National Fuel Reports Fourth Quarter and Full Year Fiscal 2016 Earnings

National Fuel Reports Fourth Quarter and Full Year Fiscal 2016 Earnings

National Fuel Gas Company (“National Fuel” or the “Company”) (NYSE:NFG) today announced consolidated results for the three months and fiscal year ended September 30, 2016. National Fuel had consolidated earnings for the quarter ended September 30, 2016, of $37.6 million or $0.44 per share, compared to the prior year’s fourth quarter consolidated loss of $187.7 million or $2.22 per share. For fiscal 2016, the Company had a consolidated net loss of $291.0 million or $3.43 per share, versus a consolidated net loss of $379.4 million or $4.50 per share in fiscal 2015.

FISCAL 2016 FOURTH QUARTER SUMMARY

• Consolidated net income of $37.6 million or $0.44 per share
• Operating Results (earnings before items impacting comparability) of $56.6 million or $0.66 per share (non-GAAP reconciliation on page 2)
• Impairment of oil and gas properties of $32.8 million ($19.0 million after tax)
• Adjusted EBITDA of $170.1 million, up from $153.6 million in the prior year (non-GAAP reconciliation on page 26)
• Net production of 39.8 Bcfe, a 6% increase from prior year, resulting in record annual net production for fiscal 2016
• Price-related production curtailments of 6.2 Bcf in Appalachia
• Average natural gas prices after hedging of $3.09 per Mcf, down $0.26 per Mcf from the prior year
• Average oil prices after hedging of $60.01 per Bbl, down $6.39 per Bbl from the prior year
• Midstream businesses Adjusted EBITDA of $67.5 million, up from $56.7 million in the prior year (non-GAAP reconciliation on page 27)

MANAGEMENT COMMENTS

Ronald J. Tanski, President and Chief Executive Officer of National Fuel Gas Company, stated: “We are pleased to finish our 2016 fiscal year with a strong fourth quarter. Realized commodity prices that declined by more than 10% over the entire fiscal year had a negative effect on our financial performance, as did weather that was 16% warmer than normal. Nonetheless, we were able to improve on our overall results from the prior year. Our team’s continued focus on cost control and operational efficiencies across the Company’s entire value chain helped drive the improved results for the year.

“Already into the second month of our 2017 fiscal year, we continue to focus on executing our integrated plans and navigating the Company through an increasingly challenging environment in the domestic energy industry. We expect to continue the methodical development of our vast, industry-leading low cost natural gas resource in the Marcellus and Utica shales. At the same time, we will leverage our valuable pipeline footprint and over 100 years of operational experience to responsibly build out and maintain the infrastructure necessary to supply the clean-burning fuel that keeps our utility customers warm, and connect the new supply sources to demand centers across the region. I am confident that our asset base and unique integrated structure will continue to provide us with a competitive advantage and that our strategy will deliver increasing returns for our shareholders, and position National Fuel as a premier energy company for years to come."

OPERATING RESULTS

DISCUSSION OF RESULTS BY SEGMENT

The following discussion of the earnings of each segment is summarized in a tabular form on pages 9 through 12 of this report. It may be helpful to refer to those tables while reviewing this discussion. Note that management defines Operating Results as reported GAAP earnings before items impacting comparability, and Adjusted EBITDA as reported GAAP earnings before the following items: interest expense, depreciation and amortization, interest and other income, impairments, items impacting comparability, and income taxes.

Upstream Business

Exploration and Production Segment

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

Net income in the Exploration and Production segment in the current year’s fourth quarter was $16.7 million or $0.20 per share, compared to a net loss of $207.0 million or $2.45 per share in the prior year’s fourth quarter, an increase of $223.7 million, or $2.65 per share. The increase in the Exploration and Production segment's fourth quarter net income is mainly due to lower charges that were recorded to write down the value of Seneca’s oil and natural gas reserves under the full cost method of accounting. The non-cash, pre-tax impairment charge recorded in the current year's fourth quarter was $32.8 million ($19.0 million after-tax) versus $417.2 million ($240.8 million after-tax) in the prior year. The full cost method of accounting requires that Seneca perform a quarterly “ceiling test” to compare the present value of future 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. While possible, Seneca does not expect to incur an impairment charge in the first quarter of fiscal 2017 due to the improvement in oil and gas prices and lower lease operating expenses and development costs.

