National Fuel Reports Second Quarter Earnings

WILLIAMSVILLE, N.Y., May 02, 2019 (GLOBE NEWSWIRE) -- National Fuel Gas Company ("National Fuel" or the "Company") NFG today announced consolidated results for the second quarter of its 2019 fiscal year and for the six months ended March 31, 2019.

FISCAL 2019 SECOND QUARTER SUMMARY

• GAAP earnings of $90.6 million, or $1.04 per share, compared to $91.8 million, or $1.06 per share, in the prior year
• Adjusted operating results of $92.9 million, or $1.07 per share, compared to $95.6 million, or $1.11 per share, in the prior year (see non-GAAP reconciliation below)
• Consolidated Adjusted EBITDA of $225.8 million compared to $232.4 million in the prior year (see non-GAAP reconciliation on page 24)
• E&P segment net production of 48.8 Bcfe, an increase of 6% from the prior year
• Appalachian net natural gas production of 499 MMcf/d, up 8% from the prior year and up 1% from the first quarter
• Average natural gas prices, after the impact of hedging, of $2.58 per Mcf, up $0.06 per Mcf from the prior year
• Average oil prices, after the impact of hedging, of $61.01 per Bbl, up $2.70 per Bbl from the prior year
• Gathering segment operating revenues increased $1.6 million on 5% increase in gathered volumes
• Utility segment net income increased $2.2 million, or 7%, on higher customer margins and lower interest expense

MANAGEMENT COMMENTS

Ronald J. Tanski, President and Chief Executive Officer of National Fuel Gas Company, stated: "The Company's second fiscal quarter results evidence the value of our integrated business model, where the consistent earnings from each of our major operating segments contributed to our balanced consolidated earnings.  Our financial results were in line with our forecast for the quarter, and keep us on track to deliver results in line with our fiscal year earnings guidance, which remains unchanged.

"Financial results in our regulated businesses were consistent with the prior year, where higher earnings in the utility business offset a portion of the expected decline in the interstate pipeline business caused by the expiration of a large transportation contract.  In our Exploration & Production business, we experienced a few operational delays during the quarter, which deferred a portion of our production that was scheduled to come online this quarter into the latter part of fiscal 2019.   We still expect, however, that our steady, three-rig drilling program will deliver average production growth of 15 to 20 percent through our fiscal 2022 forecast period.  Given our large undeveloped acreage position, our production growth can be sustained throughout the next decade.

"We are excited that that our various Pipeline & Storage projects under development continue to take meaningful strides forward, including the recent receipt of the FERC Certificate for our Empire North project, positive legal and regulatory developments on our Northern Access project, and the commencement of construction on our Line N to Monaca project.  Each of these projects will help to meet the increasing regional demand for domestic and abundant natural gas supplies. As the nation's electric grid continues to decrease reliance on aging coal-fired plants and integrate more intermittent renewable generation facilities, more reliance will be placed on natural gas electric generation, much like many of our residential customers depend on their gas-powered back-up generators."

FISCAL 2019 GUIDANCE

National Fuel is reaffirming its full year earnings guidance for fiscal 2019.  The Company projects 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 Company's earnings guidance range reflects the impact of actual results for the six months ended March 31, 2019, an update to the Company's commodity price assumptions to reflect the current futures market, including a $10 per barrel increase in NYMEX crude oil, offset by the consolidated impact of the reduction in its production guidance discussed below.  Further changes in NYMEX or Appalachian basin spot natural gas prices are not expected to have a significant impact on current year earnings as the realizations on a large portion of the Company's remaining natural gas production are locked in with firm sales and financial hedges. Projections for consolidated and individual segment capital expenditures are unchanged.

The Company is revising its Exploration and Production segment's fiscal 2019 net production guidance to be in the range of 205 to 215 billion cubic feet equivalent ("Bcfe").  At the midpoint of the range, the Company's revised fiscal 2019 production guidance represents an 18 percent increase over fiscal 2018.

