National Fuel Reports First Quarter Earnings

WILLIAMSVILLE, N.Y., Feb. 01, 2018 (GLOBE NEWSWIRE) -- National Fuel Gas Company (“National Fuel” or the “Company”) (NYSE:NFG) today announced consolidated results for the first quarter of its 2018 fiscal year.

FISCAL 2018 FIRST QUARTER SUMMARY

• Consolidated net income of $198.7 million, or $2.30 per share, compared to $88.9 million, or $1.04 per share, in the prior year first quarter
• Excluding the $111.0 million, or $1.29 per share, reduction in tax expense due to the remeasurement of deferred taxes,  Adjusted Operating Results for the quarter were $87.7 million, or $1.02 per share (see non-GAAP reconciliation on page 21 and discussion of federal tax reform on page 2)
• Realized net earnings benefit for the quarter of $9.5 million, or $0.11 per share, due to the reduction in the fiscal 2018 federal statutory rate from 2017 Tax Reform Act (see discussion on page 2)
• Consolidated Adjusted EBITDA of $197.8 million (non-GAAP reconciliation on page 21)
• Net natural gas and oil production of 40.1 Bcfe
• Price-related natural gas production curtailments of 1.2 Bcf in Appalachia
• Average natural gas prices, after the impact of hedging, of $2.72 per Mcf, down $0.25 per Mcf from the prior year
• Average oil prices, after the impact of hedging, of $59.79 per Bbl, up $5.08 per Bbl from the prior year
• Weather in Utility segment's Pennsylvania utility service territory 15.9% colder than last year

MANAGEMENT COMMENTS

Ronald J. Tanski, President and Chief Executive Officer of National Fuel Gas Company, stated: “Our 2018 fiscal year is off to a strong start. Operationally, our Utility and Pipeline and Storage subsidiaries entered the winter heating season prepared to provide our customers and service territories with safe and reliable natural gas services.  As expected, operating income in our Exploration and Production segment dipped as older natural gas sales and hedge contracts with more favorable prices continued to expire and production in Seneca’s Eastern Development Area followed its normal production curve.  After adding a second rig in 2017 and, in January, connecting the first new Marcellus pad in our Eastern Development Area since 2016, we expect production to increase in the second quarter as we resume our targeted path of measured production growth.

“Perhaps the biggest development in the quarter was the passing of federal tax reform, which we believe will positively impact our business, our shareholders, and our customers. The reduction in the federal tax rate should increase the Company’s earnings and cash flows over the long-term, freeing up shareholder capital to be reinvested into growing our business.  We also expect the reduction in the federal tax rate will ultimately benefit our utility and pipeline and storage customers, as well as thousands of Western New York and northwestern Pennsylvania residents and businesses.  We look forward to working with our regulators to evaluate the impact of these positive changes.”

DISCUSSION OF FEDERAL INCOME TAX REFORM

On December 22, 2017, the “Tax Cuts and Jobs Act” (the 2017 Tax Reform Act) was enacted, which made significant changes to the taxation of business entities and included provisions that materially impacted the Company’s financial statements. The most significant change was the reduction in the statutory corporate tax rate from 35 percent to 21 percent.  As a fiscal year tax payer, the Company is required to use a blended statutory federal tax rate of 24.5 percent for fiscal 2018, including the first quarter ended December 31, 2017.  The Company’s income will be taxed at the new 21 percent statutory federal tax rate in fiscal 2019 and beyond.

Excluding the impact on deferred income taxes (discussed below), the reduction in the statutory federal tax rate from 35 percent to 24.5 percent resulted in a benefit of $13.9 million, or $0.16 per share, on the Company’s consolidated first quarter earnings.  Consistent with utility rate treatment implemented after previous federal tax reforms, the Company recorded a $6.0 million regulatory refund provision ($4.4 million after-tax, or $0.05 per share) that reduced the Utility segment’s operating revenues and deferred the net effect of the reduction in tax rates by increasing the segment’s regulatory liability.  The following summarizes the impact of the federal tax rate reduction, excluding the impact on deferred income taxes, on first quarter fiscal 2018 earnings by segment:

Additionally, the Company’s deferred income taxes were remeasured as of September 30, 2017, based on the new statutory federal tax rate.  For non-rate regulated activities, the net decrease in the Company’s deferred income tax liability was recorded as a reduction to income tax expense, benefiting first quarter earnings by $111.0 million, or $1.29 per share.  For the rate regulated activities of the Utility and Pipeline and Storage segments, the change in deferred income taxes was recorded as a $65.7 million decrease in recoverable future taxes and a $271.0 million increase in taxes refundable to customers.  The 2017 Tax Reform Act includes provisions that stipulate how excess deferred income taxes related to certain accelerated depreciation benefits, which make up substantially all of the regulatory liability, are to be passed back to customers.  Potential refunds of other deferred income taxes will be determined by the federal and state regulatory agencies.  The following summarizes the impact and regulatory accounting treatment of the remeasurement of deferred income taxes by segment:

The 2017 Tax Reform Act also repealed the corporate alternative minimum tax (AMT) and provides that the Company’s existing AMT credit carryovers are refundable beginning in fiscal 2019.  As of December 31, 2017, the Company had $92 million of AMT credit carryovers that are expected to be utilized by or refunded to the Company between fiscal 2019 and fiscal 2022.

DISCUSSION OF RESULTS BY SEGMENT

The following discussion of the earnings of each segment 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 EBITDA as reported GAAP earnings before the following items: interest expense, income taxes, depreciation, depletion and amortization, interest and other income, 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 Corporation ("Seneca").  Seneca explores for, develops and produces natural gas and oil reserves, primarily in Pennsylvania and California.

Excluding the impact of federal tax reform as discussed on page 2, earnings for the Exploration and Production segment declined $9.8 million, as the positive impact of higher realized crude oil prices was more than offset by lower natural gas and crude oil production and a decline in realized natural gas prices.

Seneca’s first quarter net production was 40.1 billion cubic feet equivalent (“Bcfe”), a decrease of 4.8 Bcfe, or 11 percent, from the prior year, and a decrease of 0.2 Bcfe, or 1 percent, versus the fiscal 2017 fourth quarter.  Net natural gas production decreased 4.5 billion cubic feet (“Bcf”) versus the prior year due mainly to natural declines from Marcellus wells in the Eastern Development Area (“EDA”) where the Company last brought on a new development pad in fiscal 2016, offset partially by higher net production in the Western Development Area (“WDA”) from new Marcellus and Utica wells completed and connected to sales during the past year.  As a result of depressed local daily spot prices in Pennsylvania, Seneca voluntarily curtailed an estimated 1.2 Bcf of net natural gas production during the first quarter.

Seneca’s oil production decreased 48 thousand barrels ("Mbbl"), or 7 percent, versus the prior year and was relatively flat when compared to the fiscal 2017 fourth quarter.  The year over year decrease in production was largely due to the lagging impact of a significant reduction in well workover activity in California over the last few years in response to low crude oil prices, as well as modifications made to steam operations at the Midway Sunset fields.  Over the past two quarters, Seneca has seen a steady improvement in production levels at North and South Midway Sunset as the Company has recently increased workover activity and the fields continue to respond favorably to steaming operations.  Seneca also temporarily shut-in production at its Sespe field in Ventura County, California for a short period due to the wildfires that affected the region during the quarter.

Seneca's average realized natural gas price, after the impact of hedging and all marketing and transportation costs, was $2.72 per thousand cubic feet ("Mcf"), a decrease of $0.25 per Mcf from the prior year.  The decline in Seneca’s realized natural gas price is primarily attributable to the expiration of physical firm sales and financial hedge contracts over the past 12 months that had favorable pricing relative to current market prices and hedge book. Seneca's average realized oil price, after the impact of hedging, was $59.79 per barrel ("Bbl"), an increase of $5.08 per Bbl.  The improvement in oil price realizations was due primarily to higher market prices for West Texas Intermediate (WTI) crude oil during the quarter and stronger price differentials relative to WTI at local sales points in California.

Lease operating and transportation expense (“LOE”) was relatively flat when compared to the prior year as the impact of lower natural gas production in Appalachia, which resulted in lower gathering and other variable operating costs, was offset by  an increase in well workover activities as well as higher steam volumes at South Midway Sunset in California.  Depreciation, depletion and amortization (“DD&A”) expense decreased $1.6 million as the impact of lower production was slightly offset by a higher per unit DD&A rate, which increased by $0.03 per thousand cubic feet equivalent (“Mcfe”) to $0.68 per Mcfe due mainly to a higher depletable fixed asset balance at December 31, 2017.

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.

Excluding the impacts of federal tax reform as discussed on page 2, the Pipeline and Storage segment’s earnings increased $1.5 million due to lower Operation and Maintenance (“O&M”) expense, which was partially offset by an increase in DD&A expense.  O&M expense decreased $2.9 million compared to the prior year first quarter due mostly to lower pension and post-retirement benefit expenses and a decrease in the reserve for preliminary engineering costs on projects in development.

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.

Excluding the impacts of federal tax reform as discussed on page 2, the Gathering segment’s earnings decreased $2.0 million versus the prior year first quarter due mainly to lower operating revenues. Operating revenues declined $4.0 million due primarily to lower throughput from Seneca, which decreased by 7.4 Bcf versus the prior year.  Most of the decrease in throughput occurred on Midstream Corporation’s Covington (Tioga Co., Pa.) and Trout Run (Lycoming Co., Pa.) gathering systems, which serve producing areas where Seneca did not add any new wells over the last year and have been subject to price-related production curtailments.   In 2017, Seneca resumed development activities on its Lycoming Co., Pa. acreage. Production from new wells is expected to help increase Trout Run system throughput starting in the second quarter of fiscal 2018.

Downstream Businesses

Utility Segment

The Utility segment operations are carried out by National Fuel Gas Distribution Corporation (“Distribution”), which sells or transports natural gas to customers located in western New York and northwestern Pennsylvania.

Excluding the impact of federal tax reform as discussed on page 2, the Utility segment’s earnings were relatively flat versus the prior year as the impact of colder weather and new customer rates in Distribution’s New York service territory (effective in April 2017) was offset by an increase in O&M expense.  Weather in Distribution’s Pennsylvania service territory was 15.9 percent colder on average than last year, resulting in higher residential and transportation customer throughput and revenues.  In New York, the impact of weather variations on earnings is largely mitigated by that jurisdiction’s weather normalization clause.  O&M expense increased nearly $1.0 million due mainly to higher amortization of environmental remediation costs that resulted from the April 2017 rate case order in New York.

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 $0.7 million decrease in the Energy Marketing segment’s first quarter earnings was primarily attributable to lower customer margins. NFR’s customer margins were negatively impacted by stronger natural gas prices at local purchase points relative to NYMEX-based customer sales contracts.

Corporate and All Other

For the first quarter of fiscal 2018, the Corporate and All Other category had a net loss of $13.9 million compared to net income of $0.5 million in the prior year first quarter.  The decrease in earnings was primarily attributable to the non-cash $15.1 million loss recorded to remeasure certain deferred tax assets resulting from federal tax reform.

GUIDANCE

National Fuel is revising its fiscal 2018 earnings guidance to $3.20 to $3.40 per share, or $3.30 per share at the midpoint of the range.  The revised earnings guidance does not include the impact of the remeasurement of deferred income taxes resulting from the 2017 Tax Reform Act, which reduced the Company’s consolidated income tax expense and benefited earnings for the three months ended December 31, 2017 by $111.0 million, or $1.29 per share.  While the Company expects to record additional adjustments to its deferred income taxes as a result of the 2017 Tax Reform Act during the remaining nine months of fiscal 2018, the amounts of these and other potential adjustments are not reasonably determinable at this time.  The final determination of the impact of the income tax effects of certain items will require additional analysis and further interpretation of the 2017 Tax Reform Act from yet to be issued U.S. Treasury regulations, state income tax guidance, federal and state regulatory guidance, and technical corrections.  Some or all of these factors may be significant.  Because the amounts of final adjustments are not reasonably determinable at this time, the Company is unable to provide earnings guidance other than on a non-GAAP basis that excludes the impact of the remeasurement of deferred income taxes and other potential adjustments.

The revised earnings guidance range reflects the impact of actual results for the three months ended December 31, 2017, the impact of lower federal income tax rates on fiscal 2018 income, and other updates to key forecast assumptions, including revisions to the Exploration and Production segment’s forecasted production, natural gas and oil pricing, and operating expense assumptions, as outlined in the table below.

The Exploration and Production segment’s fiscal 2018 forecasted production was reduced by 5 Bcfe at the midpoint of the range to reflect first quarter actual production, which was negatively impacted by 1.2 Bcf of voluntary price-related natural gas curtailments and approximately 2 Bcf of unforecasted operational natural gas curtailments, and adjustments made to Seneca’s operations schedule in Appalachia that pushed a portion of fiscal 2018 production to fiscal 2019.

Excluding the impact of the remeasurement of deferred income taxes, the Company expects that the reduction in the statutory federal tax rate from 35 percent to 24.5 percent will lower the Company’s effective income tax rate for fiscal 2018 to approximately 27 percent. Furthermore, consistent with utility rate treatment implemented after previous tax reforms, the Company expects to record a regulatory refund provision of approximately $16.0 million in fiscal 2018 to reduce the Utility segment’s operating revenues and defer the net effect of the reduction in tax rates by increasing the segment’s regulatory liability. The Company recorded a $6.0 million ($4.4 million after-tax) regulatory refund provision in the first quarter.  The Company’s earnings guidance, including the impact from the Utility segment’s projected regulatory refund provision, assumes normal weather.

Additional details on the Company's forecast assumptions and business segment guidance for fiscal 2018 are outlined in the table below.

(1)   Excludes earnings impact of the remeasurement of deferred income taxes resulting from the 2017 Tax Reform Act.
(2)   Net of conveyance proceeds received from joint development partner for working interest in joint development wells.
(3)   Seneca East Division - Appalachia production guidance assumes approximately 17.5 Bcf of spot sales in FY18.

EARNINGS TELECONFERENCE

The Company will host a conference call on Friday, February 2, 2018, 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 “8999277.”  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 “8999277.”  Both the webcast and a telephonic replay will be available until the close of business on Friday, February 9, 2018.

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 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; 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; 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.

⁽¹⁾ Capital expenditures for the three months ended December 31, 2017, include accounts payable and accrued liabilities related to capital expenditures of $37.1 million, $10.7 million, $4.7 million, and $3.6 million in the Exploration and Production segment, Pipeline and Storage segment, Gathering segment and Utility segment, respectively.  These amounts have been excluded from the Consolidated Statement of Cash Flows at December 31, 2017, since they represent non-cash investing activities at that date.

⁽²⁾ Capital expenditures for the three months ended December 31, 2017, exclude capital expenditures of $36.5 million, $25.1 million, $3.9 million and $6.7 million in the Exploration and Production segment, Pipeline and Storage segment, Gathering segment and Utility segment, respectively.  These amounts were in accounts payable and accrued liabilities at September 30, 2017 and paid during the three months ended December 31, 2017.  These amounts were excluded from the Consolidated Statement of Cash Flows at September 30, 2017, since they represented non-cash investing activities at that date.  These amounts have been included in the Consolidated Statement of Cash Flows at December 31, 2017.

⁽³⁾ Capital expenditures for the three months ended December 31, 2016, include accounts payable and accrued liabilities related to capital expenditures of $25.3 million, $8.7 million, $7.9 million, and $7.1 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, 2016, since they represent non-cash investing activities at that date.

⁽⁴⁾ Capital expenditures for the three months ended December 31, 2016, exclude capital expenditures of $25.2 million, $18.7 million, $5.3 million and $11.2 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, 2016 and paid during the three months ended December 31, 2016.  These amounts were excluded from the Consolidated Statement of Cash Flows at September 30, 2016, 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, 2016.

⁽¹⁾ Percents compare actual 2017 degree days to normal degree days and actual 2017 degree days to actual 2016 degree days.

N/M - Not Meaningful

⁽¹⁾ Refer to page 13 for the General and Administrative Expense, Lease Operating Expense and Depreciation, Depletion, and Amortization Expense for the Exploration and Production segment.

⁽²⁾ Amounts include transportation expense of $0.54 and $0.53 per Mcfe for the three months ended December 31, 2017 and December 31, 2016, 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 and Adjusted EBITDA, which are non-GAAP financial measures.  The Company believes that these non-GAAP financial measures are useful to investors because they provide an alternative method for assessing the Company's ongoing operating results and for comparing the Company’s financial performance to other companies.  The Company's management uses these non-GAAP financial measures for the same purpose, and for planning and forecasting purposes.  The presentation of non-GAAP financial measures is not meant to be a substitute for financial measures in accordance with GAAP.

Management defines Adjusted Operating Results as reported GAAP earnings before items impacting comparability.  The following table reconciles National Fuel's reported GAAP earnings to Adjusted Operating Results for the three months ended December 31, 2017 and 2016:

Management defines Adjusted EBITDA as reported GAAP earnings before the following items:  interest expense, income taxes, depreciation, depletion and amortization, interest and other income, 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, 2017 and 2016: