National Fuel Reports First Quarter Earnings

WILLIAMSVILLE, N.Y., Feb. 04, 2021 (GLOBE NEWSWIRE) -- National Fuel Gas Company ("National Fuel" or the "Company") NFG today announced consolidated results for the first quarter of its 2021 fiscal year.

FISCAL 2021 FIRST QUARTER SUMMARY

• GAAP net income of $77.8 million, or $0.85 per share, which includes a $55.2 million non-cash, after-tax impairment of oil and gas properties, and a $37.0 million after-tax gain on the sale of the Company's timber properties, compared to GAAP net income of $86.6 million, or $1.00 per share, in the prior year.
• Adjusted operating results of $97.0 million, or $1.06 per share, compared to $87.4 million, or $1.01 per share, in the prior year (see non-GAAP reconciliation on page 2).
• Adjusted EBITDA of $251.7 million, compared to $222.9 million in the prior year (see non-GAAP reconciliation on page 21).
• Pipeline & Storage segment Adjusted EBITDA of $58.1 million, an increase of 35% from the prior year.
• Gathering segment Adjusted EBITDA of $39.8 million, an increase of 35% from the prior year.
• E&P segment Adjusted EBITDA of $100.7 million, an increase of 9% from the prior year.
• E&P segment net production of 79.5 Bcfe, an increase of 21.1 Bcfe, or 36%, from the prior year, which includes the impact of the Company's Appalachian asset acquisition and approximately 4 Bcf of price-related natural gas curtailments.
• Average realized natural gas prices of $2.14 per Mcf, down $0.18 per Mcf from the prior year.
• Average realized oil prices of $49.91 per Bbl, down $13.01 per Bbl from the prior year.
• Utility segment completed its system modernization program for calendar year 2020, replacing over 150 miles of older vintage pipelines. While maintaining the Company's long-standing focus on the safety and reliability of its distribution network, this program has contributed to the more than 60% reduction in Utility greenhouse gas emissions since 1990.
• Company completed the sale of substantially all of its timber assets in Pennsylvania, with net proceeds of $104.6 million.
• Company is increasing its fiscal 2021 earnings guidance to a range of $3.65 to $3.95, an increase of $0.10 at the midpoint.

MANAGEMENT COMMENTS

David P. Bauer, President and Chief Executive Officer of National Fuel Gas Company, stated: "National Fuel had an excellent start to our fiscal 2021 on the strength of our recently completed Empire North expansion project and our Appalachian E&P and gathering acquisition. We continue to see the benefits of these newly acquired assets, with record production at Seneca driving meaningful earnings growth in our gathering segment and long-term, sustainable reductions in the cost structure of our upstream business.

As we continue to confront the COVID-19 pandemic, the safety of our employees, customers, and communities remains paramount to our daily operations across each of our businesses. National Fuel and its dedicated workforce have retained their focus on business continuity during this health crisis, and to date, the Company has not experienced any significant financial or operational impacts.

Looking forward, we are well-positioned to execute on our near-term integrated growth opportunities, with preliminary construction activities on our FM100 expansion and modernization project – the largest in the Company's history – expected to start in the next few weeks. This project, which will add more than $50 million in annual Pipeline and Storage revenues, further supports the integrated development of our prolific and highly-economic Marcellus and Utica assets and puts us on a path to generating meaningful consolidated free cash flow in fiscal 2022.

Additionally, we continue to make progress with our ESG disclosures and initiatives. Across our system, we're making investments that will reduce our operational and fugitive emissions. We're also aggressively promoting our Utility's conservation and energy efficiency programs to help lower the end-use emissions of our customers. Lastly, both on our own and through participation in programs like the Low Carbon Resources Initiatives, we're evaluating new low- and zero-carbon fuel sources and technologies. All of these initiatives make National Fuel well-positioned to play a meaningful and continued role in the decarbonization of the economy."