Excluding items impacting comparability, including the impairment charges discussed above, Operating Results in the Exploration and Production segment in the current year’s fourth quarter were $35.7 million, or $0.42 per share, compared to $19.0 million, or $0.22 per share, in the prior year’s fourth quarter, an increase of $16.7 million or $0.20 per share. The increase in Operating Results is mainly due to higher natural gas production, lower operating expenses and a lower effective tax rate, offset partially by lower realized natural gas and crude oil prices and lower oil production.

Seneca's fourth quarter net production was 39.8 billion cubic feet equivalent ("Bcfe"), an increase of 2.2 Bcfe, or 6 percent, from the prior year, and a decrease of 4.1 Bcfe, or 9 percent, versus the third quarter of fiscal 2016. Net natural gas production increased 2.5 Bcf, or 8 percent, versus prior year due mainly to new incremental firm transportation capacity that became available to Seneca during the first quarter of fiscal 2016. Seneca voluntarily curtailed an estimated 6.2 Bcf of net natural gas production in the fourth quarter as a result of depressed local spot prices in Pennsylvania. Seneca’s crude oil production decreased 54 thousand barrels ("Mbbl"), or 7 percent, due mainly to the continuing impact of a disruption in steam flood operations that occurred during the first quarter in the North Midway Sunset field. Steam volumes increased at North Midway Sunset during the fourth quarter of fiscal 2016 and field production is expected to return to pre-disruption levels in the first half of fiscal 2017.

Seneca's average realized natural gas price, after the impact of hedging, for the fourth quarter was $3.09 per thousand cubic feet ("Mcf"), a decrease of $0.26 per Mcf versus the prior year. Seneca's average realized oil price, after the impact of hedging, was $60.01 per barrel ("Bbl"), a decrease of $6.39 per Bbl. Seneca's average realized natural gas and oil prices benefited from an uplift of $0.82 per Mcf and $20.55 per Bbl, respectively, from financial hedges settled during the quarter.

The decrease in Seneca’s fourth quarter operating expenses was driven by lower lease operating and transportation expense ("LOE") and lower depreciation, depletion and amortization ("DD&A") expense. LOE decreased due to lower per unit operating costs, offset by the impact of higher natural gas production and the associated gathering costs. On a per unit of production basis, LOE decreased from $1.07 per Mcf equivalent ("Mcfe") to $0.97 per Mcfe. The $0.10 per Mcfe decrease is largely due to a reduction in well maintenance and steam fuel costs in Seneca's California division and lower salt water disposal and maintenance costs in Seneca's Appalachian division. DD&A expense decreased due to lower per unit DD&A, offset partially by the impact of higher production. Seneca’s per unit DD&A decreased $0.54 per Mcfe to $0.69 per Mcfe due to a lower depletable fixed asset balance resulting mainly from the ceiling test impairment charges recorded during the prior four quarters.

A lower effective income tax rate also benefited Seneca’s earnings. The lower effective rate was principally attributed to a tax credit related to a solar farm that went in service at Seneca’s California operations in the fourth quarter. Adjustments related to the intercompany tax sharing agreement in place amongst the Company’s subsidiaries also contributed to the lower effective rate.

The net loss in the Exploration and Production segment for fiscal 2016 was $452.8 million or $5.34 per share, compared to a net loss of $557.0 million, or $6.60 per share, in fiscal 2015, an improvement of $104.2 million or $1.26 per share. The decrease in the Exploration and Production segment's fiscal 2016 net loss is mainly due to lower charges that were recorded to write down the value of Seneca’s oil and natural gas reserves under the full cost method of accounting. The total non-cash, pre-tax impairment charge recorded in fiscal 2016 was $948.3 million ($550.0 million after-tax) versus $1.1 billion ($650.2 million after-tax) in the prior fiscal year.

Excluding items impacting comparability, including the impairment charges discussed above, Operating Results in the Exploration and Production segment for fiscal 2016 were $101.7 million, or $1.19 per share, compared to $78.4 million, or $0.92 per share, in fiscal 2015, an increase of $23.3 million or $0.27 per share. The increase in Operating Results is mainly due to higher production, lower operating expenses and a lower effective tax rate, offset partially by lower realized natural gas and crude oil prices and higher interest expense.

