National Fuel Reports Second Quarter Earnings

National Fuel Reports Second Quarter Earnings

National Fuel Gas Company (“National Fuel” or the “Company”) (NYSE:NFG) today announced consolidated results for the second quarter of its 2017 fiscal year and for the six months ended March 31, 2017.

FISCAL 2017 SECOND QUARTER SUMMARY

• Consolidated net income of $89.3 million or $1.04 per share compared to a consolidated net loss of $147.7 million or $1.74 per share in the prior year
• Adjusted EBITDA of $227.0 million, up from $224.4 million in the prior year (non-GAAP reconciliation on page 22)
• Net production of 45.6 Bcfe, a 16% increase from prior year
• Seneca combined LOE, G&A and DD&A expenses of $1.92 per Mcfe, a $0.48 per Mcfe decrease from the prior year
• Gathering revenues of $28.0 million on 50.6 Bcf of system throughput, a 29% increase from the prior year
• Weather in Utility's Pennsylvania service territory 4.1% warmer than prior year and 15.5% warmer than normal
• Raising and tightening fiscal 2017 earnings guidance to a range of $3.20 to $3.35 per share
• Raising and tightening fiscal 2017 production guidance to a range of 165 to 180 Bcfe

MANAGEMENT COMMENTS

Ronald J. Tanski, President and Chief Executive Officer of National Fuel Gas Company, stated: “Strong performance in our Exploration & Production and Gathering segments over each of our last two quarters bodes well for our whole fiscal year. These segments continue to benefit from improving natural gas prices in the Appalachian basin. Given the relative near-term strength we are seeing in local pricing, we are positioning our near-term development and marketing plans to target a 10-plus percent annual growth rate in our Appalachian production over the next three years and lock-in attractive returns on our low-cost drilling program and gathering investments. Seneca is in the process of adding a second rig to prepare for the start of its Atlantic Sunrise capacity and eventually begin Utica Shale development in Tioga County, Pa., in fiscal 2018, providing opportunities for further growth.

“The higher earnings in our unregulated segments more than offset the decline in earnings in our regulated Pipeline & Storage and Utility segments, where a number of minor factors drove earnings modestly lower than the previous year. Since most of the daily operational activities of the regulated companies remain fairly routine from year to year, these minor variances are not uncommon. However, the increasingly difficult regulatory policies in New York are impacting our ability to make reasoned decisions with respect to additional investments in these segments in the state. Nonetheless, our dedicated employees continue to execute our operational plan to ensure safe and reliable natural gas service for our customers in New York and Pennsylvania.

“While we sort through the delay of our Northern Access pipeline project, we will concentrate on our investment opportunities outside the state of New York. As we focus on our Exploration & Production and Gathering segments, along with ongoing investment in the expansion and modernization of our pipeline systems where possible, I am confident that we can continue to grow our integrated businesses.”

DISCUSSION OF RESULTS BY SEGMENT

The following discussion of the earnings of each segment is summarized in a tabular form on pages 7 through 10 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 second quarter was $33.8 million or $0.39 per share, compared to a net loss of $213.3 million or $2.52 per share in the prior year second quarter, an increase of $247.1 million or $2.91 per share. Excluding the impact of last year's impairment charge, the increase in the Exploration and Production segment's second quarter earnings is mainly due to higher natural gas production, lower operating expenses and a lower effective income tax rate, offset partially by a decrease in oil production and lower realized natural gas prices after the impact of hedging. In the prior year second quarter, Seneca recorded a $397.4 million ($230.5 million after-tax) ceiling test impairment charge to reduce the value of Seneca’s oil and gas properties. There was no ceiling test impairment charge in the current year’s second quarter.

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. At March 31, 2017, the ceiling exceeded the book value of the oil and gas properties by approximately $201.0 million. Seneca does not expect to incur any impairment charges in fiscal 2017 due to the improvement in oil and gas prices and lower expected operating and well development costs.

Seneca's net production was 45.6 billion cubic feet equivalent ("Bcfe"), an increase of 6.4 Bcfe or 16 percent versus the prior year second quarter, and 0.7 Bcfe or 2 percent versus the first quarter of fiscal 2017. Net natural gas production increased 6.7 Bcf or 19 percent versus the prior year due to higher natural gas production in Appalachia. An improvement in local natural gas pricing in Pennsylvania allowed Seneca to produce all of its available production volumes during the second quarter. Seneca voluntarily curtailed approximately 9.1 Bcf (net) of natural gas production in the prior year second quarter. Seneca’s crude oil production decreased 49 thousand barrels ("Mbbl") or 7 percent due mainly to changes in steam operations and a reduction in well workover activity at its North Midway Sunset field.

Seneca's average realized natural gas price, after the impact of hedging, for the second quarter was $2.96 per thousand cubic feet ("Mcf"), a decrease of $0.03 per Mcf versus the prior year. Seneca's average realized oil price, after the impact of hedging, was $52.92 per barrel ("Bbl"), a decrease of $0.09 per Bbl. Seneca's average realized natural gas and oil prices benefited from an uplift of $0.21 per Mcf and $4.96 per Bbl, respectively, from financial hedges settled during the quarter.