RECONCILIATION OF GAAP EARNINGS TO ADJUSTED OPERATING RESULTS

FISCAL 2021 GUIDANCE UPDATE

National Fuel is revising its fiscal 2021 earnings guidance to reflect the results of the first fiscal quarter, along with updated commodity price and operating unit cost assumptions for the balance of the year. The Company is now projecting that earnings, excluding items impacting comparability, will be within the range of $3.65 to $3.95 per share, an increase of $0.10 per share from the midpoint of the Company's prior guidance range. The increase from the Company's prior earnings guidance reflects higher expected price realizations on Seneca's oil production and lower expected exploration and production operating unit costs, partially offset by lower expected price realizations on Seneca's natural gas production.

The Company is now assuming that NYMEX natural gas prices will average $2.75 per MMBtu for the remainder of fiscal 2021, a decrease of $0.25 per MMBtu from the $3.00 per MMBtu assumed in the previous guidance. Additionally, the Company is now assuming that WTI oil prices will average $52.50 per Bbl for the remainder of the year, a $15.00 increase from the $37.50 per Bbl assumed in the previous guidance. For guidance purposes, the Company's updated projections approximate the current NYMEX forward markets for natural gas and oil and consider the impact of local sales point differentials and new physical firm sales, transportation, and financial hedge contracts.

Seneca currently has firm sales contracts in place for 216 Bcf, or approximately 93% of its projected remaining fiscal 2021 Appalachian production, limiting its exposure to in-basin markets. Approximately 186 Bcf of those sales, or 80% of Seneca's expected remaining Appalachian production, are either matched by a financial hedge, including a combination of swaps and no-cost collars, or were entered into at a fixed price. Additionally, Seneca has financial hedges in place for 1,079 Mbbl, or approximately 67%, of its expected remaining oil production for the fiscal year.

The Company's other guidance assumptions remain largely unchanged from the previous guidance. Additional details on the Company's updated forecast assumptions and business segment guidance for fiscal 2021 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, 2020 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.

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 $53.6 million versus the prior year. This was primarily driven by a non-cash, pre-tax impairment charge of $76.2 million ($55.2 million after-tax) to write-down the value of Seneca's oil and natural gas reserves under the full cost method of accounting. This method requires Seneca to perform a quarterly "ceiling test" comparing the present value of future net revenues from its oil and natural gas reserves based on an unweighted arithmetic average of the first day of the month oil and gas prices for each month within the 12-month period prior to the end of the reporting period ("the ceiling") with the book value of those reserves at the balance sheet date. If the book value of the reserves exceeds the ceiling, a non-cash impairment charge must be recorded in order to reduce the book value of the reserves to the calculated ceiling. Seneca does not expect to incur impairment charges in the remaining quarters of fiscal 2021. Excluding this item, Seneca's first quarter earnings increased $1.6 million.

Seneca produced 79.5 Bcfe during the first quarter, an increase of 21.1 Bcfe, or 36%, from the prior year, despite the impact of approximately 4 Bcf of price-related curtailments. The increase was primarily driven by higher natural gas production from the Company's fourth quarter fiscal 2020 acquisition of Appalachian upstream assets, as well as production from new Marcellus and Utica wells. Net production increased 16.4 Bcf to 45.7 Bcf in the Eastern Development Area ("EDA"), primarily due to higher production from the acquisition. Net production increased 5.0 Bcf to 29.9 Bcf in Seneca's Western Development Area ("WDA"), primarily due to the ongoing development program in the region. Oil production for the first quarter decreased 38,000 Bbls, or 6%, from the prior year due to production declines in Seneca's Midway Sunset and Lost Hills areas as a result of reduced steam activity and delayed workover expenses in response to lower commodity prices in the second half of fiscal 2020. These declines were partially offset by new production brought on-line in Seneca's Pioneer and Coalinga development areas.

Seneca's average realized natural gas price, after the impact of hedging and transportation costs, was $2.14 per Mcf, a decrease of $0.18 per Mcf from the prior year. Seneca's average realized oil price, after the impact of $6.43 per Bbl of hedging gains, was $49.91 per Bbl, a decrease of $13.01 per Bbl compared to the prior year. The decline in oil price realizations was due primarily to lower market prices for unhedged crude oil at local sales points in California.

