National Fuel Reports First Quarter Earnings

WILLIAMSVILLE, N.Y., Jan. 31, 2019 (GLOBE NEWSWIRE) — National Fuel Gas Company (“National Fuel” or the “Company”) (NYSE:NFG) today announced consolidated results for the first quarter of its 2019 fiscal year.

FISCAL 2019 FIRST QUARTER SUMMARY

• GAAP earnings of $102.7 million, or $1.18 per share, compared to $198.7 million, or $2.30 per share, in the prior year
• Adjusted operating results of $97.5 million, or $1.12 per share, compared to $88.0 million, or $1.02 per share, in the prior year (see non-GAAP reconciliation below)
• Consolidated Adjusted EBITDA of $219.4 million compared to $205.7 million in the prior year (see non-GAAP reconciliation on page 22)
• E&P segment net production of 49.2 Bcfe, an increase of 23% from the prior year
• Average natural gas prices, after the impact of hedging, of $2.61 per Mcf, down $0.11 per Mcf from the prior year
• Average oil prices, after the impact of hedging, of $61.70 per Bbl, up $1.91 per Bbl from the prior year
• E&P cash operating expenses averaged $1.35 per Mcfe, a decrease of $0.13 per Mcfe from the prior year
• Gathering segment operating revenues increased $5.9 million, or 25% on higher system throughput
• Utility segment net income increased $4.7 million, or 22%, on higher customer margins
• Lower consolidated interest expense of $2.1 million resulting from the early refinancing of an 8.75% coupon 10-year note that was set to mature in May 2019

MANAGEMENT COMMENTS

Ronald J. Tanski, President and Chief Executive Officer of National Fuel Gas Company, stated: “We’ve started off our 2019 fiscal year with a strong first quarter and we expect our momentum will continue through the whole year.  As we transitioned into the winter heating season, the operating teams in our Utility and Pipeline and Storage businesses have our pipeline systems ready to safely deliver natural gas to the more than 750,000 customers within our service territories and across the northeast, ensuring that homes and businesses continue to benefit from the reliability of natural gas when needed most. Our operations’ employees were also able to provide mutual aid to other northeast utilities that recently experienced operational issues on their systems.

“In our Exploration and Production and Gathering operations, both quarterly production and gathering throughput continue to grow at a healthy clip, and we’re on track to achieve our targeted production growth while also growing our earnings and cash flows. With a balanced portfolio of long-term sales and transportation contracts and line of sight on incremental transportation capacity out of the basin, we remain focused on efficiently developing both the Marcellus and Utica shale horizons across our more than 700,000-acre, fee-owned acreage position in the Western Development Area.

“As has been the case for decades, across our operations we remain focused on prudently deploying capital, driving shareholder value with the development of our integrated assets, and returning capital to shareholders through our long-standing dividend.”

FISCAL 2019 GUIDANCE

National Fuel is tightening and raising its full-year earnings guidance for fiscal 2019.  The Company is now projecting that earnings on a non-GAAP basis will be within the range of $3.45 to $3.65 per share, or $3.55 per share at the midpoint of the range. The $0.05 per share increase from the midpoint of the previous guidance range reflects the impact of actual results for the three months ended December 31, 2018, and updates to key forecast assumptions, including natural gas and oil prices. The Company is also reaffirming its guidance for its Exploration and Production segment’s fiscal 2019 net production of 210 to 230 billion cubic feet equivalent (“Bcfe”), which represents a 24 percent increase over fiscal 2018 at the midpoint of the range. Projections for consolidated and individual segment capital expenditures are also unchanged.

The revised earnings guidance range does not include the impact of certain items that impacted the comparability of earnings during the first quarter, including: (1) the remeasurement of deferred income taxes resulting from the 2017 Tax Reform Act, which reduced the Company’s income tax expense and benefited consolidated earnings in the first quarter by $0.06 per share; (2) the full year impact of the Exploration and Production segment’s unrealized gain on hedging ineffectiveness, which increased earnings by $0.06 per share in the first quarter ($3.2 million, or $0.03 per share, of the unrealized gain relates to hedge contracts that will settle during the remaining nine months ending September 30, 2019); and (3) the unrealized loss on other investments due to the change in an accounting rule discussed on page 6, which lowered earnings by $0.06 per share.  While the Company expects to record additional adjustments to one or more of these items during the remaining nine months ending September 30, 2019, the amounts of these and other potential adjustments are not reasonably determinable at this time.   As such, the Company is unable to provide earnings guidance other than on a non-GAAP basis.

Additional details on the Company’s forecast assumptions and business segment guidance for fiscal 2019 are outlined in the table on page 8.