The 10 Bcfe, or 5 percent, decrease from the midpoint of the Company's previous guidance range is primarily due to the following factors:

• Drilling and completion delays at DCNR tracts 007 and 100 in the EDA, which has deferred forecasted production online dates;

• The impact of the Company's ongoing testing efforts to optimize its Utica drilling and completion design in the WDA; and

• The Company's continued trend towards drilling longer laterals, which is expected to benefit the program's economics, but defers the online dates related to future development pads beyond the previous plan.

While the delays in new well turn on dates have the effect of pushing production to future periods, they are not expected to have a material impact on the ultimate recovery of the Company's reserves or the economics of its Marcellus and Utica programs.

The Company's earnings guidance range does not include the impact of certain items that impacted the comparability of earnings during the six months ended March 31, 2019, 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 six months ended March 31, 2019 by $0.06 per share; (2) the full year impact of the Exploration and Production segment's unrealized gain on hedging ineffectiveness; and (3) the unrealized loss on other investments due to the change in an accounting rule discussed on page 6, which lowered earnings by $0.02 per share.  While the Company expects to record additional adjustments to one or more of these items during the remaining six 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 earnings of each operating segment for the quarter ended March 31, 2019 is summarized in a tabular form on pages 9 and 10 of this report (earnings drivers for the six months ended March 31, 2019 are summarized on pages 11 and 12).  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.

The Exploration and Production segment's second quarter GAAP earnings decreased $4.7 million versus the prior year, driven primarily by the net impact of unrealized gains and losses that were recognized due to hedge accounting ineffectiveness and an $0.8 million adjustment recorded in the prior year second quarter relating to the remeasurement of deferred income taxes under the 2017 Tax Reform Act.  Excluding these items (see table above), the Exploration and Production segment's second quarter earnings increased $0.1 million as the positive impacts of higher natural gas production and better realized natural gas and crude oil prices were offset by lower crude oil production, higher lease operating and transportation ("LOE") expense, higher depreciation, depletion and amortization ("DD&A") expense, and the impact of income taxes.

Seneca's second quarter net production was 48.8 Bcfe, an increase of 2.7 Bcfe, or 6 percent, from the prior year.  Natural gas production increased 3.3 billion cubic feet ("Bcf"), or 8 percent, due primarily to production from new Marcellus and Utica wells completed and connected to sales in Appalachia.  Seneca increased production in the WDA-Clermont area by 4.4 Bcf, where Seneca has increased development activity. Seneca's average realized natural gas price, after the impact of hedging and transportation costs, was $2.58 per thousand cubic feet ("Mcf"), an increase of $0.06 per Mcf from the prior year. The improvement was driven primarily by higher NYMEX pricing and local spot pricing in Pennsylvania, which benefited realizations on Seneca's unhedged production.

Seneca's oil production for the second quarter decreased 99 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 $61.01 per barrel ("Bbl"), an increase of $2.70 per Bbl over the prior year.  The improvement in oil price realizations was due primarily to stronger price differentials relative to West Texas Intermediate (WTI) index prices at local sales points in California.

LOE expense increased $2.1 million due mostly to higher gathering expenses in Appalachia resulting from the increase in natural gas production coupled with an increase in well repairs, contract labor and steam fuel costs in the West Coast region, partially offset by lower operating costs in California following the sale of Seneca's Sespe properties.  DD&A expense increased $3.9 million due to the increase in production and a higher unit depletion rate.

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 the segment's income tax expense on current period income by $1.0 million.  The impact of the lower federal rate on current quarter income was more than offset by the net effect of other items that increased income tax expense by $1.9 million.