Lease operating and transportation expense ("LOE") increased $5.0 million due mainly to higher production. However, LOE expense on a per unit of production basis decreased from $0.96 per Mcfe to $0.93 per Mcfe. The $0.03 per Mcfe improvement is largely the result of higher Appalachian natural gas production, which carries a lower per unit LOE cost relative to Seneca’s California oil operations, as well as a general reduction in well repair and maintenance costs across Seneca's California and Appalachia divisions.

Seneca’s General & Administrative (“G&A”) expense decreased $2.6 million due to lower personnel costs. Seneca’s per unit of production G&A expense for the quarter was $0.36 per Mcfe, a decrease of $0.13 per Mcfe or 27 percent from the prior year.

Depreciation, depletion and amortization ("DD&A") expense decreased $8.4 million due to lower per unit DD&A, offset partially by the impact of higher production. Seneca’s per unit DD&A decreased by $0.32 per Mcf equivalent ("Mcfe") to $0.63 per Mcfe due to a lower depletable fixed asset balance resulting mainly from the ceiling test impairment charges recorded during the past year.

Seneca’s effective income tax rate decreased in the second quarter due primarily to an enhanced oil recovery tax credit related to Seneca’s California properties. This credit was applicable this year as a result of relatively low domestic crude oil prices.

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 earnings decreased from the prior year due primarily to a $3.8 million decline in operating revenues. The decrease in revenues was the result of the reduction in Supply Corporation and Empire’s rates related to their rate case settlements that went into effect in 2016, as well as a decline in short-term transportation contracts in the current quarter.

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 second quarter earnings increased $2.7 million or 36 percent versus the prior year on higher revenues offset slightly by higher operating expenses. Operating revenues increased $6.3 million as the increase in Seneca’s gross Appalachian natural gas production, which includes production from joint development wells, helped drive higher volumes across the Company’s gathering systems. The Gathering segment transported 50.6 Bcf on its systems in the second quarter, up 11.4 Bcf or 29 percent from the prior year. Operation and Maintenance (“O&M”) expenses were up $1.0 million versus the prior year due to higher costs associated with operating new compression and dehydration facilities at the segment’s Clermont gathering system.

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 second quarter earnings decreased $6.4 million or 20 percent due primarily to higher O&M and DD&A expenses and warmer weather. O&M expense increased $6.5 million versus the prior year due mainly to higher pension and benefits costs and uncollectible accounts. DD&A expense increased $1.7 million due to higher plant balances at March 31, 2017, which was primarily driven by the replacement of Distribution’s legacy customer information system that was placed in service in May 2016.

The weather was 4.1 percent warmer than last year and 15.5 percent warmer than normal in Distribution’s Pennsylvania service territory, resulting in lower retail residential and transportation customer throughput and revenues when compared to both the prior year and Company projections for earnings guidance purposes, which assumes normal weather. In New York, the impact of weather variations on earnings is largely mitigated by that jurisdiction’s weather normalization clause.

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 earnings decreased $2.6 million due to lower margin. NFR’s customer margins were negatively impacted by stronger natural gas prices at local pricing points relative to NYMEX-based sales contracts and lower volumes as a result of warmer weather during the period.

Corporate and All Other

The Corporate and All Other category had a loss of $0.5 million or $0.00 per share for the second quarter compared to earnings of $1.4 million or $0.02 per share in the prior year. The $1.9 million decrease is primarily attributable to the non-recurrence of a death benefit gain on life insurance proceeds and related tax benefits that were recognized in the prior year.

GUIDANCE

The Company is raising and tightening its earnings guidance for fiscal 2017 to a range of $3.20 to $3.35 per share to reflect the impact of actual results for the six months ended March 31, 2017, and updates to key forecast assumptions, including positive revisions to the Exploration & Production segment’s forecasted production and operating expense assumptions, as outlined in the table below.

The Company is also updating fiscal 2017 capital expenditure guidance to a range of $450 to $530 million, a decrease of $100 million at the midpoint. Expected capital expenditures for the Pipeline & Storage segment were reduced by $115 million at the midpoint to reflect the delay in the Northern Access pipeline project. Changes to Exploration & Production, up $30 million at the midpoint of the range, and Gathering, down $15 million at the midpoint, were the result of changes in the timing of Seneca’s Appalachian development activities between fiscal 2017 and fiscal 2018. There were no changes to the Utility segment’s capital expenditure budget.

(1)  Net of initial conveyance proceeds received from joint development partner for working interest in joint development wells

EARNINGS TELECONFERENCE

The Company will host a conference call on Friday, May 5, 2017, 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) 877-201-0168, using conference ID number “4568855.” 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 “4568855.” Both the webcast and a telephonic replay will be available until the close of business on Friday, May 12, 2017.

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; 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; 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 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; 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.