DISCUSSION OF RESULTS BY SEGMENT

The following discussion of the earnings of each operating segment is summarized in a tabular form on pages 9 and 10 of this report.  It may be helpful to refer to those tables while reviewing this discussion.  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.

The 2017 Tax Reform Act, which was passed during the prior year first quarter, reduced the statutory federal tax rate and resulted in the remeasurement of the Company’s deferred income taxes.  For the Company’s non-rate regulated activities, the net decrease in the Company’s deferred income taxes lowered income tax expense and benefited the prior year first quarter consolidated earnings by $111.0 million, or $1.29 per share. A removal of a valuation allowance related to the remeasurement of deferred income taxes from the 2017 Tax Reform Act during the current year first quarter lowered income tax expense and benefited consolidated earnings by $5.0 million, or $0.06 per share. The remeasurement of deferred income taxes due to 2017 Tax Reform, which was a significant driver of the Company’s first quarter segment GAAP earnings when compared to the prior year, is outlined in the tables below that reconcile GAAP earnings to Adjusted Operating Results by segment.

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.

The Exploration and Production segment’s first quarter GAAP earnings decreased $68.5 million versus the prior year, driven primarily by the impact of 2017 Tax Reform on deferred taxes discussed above and the net impact of unrealized gains and losses that were recognized due to hedge accounting ineffectiveness (see further discussion below).  Excluding these items, the Exploration and Production segment’s first quarter earnings increased $2.4 million as higher natural gas production and better realized crude oil prices were partially offset by the negative impacts of lower realized natural gas prices, lower crude oil production, and higher operating expenses.

Seneca’s first quarter net production was 49.2 billion cubic feet equivalent (“Bcfe”), an increase of 9.1 Bcfe, or 23 percent, from the prior year.  Natural gas production increased 9.7 billion cubic feet (“Bcf”), or 27 percent, due primarily to production from new Marcellus and Utica wells completed and connected to sales in Pennsylvania.  Seneca increased production by 5.7 Bcf in the EDA-Lycoming area, where development was timed to fill interstate pipeline capacity contracted on the Atlantic Sunrise project which went in service during the quarter.  Production from the WDA-Clermont area increased 3.3 Bcf due to increased Utica development.  Seneca’s average realized natural gas price, after the impact of hedging and transportation costs, was $2.61 per thousand cubic feet (“Mcf”), a decrease of $0.11 per Mcf from the prior year.  The decline in Seneca’s average realized natural gas price is primarily attributable to the expiration of physical firm sales and financial hedge contracts over the past 12 months that had favorable pricing relative to firm sales and hedges settled in the current quarter, offset partially by improved realizations on unhedged production tied to NYMEX and sold into the spot markets in Pennsylvania.

Seneca’s oil production for the first quarter decreased 101 thousand barrels (“Mbbl”) due largely to the impact of the sale of Seneca’s Sespe properties in California in the third quarter of fiscal 2018.  Seneca’s average realized oil price, after the impact of hedging, was $61.70 per barrel (“Bbl”), an increase of $1.91 per Bbl over the prior year.  The improvement in oil price realizations was due primarily to higher market prices for West Texas Intermediate (WTI) crude oil during the quarter and stronger price differentials relative to WTI at local sales points in California. The improving local price differentials also required Seneca to record the net $6.5 million unrealized mark-to-market gain on its WTI and Brent financial swap contracts due to accounting rules on measuring hedge ineffectiveness.

Total operating expenses increased $14.4 million during the first quarter.  Lease operating and transportation (“LOE”) expense increased $2.9 million due mostly to higher gathering expenses in Appalachia resulting from the increase in natural gas production, partially offset by lower operating costs in California following the sale of Seneca’s Sespe properties.  General and Administrative (“G&A”) expense increased $1.6 million due mainly to higher personnel costs.  Depreciation, depletion and amortization (“DD&A”) expense increased $7.3 million due to the increase in production and a higher per unit depletion rate.  Property, franchise, and other taxes increased $2.8 million due to higher impact fees in Pennsylvania, which increase and decrease along with natural gas index prices on a calendar year basis.  On a per unit of production basis, cash operating expenses (total operating expenses excluding DD&A) were $1.35 per thousand cubic feet equivalent (“Mcfe”), a decrease of $0.13 per Mcfe from the prior 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 $13.4 million versus the prior year, driven primarily by the impact of 2017 Tax Reform on deferred taxes discussed above.  Excluding this item, the Pipeline and Storage segment’s first  quarter earnings increased $0.7 million as higher operating revenues, lower interest expense and a lower effective tax rate were partially offset by higher operating expenses.  Operating revenues increased $1.8 million versus the prior year due primarily to other revenues recorded during the quarter for funds received relating to the early termination of a transportation contract. Operation and Maintenance (“O&M”) expense increased $4.0 million over the prior year due primarily to an increase in compressor and facility maintenance activity during the quarter, higher long term incentive compensation expense, and the impact in the prior year of the reversal of a reserve for preliminary engineering and survey costs relating to projects in development. The combined $0.7 million increase in DD&A expense and property, franchise and other taxes was due to projects and new facilities placed in service over the past year.

The 2017 Tax Reform Act lowered the Company’s statutory federal income tax rate from a blended 24.5 percent in fiscal 2018 to 21 percent in fiscal 2019, which decreased income tax expense by $0.8 million.  Other tax items, due mostly to permanent book to tax differences, lowered income tax expense by another $1.6 million.

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 delivers Seneca’s gross Appalachian production to the interstate pipeline system.

The Gathering segment’s first quarter GAAP earnings decreased $31.2 million versus the prior year, driven primarily by the impact of 2017 Tax Reform on deferred taxes discussed above.  Excluding this item, the $3.2 million increase in the Gathering segment’s first quarter earnings was due mainly to higher operating revenues, offset partially by higher operating expenses. Operating revenues increased $5.9 million, or 25 percent, due primarily to an 11.5 Bcf increase in throughput from Seneca’s Appalachian natural gas production. The Trout Run gathering system throughput increased 6.7 Bcf as Seneca increased production during the quarter to fill its new interstate pipeline capacity on the Atlantic Sunrise project. Throughput on the Covington and Clermont gathering systems increased 1.4 Bcf and 4.1 Bcf, respectively.

Operating expenses increased $1.3 million during the first quarter. O&M expense increased $0.7 million due largely to the operation of additional compression facilities along the Covington gathering system, which were acquired from affiliate Seneca in March 2018, and an increase in facilities and related maintenance activity at the Trout Run gathering system.  DD&A expense increased $0.6 million due to an increase in plant assets in-service during the quarter ended December 31, 2018.

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 $4.7 million increase in the Utility segment’s first quarter GAAP earnings was due primarily to higher margin (operating revenues less purchased gas expense), lower interest expense and a lower effective tax rate.  The increase in the Utility’s margin was largely attributable to the impacts of higher usage and weather on residential and commercial customer margins. Also contributing to the increase were revenues relating to the recovery of the segment’s increased capital investment in its distribution system under a system modernization mechanism. Interest expense decreased $0.9 million due primarily to the Company’s early refinancing of an 8.75 percent coupon 10-year note that was set to mature in May 2019.

The 2017 Tax Reform Act lowered the Company’s statutory federal income tax rate from a blended 24.5 percent in fiscal 2018 to 21 percent in fiscal 2019, which decreased income tax expense $1.0 million from the prior year first quarter.  In accordance with state regulatory orders, the Utility segment has been recording a refund provision to return the net effect of the 2017 Tax Reform Act to its customers.  The estimated refund provision recorded for the quarter ended December 31, 2018, was $0.5 million lower than the refund provision recorded for the quarter ended December 31, 2017.

Energy Marketing Segment

The Energy Marketing segment’s operations are carried out by National Fuel Resources, Inc. (“NFR”).  NFR markets natural gas to industrial, wholesale, commercial, public authority, and residential customers primarily in western and central New York and northwestern Pennsylvania, offering competitively priced natural gas to its customers.

The Energy Marketing segment’s first quarter GAAP earnings decreased $1.3 million versus the prior year, driven partly by the impact of 2017 Tax Reform on deferred taxes discussed above.  Excluding this item, the Energy Marketing segment’s first quarter net loss of $0.5 million was a decrease of $1.7 million over the prior year earnings of $1.2 million.  The decrease is due largely to lower margins (operating revenues less purchased gas costs).  NFR’s customer margins were negatively impacted by stronger natural gas prices at local purchase points relative to NYMEX-based customer sales contracts. The average cost per Mcf of gas purchased on a spot basis at local purchase points increased 42 percent during the quarter, compared to the average increase in NYMEX monthly settlement prices of 24 percent.

Corporate and All Other

Corporate and All Other operations had a combined loss of $0.2 million for the current year first quarter, which was $13.7 million lower than the loss of $13.9 million for prior year first quarter.  The decrease in the loss was primarily attributable to the impact of the 2017 Tax Reform Act, which resulted in a remeasurement of deferred income taxes that increased prior quarter income tax expense by $15.1 million. A removal of a valuation allowance related to the 2017 Tax Reform Act during the quarter ended December 31, 2018, resulted in an adjustment to Corporate and All Other’s remeasured deferred income taxes and lowered current quarter income tax expense by $3.3 million. This increase in earnings was partially offset by the impact of $6.3 million of unrealized losses on investments in equity securities recorded during the quarter. Unrealized gains and losses on investments in equity securities are now recognized in earnings following the adoption of authoritative accounting guidance effective October 1, 2018.  These unrealized gains and losses had been previously recorded as other comprehensive income.

EARNINGS TELECONFERENCE

The Company will host a conference call on Friday, February 1, 2019, 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 “7996513”.  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 “7996513”.  Both the webcast and a telephonic replay will be available until the close of business on Friday, February 8, 2019.

National Fuel is an integrated energy company reporting financial results for five operating segments: Exploration and Production, Pipeline and Storage, Gathering, Utility, and Energy Marketing.  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: 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 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; 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; changes in the price of natural gas or oil; impairments under the SEC’s full cost ceiling test for natural gas and oil reserves; 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; 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; 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 potential 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

GUIDANCE SUMMARY

As discussed on page 2, the Company is revising its earnings guidance for fiscal 2019.  Additional details on the Company’s forecast assumptions and business segment guidance for fiscal 2019 are outlined in the table below.

The revised earnings guidance range does not include the impact of certain items that impacted the comparability of earnings during the first quarter, including: (1) the remeasurement of deferred income taxes resulting from the 2017 Tax Reform Act, which reduced the Company’s income tax expense and benefited consolidated earnings in the first quarter by $0.06 per share; (2) the full year impact of the Exploration and Production segment’s unrealized gain on hedging ineffectiveness, which increased earnings by $0.06 per share in the first quarter ($3.2 million, or $0.03 per share, of the unrealized gain relates to hedge contracts that will settle during the remaining nine months ending September 30, 2019); and (3) the unrealized loss on other investments due to the change in an accounting rule discussed on page 6, which lowered earnings by $0.06 per share.  While the Company expects to record additional adjustments to one or more of these items during the remaining nine months ending September 30, 2019, the amounts of these and other potential adjustments are not reasonably determinable at this time.  As such, the Company is unable to provide earnings guidance other than on a non-GAAP basis.

^{(1) Capital expenditures for the three months ended December 31, 2018, include accounts payable and accrued liabilities related to capital expenditures of $66.1 million, $12.9 million, $4.4 million, and $2.8 million in the Exploration and Production segment, Pipeline and Storage segment, Gathering segment and Utility segment, respectively.  These amounts have been excluded from the Consolidated Statement of Cash Flows at December 31, 2018, since they represent non-cash investing activities at that date.}

^{(2) Capital expenditures for the three months ended December 31, 2018, exclude capital expenditures of $51.3 million, $21.9 million, $6.1 million and $9.5 million in the Exploration and Production segment, Pipeline and Storage segment, Gathering segment and Utility segment, respectively.  These amounts were in accounts payable and accrued liabilities at September 30, 2018 and paid during the three months ended December 31, 2018.  These amounts were excluded from the Consolidated Statement of Cash Flows at September 30, 2018, since they represented non-cash investing activities at that date.  These amounts have been included in the Consolidated Statement of Cash Flows at December 31, 2018.}

^{(3) Capital expenditures for the three months ended December 31, 2017, include accounts payable and accrued liabilities related to capital expenditures of $37.1 million, $10.7 million, $4.7 million, and $3.6 million in the Exploration and Production segment, Pipeline and Storage segment, Gathering segment and Utility segment, respectively.  These amounts have been excluded from the Consolidated Statement of Cash Flows at December 31, 2017, since they represent non-cash investing activities at that date.}

^{(4) Capital expenditures for the three months ended December 31, 2017, exclude capital expenditures of $36.5 million, $25.1 million, $3.9 million and $6.7 million in the Exploration and Production segment, Pipeline and Storage segment, Gathering segment and Utility segment, respectively.  These amounts were in accounts payable and accrued liabilities at September 30, 2017 and paid during the three months ended December 31, 2017.  These amounts were excluded from the Consolidated Statement of Cash Flows at September 30, 2017, since they represented non-cash investing activities at that date.  These amounts have been included in the Consolidated Statement of Cash Flows at December 31, 2017.}

^{(1) Percents compare actual 2018 degree days to normal degree days and actual 2018 degree days to actual 2017 degree days.}

^{(1) Refer to page 14 for the General and Administrative Expense, Lease Operating and Transportation Expense and Depreciation, Depletion, and Amortization Expense for the Exploration and Production segment.}

^{(2)  Amounts include transportation expense of $0.54 per Mcfe for both the three months ended December 31, 2018 and December 31, 2017.}

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, 2018 and 2017:

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, 2018 and 2017:

NATIONAL FUEL GAS COMPANY
AND SUBSIDIARIES
NON-GAAP FINANCIAL MEASURES
 SEGMENT ADJUSTED EBITDA