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 second quarter GAAP earnings decreased $5.0 million versus the prior year.  The decrease was driven primarily by lower operating revenues and higher operation and maintenance ("O&M") expenses, which were partially offset by lower income tax expense due to the impact of the 2017 Tax Reform Act.   The $4.4 million decrease in operating revenues was due largely to the anticipated expiration of a significant firm transportation contract on the Empire system in December 2018.  The impact of the contract expiration was partially offset by an increase in Empire's transportation rates following the Company's rate case settlement effective January 1, 2019.  The settlement remains subject to FERC approval.  O&M expense increased $3.1 million due primarily to an increase in compressor and facility maintenance activity during the quarter and higher personnel costs.

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 the Pipeline and Storage segment's income tax expense on current period income by $0.8 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 $0.9 million increase in the Gathering segment's second quarter GAAP earnings was driven primarily by higher operating revenues and the net impact of the 2017 Tax Reform Act, which were partially offset by higher O&M expenses.  Operating revenues increased $1.6 million, or 6 percent, due primarily to a 2.8 Bcf increase in gathered volume from Seneca's Appalachian natural gas production.  O&M expenses increased $1.3 million in the second quarter 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 normal-course preventative compressor maintenance activity at the Clermont gathering system.

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 the segment's income tax expense on current period income by $0.6 million.  Additionally, the Gathering segment recorded a $0.4 million adjustment in the prior year second quarter to the remeasurement of deferred income taxes under the 2017 Tax Reform Act, which increased income tax expense and lowered earnings in 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 $2.2 million increase in the Utility segment's second quarter GAAP earnings was due primarily to higher customer margins and lower interest expense partially offset by the net impact of the 2017 Tax Reform Act.  Higher customer usage, an increase in revenues relating to a system modernization tracking mechanism, and the impact of regulatory adjustments contributed to the increase in customer margins. Interest expense decreased $0.6 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 $1.9 million increase in O&M expense was substantially offset by the $2.3 million decrease in other deductions, which was largely a result of non-service pension and postretirement benefit costs that are now reported separately from O&M expenses following the adoption of new accounting guidance in the current 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 on current period income by $1.5 million.  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 refund provision recorded during the quarter as a reduction to operating revenues was $3.7 million higher than the refund provision recorded in the prior year, reducing second quarter earnings by $2.8 million and offsetting the benefit of the lower federal income tax rate.

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 second quarter GAAP earnings were largely unchanged versus the prior year, as the slight decline in customer margins (operating revenues less purchased gas sold) was offset by the impact of an adjustment made in the prior year second quarter to the segment's remeasurement of deferred income taxes under the 2017 Tax Reform Act.

Corporate and All Other

Corporate and All Other operations had combined earnings of $2.2 million in the current year second quarter, which was $5.3 million higher than the loss of $3.1 million in the prior year second quarter.  The increase in earnings was primarily attributable to the impact of the 2017 Tax Reform Act, which resulted in a remeasurement of deferred income taxes that increased the prior year's second quarter income tax expense by $2.7 million, and the impact of $3.8 million in unrealized gains on investments in equity securities recorded during the quarter ($3.0 million after-tax).  Unrealized gains and losses on investments in equity securities are now recognized in earnings following the adoption of new accounting guidance in the current year.  These unrealized gains and losses had been previously recorded as other comprehensive income. These increases were partially offset by lower operating revenues from the sale of standing timber by the Company's land and timber operations.

EARNINGS TELECONFERENCE

The Company will host a conference call on Friday, May 3, 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 "6683755".  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 "6683755".  Both the webcast and a telephonic replay will be available until the close of business on Friday, May 10, 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 Company's earnings guidance range does not include the impact of certain items that impacted the comparability of earnings during the six months ended March 31, 2019, 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 six months ended March 31, 2019 by $0.06 per share; (2) the full year impact of the Exploration and Production segment's unrealized gain on hedging ineffectiveness; and (3) the unrealized loss on other investments due to the change in an accounting rule discussed on page 6, which lowered earnings by $0.02 per share.  While the Company expects to record additional adjustments to one or more of these items during the remaining six 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⁾  Revised commodity price assumptions reflect the Company's forecast for the remainder of fiscal 2019.