Seneca generated record net production of 161.1 Bcfe in fiscal 2016, an increase of 3.3 Bcfe, or 2 percent, versus fiscal 2015. Seneca voluntarily curtailed an estimated 34.6 Bcf of net natural gas production in fiscal 2016. Seneca's average realized natural gas and oil prices, after the impact of hedging, were $3.02 per Mcf and $57.91 per Bbl, respectively, a decrease of $0.36 per Mcf and $12.45 per Bbl, versus fiscal 2015.

LOE expense decreased primarily due to lower repairs and maintenance expenses and overall operating costs, which decreased Seneca’s average per unit LOE by $0.10 per Mcfe, offset slightly by the impact of higher production and the associated gathering costs. Property, franchise and other taxes decreased due to lower Pennsylvania impact fee payments and California assessments. DD&A expense decreased $0.65 per Mcfe to $0.87 per Mcfe as a result of lower depletable fixed asset balance following the ceiling test impairment charges.

Year End Proved Reserves

Seneca’s total proved crude oil and natural gas reserves were 1,849 Bcfe at September 30, 2016 versus 2,344 Bcfe at September 30, 2015. The 495 Bcfe decrease was due primarily to 262 Bcfe of mineral sales, another 262 Bcfe of net negative revisions, and 161 Bcfe of annual production, offset by a 190 Bcfe of extensions and discoveries. Seneca’s total proved undeveloped reserves (“PUDs”) at the end of fiscal 2016 were 543 Bcfe, or 29 percent of proved reserves, which was down from 35 percent of proved reserves at the end of fiscal 2015.

As part of the joint development agreement (“JDA”) entered into in November 2015 and extended in June 2016, Seneca conveyed approximately 246 Bcfe of natural gas reserves to the JDA partner in fiscal 2016. The Company expects to convey an additional 69 Bcfe of proved reserves to the JDA partner in fiscal 2017. In addition to the JDA, the Company sold approximately 16 Bcfe of Upper Devonian reserves in fiscal 2016.

Revisions to previous proved reserve estimates resulted in a net reduction of 262 Bcfe, with 227 Bcfe, or 87 percent, due to lower oil and gas pricing. Similar to the quarterly ceiling test calculation discussed above, Seneca is required under SEC accounting rules to use 12-month historical oil and gas pricing to estimate its proved reserves. Average natural gas and oil prices used to estimate the Company’s proved reserves decreased $0.75 per Mcf and $18.57 per Bbl, respectively, from 2015. The Company is able to record positive price related revisions to its proved reserves if oil and gas prices increase.

Adjusting for sales and revisions, Seneca replaced 117 percent of its production in fiscal 2016 versus 404 percent in fiscal 2015. The decrease was driven primarily by the JDA and an overall reduction in development activity in Appalachia, where the Company went from operating 3 rigs in fiscal 2015 to a single rig in the second quarter of fiscal 2016.

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 fourth quarter earnings decreased $1.7 million versus the prior year as the increase in the segment’s operating income was more than offset by lower other income and higher income taxes. Operating income increased $2.9 million, or 9 percent, as a result of the three expansion projects - Northern Access 2015, Westside Expansion & Modernization, and Tuscarora Lateral - that were placed in service during the first quarter of fiscal 2016. Other income decreased $1.4 million as the Company recorded lower allowance for funds used during construction (“AFUDC”) following the in-service of the three expansion projects that were under construction during the prior year. The segment’s effective tax rate was higher in the fourth quarter due to adjustments related to the intercompany tax sharing agreement in place amongst the Company's subsidiaries.

Similarly, the Pipeline and Storage segment's fiscal 2016 earnings decreased $3.7 million versus the prior year as the increase in operating income was more than offset by higher interest expense and income taxes. Operating income increased $4.4 million, or 3 percent, as a result of the three expansion projects that were placed in service during the first quarter of fiscal 2016. The impact of the expansion projects were partially offset by a decrease in revenues from short-term seasonal contracts and a reduction in some of Supply Corporation’s and Empire’s tariff rates, as well as higher post-retirement benefit and executive compensation costs. The increase in interest expense was due to the full year impact of the long-term debt issuance that occurred at the end of the quarter ended June 30, 2015. The segment’s effective tax rate was higher in the fourth quarter due to changes in intercompany tax adjustments recorded in the current year.

Gathering Segment

The Gathering segment’s operations are carried out by National Fuel Gas Midstream Corporation’s subsidiary 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 fourth quarter earnings increased 12 percent due to higher gathering revenues, offset partially by higher Operation and Maintenance ("O&M"), DD&A and interest expenses. Operating revenues increased $5.2 million, or 29 percent, as a result of the increase in Seneca's gross production volumes during the quarter. O&M expense increased on higher costs associated with the operation of various compression facilities that were placed in service during the current fiscal year. DD&A expense increased due to higher gross plant in service during the quarter. Interest expense increased due to a decline in capitalized interest on lower construction work in progress during the current quarter.

The Gathering segment’s fiscal 2016 earnings declined 4 percent versus fiscal 2015 as the increase in operating income was more than offset by an increase in interest expense. Operating income increased $5.4 million, or 9 percent, as gathering revenues from higher system throughput more than offset higher O&M and DD&A expenses. Operating revenues increased $12.2 million, or 16 percent, due to the increase in Seneca's gross production volumes in 2016. O&M expense increased on higher costs associated with the operation of various compression facilities that were placed in service during the current fiscal year. DD&A expense increased due to higher gross plant in service during the year. The increase in interest expense was due to the full year impact of the long-term debt issuance that occurred at the end of the quarter ended June 30, 2015, coupled with lower capitalized interest.

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 $0.02 per share improvement in the Utility segment's fourth quarter net loss was largely attributable to lower O&M expenses offset slightly by higher DD&A expense. O&M expense decreased $5.6 million versus the prior year due to lower maintenance, personnel, and post-retirement benefit costs.

The Utility segment’s fiscal 2016 earnings decreased 19 percent due to the warmer winter heating season and the impact of a regulatory true-up adjustment in fiscal 2015, offset partially by a reduction in O&M expenses. Warmer weather during the winter heating season had a negative impact on the segment’s margins, which contributed to a $0.15 per share decline in the Utility’s earnings. In New York, the impact of weather variations on earnings is largely mitigated by that jurisdiction’s weather normalization clause. O&M expense decreased $10.8 million in fiscal 2016 due to a decline in uncollectible customer accounts and lower maintenance, personnel, and post-retirement benefit costs.

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 fourth quarter earnings were relatively flat when compared to the prior year. For fiscal 2016, earnings declined $3.4 million due primarily to lower customer volumes and margins, which were negatively impacted by the warmer winter weather and stronger natural gas prices at local purchase points relative to NFR’s NYMEX-based customer sales contracts.

Corporate and All Other

The Corporate and All Other category net loss of $3.0 million for the quarter ended September 30, 2016, compares to a net loss of $3.5 million in the prior year’s fourth quarter. The $0.5 million decrease in the net loss impacted consolidated earnings by less than $0.01 per share.

The Corporate and All Other category net loss of $0.5 million for the year ended September 30, 2016, compares to a net loss of $5.7 million in the prior year. The $5.2 million decrease in the net loss was due to lower corporate-level expenses and lower income taxes.

EARNINGS GUIDANCE

The Company is reaffirming its earnings guidance for fiscal 2017 with a range of $2.85 to $3.15 per share. While the earnings guidance range remains unchanged, the Company is updating fiscal 2017 capital expenditure and production guidance and revising some of its Exploration & Production forecast assumptions.

EARNINGS TELECONFERENCE

The Company will host a conference call on Friday, November 4, 2016, 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) 844-742-4246, using conference ID number “97603563.” 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) 855-859-2056 or 404-537-3406, using conference ID number “97603563.” Both the webcast and telephonic replay will be available until the close of business on Friday, November 11, 2016.

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; impairments under the SEC’s full cost ceiling test for natural gas and oil reserves; changes in the price of natural gas or oil; 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; 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; 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 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; economic disruptions or uninsured losses resulting from major accidents, fires, severe weather, natural disasters, terrorist activities, acts of war, cyber attacks or pest infestation; significant differences between the Company’s projected and actual capital expenditures and operating expenses; 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; increasing health care costs and the resulting effect on health insurance premiums and on the obligation to provide other post-retirement benefits; 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.