generated in the prior year first quarter.  The increase in earnings was driven primarily by lower unrealized losses coupled with an increase in realized gains on investment securities sold in the current year. These positive items were partially offset by the impact of the prior year remeasurement of deferred income taxes under 2017 Tax Reform that lowered income tax expense.

EARNINGS TELECONFERENCE

The Company will host a conference call on Friday, January 31, 2020, at 11 a.m. Eastern Time to discuss this announcement.  There are two ways to access this call.  For those with Internet access, visit the NFG Investor Relations News & Events page at National Fuel’s website at investor.nationalfuelgas.com.  For those without Internet access, audio access is also provided by dialing (toll-free) 833-287-0795, using conference ID number “8154487”.  For those unable to listen to the live conference call, an audio replay will be available approximately two hours following the teleconference at the same website link and by phone at (toll-free) 800-585-8367 using conference ID number “8154487”.  Both the webcast and a telephonic replay will be available until the close of business on Friday, February 7, 2020.

National Fuel is an integrated energy company reporting financial results for four operating segments: Exploration and Production, Pipeline and Storage, Gathering, and Utility.  Additional information about National Fuel is available at www.nationalfuelgas.com.

Certain statements contained herein, including statements identified by the use of the words “anticipates,” “estimates,” “expects,” “forecasts,” “intends,” “plans,” “predicts,” “projects,” “believes,” “seeks,” “will,” “may” and similar expressions, and statements which are other than statements of historical facts, are “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. The Company’s expectations, beliefs and projections contained herein are expressed in good faith and are believed to have a reasonable basis, but there can be no assurance that such expectations, beliefs or projections will result or be achieved or accomplished. In addition to other factors, the following are important factors that could cause actual results to differ materially from those discussed in the forward-looking statements: changes in the price of natural gas or oil; impairments under the SEC’s full cost ceiling test for natural gas and oil reserves; changes in laws, regulations or judicial interpretations to which the Company is subject, including those involving derivatives, taxes, safety, employment, climate change, other environmental matters, real property, and exploration and production activities such as hydraulic fracturing; delays or changes in costs or plans with respect to Company projects or related projects of other companies, including difficulties or delays in obtaining necessary governmental approvals, permits or orders or in obtaining the cooperation of interconnecting facility operators; governmental/regulatory actions, initiatives and proceedings, including those involving rate cases (which address, among other things, target rates of return, rate design and retained natural gas), environmental/safety requirements, affiliate relationships, industry structure, and franchise renewal; changes in price differentials between similar quantities of natural gas or oil sold at different geographic locations, and the effect of such changes on commodity production, revenues and demand for pipeline transportation capacity to or from such locations; financial and economic conditions, including the availability of credit, and occurrences affecting the Company’s ability to obtain financing on acceptable terms for working capital, capital expenditures and other investments, including any downgrades in the Company’s credit ratings and changes in interest rates and other capital market conditions; factors affecting the Company’s ability to successfully identify, drill for and produce economically viable natural gas and oil reserves, including among others geology, lease availability, title disputes, weather conditions, shortages, delays or unavailability of equipment and services required in drilling operations, insufficient gathering, processing and transportation capacity, the need to obtain governmental approvals and permits, and compliance with environmental laws and regulations; increasing health care costs and the resulting effect on health insurance premiums and on the obligation to provide other post-retirement benefits; other changes in price differentials between similar quantities of natural gas or oil having different quality, heating value, hydrocarbon mix or delivery date; the cost and effects of legal and administrative claims against the Company or activist shareholder campaigns to effect changes at the Company; uncertainty of oil and gas reserve estimates; significant differences between the Company’s projected and actual production levels for natural gas or oil; changes in demographic patterns and weather conditions; changes in the availability, price or accounting treatment of derivative financial instruments; changes in laws, actuarial assumptions, the interest rate environment and the return on plan/trust assets related to the Company’s pension and other post-retirement benefits, which can affect future funding obligations and costs and plan liabilities; changes in economic conditions, including global, national or regional recessions, and their effect on the demand for, and customers’ ability to pay for, the Company’s products and services; the creditworthiness or performance of the Company’s key suppliers, customers and counterparties; the impact of  information technology, cybersecurity or data security breaches; economic disruptions or uninsured losses resulting from major accidents, fires, severe weather, natural disasters, terrorist activities or acts of war; significant differences between the Company’s projected and actual capital expenditures and operating expenses; or increasing costs of insurance, changes in coverage and the ability to obtain insurance. The Company disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date thereof.

NATIONAL FUEL GAS COMPANY
AND SUBSIDIARIES

NON-GAAP FINANCIAL MEASURES

In addition to financial measures calculated in accordance with generally accepted accounting principles (GAAP), this press release contains information regarding Adjusted Operating Results and Adjusted EBITDA, which are non-GAAP financial measures.  The Company believes that these non-GAAP financial measures are useful to investors because they provide an alternative method for assessing the Company's ongoing operating results and for comparing the Company’s financial performance to other companies.  The Company's management uses these non-GAAP financial measures for the same purpose, and for planning and forecasting purposes.  The presentation of non-GAAP financial measures is not meant to be a substitute for financial measures in accordance with GAAP.

Management defines Adjusted Operating Results as reported GAAP earnings before items impacting comparability.  The following table reconciles National Fuel's reported GAAP earnings to Adjusted Operating Results for the three months ended December 31, 2019 and 2018:

Management defines Adjusted EBITDA as reported GAAP earnings before the following items:  interest expense, income taxes, depreciation, depletion and amortization, other income and deductions, impairments, and other items reflected in operating income that impact comparability.  The following tables reconcile National Fuel's reported GAAP earnings to Adjusted EBITDA for the three months ended December 31, 2019 and 2018:

(3)(4)