Lease operating and transportation ("LOE") expense increased $14.8 million primarily due to higher transportation costs in Appalachia from increased production and an increase in well repairs, as well as higher steam facility repairs and maintenance and steam fuel costs in California. LOE expense includes $46.7 million in intercompany expense for gathering and compression services used to connect Seneca's Marcellus and Utica production to sales points along interstate pipelines. DD&A expense increased $1.2 million due largely to higher natural gas production, partially offset by the impact of ceiling test impairments recorded during fiscal 2020. Seneca's general and administrative ("G&A") expense increased $1.6 million due primarily to higher personnel costs.

On a unit of production basis, Seneca's combined G&A, LOE, other operation and maintenance ("O&M") expense, and Property, Franchise, and Other Taxes decreased $0.12 per Mcfe, or 10%, during the quarter.

Interest expense increased by $1.4 million from the prior year, primarily driven by additional long-term borrowings from the Company's long-term debt issuance in June 2020 that was used to fund a portion of the Company's Appalachian acquisition. The increase in Seneca's effective income tax rate was largely driven by an increase to a valuation allowance for deferred tax assets that was initially established in the second quarter of fiscal 2020.

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 increased $6.1 million versus the prior year, with higher operating revenues partially offset by higher DD&A expense and higher interest expense. The increase in operating revenues of $15.5 million, or 22%, was largely due to an increase in Supply Corporation's transportation and storage rates effective February 1, 2020, in accordance with Supply Corporation's rate case settlement, coupled with new demand charges for transportation service from the Company's Empire North expansion project, which was placed in service near the end of the fourth quarter of fiscal 2020. The increase in DD&A expense of $3.9 million was primarily attributable to an increase in Supply Corporation's depreciation rates associated with its rate case settlement combined with incremental depreciation from the Empire North expansion project. The increase in interest expense of $3.6 million was primarily driven by additional long-term borrowings from the Company's long-term debt issuance in June 2020.

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

The Gathering segment's first quarter GAAP earnings increased $4.6 million versus the prior year. The increase was primarily driven by higher operating revenues, which was partially offset by higher DD&A expense, higher O&M expenses and higher interest expense. Operating revenues increased $12.2 million, or 35%, primarily due to increased gathering throughput resulting from the Company's Appalachian acquisition in the fourth quarter of fiscal 2020 and from new Appalachian wells that were brought on-line. The increase in DD&A expense of $2.8 million was primarily attributable to incremental depreciation expense related to the recent Appalachian acquisition, as well as higher average depreciable plant in service compared to the prior year. Compression leasing expenses associated with the Appalachian acquisition were primarily responsible for the $1.9 million increase in O&M expense, partly offset by a decline in compressor station O&M expenses on Company owned facilities. The increase in interest expense of $1.9 million was primarily driven by additional long-term borrowings from the Company's long-term debt issuance in June 2020 that was used to fund a portion of the Appalachian acquisition.

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 decreased $3.5 million versus the prior year primarily due to higher O&M expense and a higher effective income tax rate. The $2.4 million increase in O&M expense was primarily attributable to incremental expense recorded to increase the allowance for uncollectible accounts due to the potential for customer non-payment resulting from the current economic backdrop brought on by COVID-19, as well as higher personnel costs. Warmer than normal weather in Distribution's Pennsylvania service territory resulted in a decline in customer usage and margin, which was largely offset by higher revenues earned through the Company's system modernization tracking mechanism in its New York service territory. Weather in Distribution's Pennsylvania service territory was 11% warmer on average than last year, and 17% warmer than normal. The impact of weather variations on earnings in Distribution's New York service territory is largely mitigated by that jurisdiction's weather normalization clause. The increase in the Utility segment's effective income tax rate was primarily due to the non-recurring impact of permanent book versus tax differences.

Corporate and All Other

The Company's operations that are included in Corporate and All Other generated combined earnings of $39.6 million in the current year first quarter, which was a $37.6 million increase over combined earnings of $2.0 million generated in the prior-year first quarter. The increase was primarily driven by a gain recognized on the sale of the Company's timber properties of $51.1 million ($37.0 million after-tax). The Company completed the sale of substantially all of its timber assets in Pennsylvania on December 10, 2020 for net proceeds of $104.6 million. The proceeds from this sale were used to complete a reverse like-kind exchange in conjunction with the Company's fourth quarter fiscal 2020 Appalachian acquisition of certain upstream assets and midstream gathering assets.

EARNINGS TELECONFERENCE

The Company will host a conference call on Friday, February 5, 2021, at 11 a.m. Eastern Time to discuss this announcement. Pre-registration is required to access the teleconference by phone in a listen-only mode by following this link: http://www.directeventreg.com/registration/event/9363257. To access the webcast, visit the Events Calendar under the News & Events page on the NFG Investor Relations website at investor.nationalfuelgas.com. A replay of the conference call will be available approximately two hours following the teleconference at the same website link and by phone (toll-free) at 800-585-8367 using conference ID number "9363257". Both the webcast and conference call replay will be available until the close of business on Friday, February 12, 2021.

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: the length and severity of the recent COVID-19 pandemic, including its impacts across our businesses on demand, operations, global supply chains and liquidity; 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; changes in the price of natural gas or oil; impairments under the SEC's full cost ceiling test for natural gas and oil reserves; the creditworthiness or performance of the Company's key suppliers, customers and counterparties; 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 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 disruptions due to the COVID-19 pandemic, as well as difficulties or delays in obtaining necessary governmental approvals, permits or orders or in obtaining the cooperation of interconnecting facility operators; the Company's ability to complete planned strategic transactions; the Company's ability to successfully integrate acquired assets and achieve expected cost synergies; 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; the impact of information technology disruptions, cybersecurity or data security breaches; 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; 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 2021. Additional details on the Company's forecast assumptions and business segment guidance 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 after-tax impairment of oil and gas properties, which reduced earnings by $0.60 per share; (2) the after-tax gain on sale of timber properties, which increased earnings by $0.40 per share; and (3) the after-tax unrealized loss on other investments, which reduced earnings by $0.01 per share. While the Company expects to record additional adjustments to unrealized gain or loss on other investments during the nine months ending September 30, 2021, 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.

* Commodity price assumptions are for the remaining 9 months of the fiscal year.

(1) Capital expenditures for the quarter ended December 31, 2020, include accounts payable and accrued liabilities related to capital expenditures of $35.1 million, $11.2 million, $2.3 million, and $3.5 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, 2020, since they represent non-cash investing activities at that date.

(2) Capital expenditures for the quarter ended December 31, 2020, exclude capital expenditures of $45.8 million, $17.3 million, $13.5 million and $10.7 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, 2020 and paid during the quarter ended December 31, 2020. These amounts were excluded from the Consolidated Statement of Cash Flows at September 30, 2020, 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, 2020.

(3) Capital expenditures for the quarter ended December 31, 2019, include accounts payable and accrued liabilities related to capital expenditures of $62.3 million, $22.7 million, $5.3 million, and $3.5 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, 2019, since they represent non-cash investing activities at that date.

(4) Capital expenditures for the quarter ended December 31, 2019, exclude capital expenditures of $38.0 million, $23.8 million, $6.6 million and $12.7 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, 2019 and paid during the quarter ended December 31, 2019. These amounts were excluded from the Consolidated Statement of Cash Flows at September 30, 2019, 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, 2019.

(1) Percents compare actual 2020 degree days to normal degree days and actual 2020 degree days to actual 2019 degree days.

(1) Refer to page 13 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 $0.57 and $0.57 per Mcfe for the three months ended December 31, 2020 and December 31, 2019, respectively.

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, Adjusted EBITDA and free cash flow, 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 or liquidity 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, 2020 and 2019:

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, 2020 and 2019: