National Fuel Reports Fourth Quarter and Full Year Fiscal 2018 Earnings

WILLIAMSVILLE, N.Y., Nov. 01, 2018 (GLOBE NEWSWIRE) -- 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, 2018.

FISCAL 2018 FOURTH QUARTER SUMMARY

• GAAP earnings of $38.0 million, or $0.44 per share, compared to $45.6 million, or $0.53 per share, in the prior year
• Adjusted operating results of $42.2 million, or $0.49 per share (see reconciliation below)
• Consolidated Adjusted EBITDA of $143.8 million compared to $142.8 million in the prior year (non-GAAP reconciliation on page 25)
• Net production of 47.3 Bcfe, an increase of 17% from the prior year
• Average natural gas prices, after the impact of hedging, of $2.45 per Mcf, down $0.46 per Mcf from the prior year
• Average oil prices, after the impact of hedging, of $57.71 per Bbl, up $2.94 per Bbl from the prior year
• Gathering segment operating income of $19.2 million, up 12% on higher system throughput

FISCAL 2018 HIGHLIGHTS

• GAAP earnings of $391.5 million, or $4.53 per share, compared to $283.5 million, or $3.30 per share, in the prior year
• Adjusted operating results of $288.8 million, or $3.34 per share (see reconciliation below)
• Net cash provided by operating activities exceeded net cash used in investing activities by $84.7 million
• Net production of 178.1 Bcfe, an increase of 3% over fiscal 2017 and the highest output in Company history
• Proved reserves at September 30, 2018, of 2.5 Tcfe, an increase of 17% from September 30, 2017
• Increased shareholder dividend for the 48th consecutive year to an annualized distribution of $1.70 per share

MANAGEMENT COMMENTS

Ronald J. Tanski, President and Chief Executive Officer of National Fuel Gas Company, stated: “National Fuel concluded another successful fiscal year with strong results.  Over the course of the year, we were busy setting Company records for Seneca’s Appalachian proved natural gas reserves and production, along with a record high level of throughput in our Gathering segment.  We continued our investments dedicated to the modernization and safety of our interstate and utility pipeline systems, and maintained our strong record of customer service and reliability.  Lower taxes from tax legislation enacted late last year helped to offset the decline in realized pricing on Seneca’s production, and the benefits of lower taxes in our Utility segment are being passed along to our utility customers.  In what appears to be a ‘new normal’ period of lower natural gas prices, we nonetheless generated positive free cash flow for the third consecutive year - a testament to the quality of our assets and our focus on cost control and achieving operational efficiencies.

“Already a month into our 2019 fiscal year, we are well positioned to build on our success.  Recently commissioned capacity on the Atlantic Sunrise project provides us with an avenue to further develop our acreage in Lycoming County, Pa., one of the most prolific positions in Appalachia.  We will continue to transition to development of the Utica shale in the Western Development Area to enhance consolidated upstream and midstream returns and take advantage of improving pricing in the basin, all the while minimizing the environmental footprint of our operations as we utilize existing infrastructure.  Combined with the stability of the rate-regulated businesses, we expect to responsibly grow the Company in a manner that strengthens our financial position and maximizes the value of our assets for our shareholders for years to come.”

FISCAL 2019 GUIDANCE

National Fuel is revising the preliminary guidance for fiscal 2019 that was announced in conjunction with the Company’s third quarter earnings release.  The Company is now projecting that earnings will be within the range of $3.35 to $3.65 per share, or $3.50 per share at the midpoint of the range, which represents a $0.16 per share increase from fiscal 2018’s adjusted operating results.  The $0.05 per share increase from the preliminary guidance is primarily due to higher expected price realizations on Seneca’s production and lower projected operating expenses at the Utility and Pipeline and Storage segments.

Seneca’s net production is expected to be in the range of 210 to 230 Bcfe, unchanged from the preliminary guidance, and a 24 percent increase over fiscal 2018 at the midpoint of the range.  The increase in Seneca’s production is also expected to generate higher throughput and revenues for the Company’s Gathering segment. At the midpoint of the guidance range, Gathering segment revenues are forecasted to increase by approximately $27 million, or 25 percent, to $135 million for fiscal 2019. Under current development plans in Appalachia, the Company expects to grow its production and gathering throughput at a 15 to 20 percent compound annual growth rate through fiscal 2022.

In addition to higher earnings expectations, the Company’s consolidated capital expenditures in fiscal 2019 are expected to be lower than disclosed in last quarter’s preliminary guidance due to reductions at the Exploration and Production and Pipeline and Storage segments.  The new range is expected to be $725 million to $810 million, at the midpoint a $167 million increase from the Company’s fiscal 2018 capital expenditures. The primary driver of the year over year increase is Seneca’s development activity in Appalachia, where the Company plans to operate three drilling rigs for the entirety of the fiscal year.  Despite the increase in Seneca’s spending, the capital budget for the Gathering segment is expected to be relatively flat year over year as Seneca shifts its Utica development into areas in the WDA where gathering infrastructure already exists and is currently being utilized to move Marcellus production.

Seneca currently has physical firm sales contracts in place with third parties that provide fixed pricing basis protection on 177 Bcf, or more than 85 percent, of its projected fiscal 2019 natural gas production.  A majority of these sales, nearly 150 Bcf, are also matched with a financial hedge that locks in revenues on that production at a weighted average realized price of $2.43 per Mcf, net of firm transportation costs.  With price certainty on a majority of its natural gas production, strong margins on California oil production, growing Gathering segment revenues, and stable earnings from the Company’s rate-regulated Pipeline and Storage and Utility segments, the Company expects that substantially all of its fiscal 2019 capital expenditures will be funded by internally generated cash flows.

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 the earnings of each operating 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 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 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 fourth quarter earnings declined $10.8 million, as the positive impacts of higher natural gas production, better realized crude oil prices, and lower lease operating and transportation (“LOE”) and other operating expenses were more than offset by the negative impacts of lower realized natural gas prices, higher depreciation, depletion and amortization (“DD&A”) expense and a higher effective income tax rate.

Seneca’s fourth quarter net production was 47.3 billion cubic feet equivalent (“Bcfe”), an increase of 7.0 Bcfe from the prior year.  Natural gas production increased 7.4 billion cubic feet (“Bcf”), or 20 percent, due primarily to production from new Marcellus and Utica wells completed and connected to sales in the EDA-Lycoming and WDA-Clermont development areas as a result of increased drilling activity.  Seneca's average realized natural gas price, after the impact of hedging and transportation costs, was $2.45 per thousand cubic feet ("Mcf"), a decrease of $0.46 per Mcf from the prior year.  The decline in Seneca’s average 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 firm sales and hedges settled in the current quarter.

Seneca’s oil production for the fourth quarter decreased 77 thousand barrels ("Mbbl") in the fourth quarter due largely to the impact of the sale of Seneca’s Sespe properties in California in the third quarter of fiscal 2018.  Sespe generated 67 Mbbl of production for the Company in the prior year’s fourth quarter.  Seneca's average realized oil price, after the impact of hedging, was $57.71 per barrel ("Bbl"), an increase of $2.94 per Bbl over the prior year.  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.

LOE expense for the fourth quarter decreased $1.5 million due mostly to lower operating costs in California following the sale of Seneca’s Sespe properties combined with lower workover and steam fuel costs across its other California properties.  These decreases were partially offset by higher gathering expenses in Appalachia due to the increase in natural gas production.  On a per unit of production basis, LOE expense was $0.88 per thousand cubic feet equivalent (“Mcfe”), a decrease of $0.19 per Mcfe from the prior year.  Other operating expenses decreased $2.4 million due mainly to a one-time payment made in the prior year to reimburse a third-party pipeline operator for development costs.

DD&A expense for the fourth quarter increased $6.4 million due to the increase in production and a higher per unit depletion rate.  The depletion rate for the quarter increased by $0.04 per Mcfe to $0.71 per Mcfe due mainly to a higher depletable fixed asset balance at September 30, 2018, as Seneca has increased development activity in Appalachia over the past year.

Income tax expense increased $9.0 million versus the prior year due largely to the combined impact of deferred state income tax adjustments recorded in the current and the prior year.  The anticipated increase in Seneca’s development activity under a three-rig program in Appalachia resulted in a reapportionment of projected Pennsylvania state income taxes and increased the effective tax rate used to calculate the segment’s deferred state income tax liability at September 30, 2018.  Coupled with a $7.9 million positive adjustment recorded in the prior year, which was related to the expected state income tax benefits of Seneca’s capacity on the Atlantic Sunrise project, the current year $2.3 million adjustment negatively impacted income tax expense by $10.2 million versus the prior year.  Additionally, the Company recorded an adjustment in the current quarter relating to the remeasurement of Seneca’s deferred income taxes due to the enactment of the 2017 Tax Reform Act.  This $2.8 million adjustment reduced the initial estimated benefit recorded in the first quarter of fiscal 2018 and increased income tax expense for the quarter. These negative impacts to the segment’s effective tax rate were partially offset by a decrease in the federal statutory rate as a result of the 2017 Tax Reform Act.

Year End Proved Reserves

Seneca’s total proved natural gas and crude oil reserves at September 30, 2018 increased 369 Bcfe, or 17 percent, to 2,523 Bcfe from 2,154 Bcfe at September 30, 2017.  In fiscal 2018, Seneca recorded 536 Bcfe of proved reserve extensions and discoveries, primarily from Utica and Marcellus locations in Appalachia, and 108 Bcfe of net positive revisions due largely to improvements in well performance.  Seneca sold 57 Bcfe of Marcellus proved reserves in connection with the conveyance of the last joint development pad in the WDA, and another 39 Bcfe of proved reserves (73 percent oil) with the sale of the Sespe properties in California.  Seneca’s total proved undeveloped reserves (“PUDs”) at the end of fiscal 2018 were 757 Bcfe, only 30 percent of total proved reserves.

Adjusting for sales, Seneca replaced 361 percent of its production in fiscal 2018, up from the 225 percent reserve replacement achieved in fiscal 2017.  The year over year improvement was due mainly to the success of Seneca’s Utica Shale appraisal program in the WDA and increased development activity in the EDA-Lycoming area.  Seneca’s three-year average finding and development cost at the end of fiscal 2018 was $0.74 per Mcfe, down $0.24 per Mcfe from the three-year average of $0.98 per Mcfe at the end of fiscal 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.

The Pipeline and Storage segment’s fourth quarter earnings increased $1.5 million due primarily to higher operating revenues, and a lower effective income tax rate, offset partially by higher operating expenses.  Operating revenues increased $2.6 million, or 4 percent, versus the prior year due to new demand charges for transportation service on Supply Corporation’s Line D Expansion project, which was placed in service on November 1, 2017, an increase in storage revenues resulting from Supply Corporation’s acquisition of the remaining interest in a jointly owned storage field during the quarter, additional revenues from short-term transportation contracts, and surcharge revenues relating to Supply Corporation’s greenhouse gas and pipeline safety system enhancements that also went into effect in November 2017.

Operation and Maintenance (“O&M”) expense increased $2.8 million over the prior year due primarily to an increase in compressor and facility maintenance activity during the quarter, offset partially by lower pension and other post-retirement benefit expenses.  The combined $1.1 million increase in DD&A expense and property, franchise and other taxes was due to projects and new facilities placed in-service over the past year.  Income tax expense decreased $2.3 million due primarily to the 2017 Tax Reform Act, which reduced the Company’s federal statutory corporate tax rate.

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 $5.8 million increase in the Gathering segment’s fourth quarter earnings was due mainly to higher revenues and a lower effective income tax rate, offset partially by an increase in operating expenses.  Operating revenues increased $3.5 million, or 14 percent, due primarily to a 7.5 Bcf increase in throughput from Seneca’s Appalachian natural gas production. The Trout Run gathering system saw a 5.0 Bcf increase in throughput after Seneca resumed development activities in Lycoming County, Pa., in late fiscal 2017 and avoided price-related curtailments for much of fiscal 2018. Throughput on the Covington and Clermont gathering systems increased 2.2 Bcf and 1.1 Bcf, respectively.

O&M expense increased $0.8 million due largely to the operation of new compression facilities along the Covington gathering system, which were acquired from affiliate Seneca in March 2018, and an increase in facilities and maintenance activity at the Trout Run gathering system.  The decrease in the effective income tax rate was due primarily to the 2017 Tax Reform Act, which reduced the Company’s federal statutory corporate tax rate, and lower state income taxes resulting from tax planning and restructuring activities that were implemented during the quarter.

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 $2.9 million increase in the Utility segment’s fourth quarter net loss was due primarily to lower margin (operating revenues less purchased gas costs) and higher O&M expense, offset partially by lower property taxes and interest expense.  The decrease in the Utility’s fourth quarter margin was largely due to a change in the allocation of a cost tracking mechanism for the low income customer program in the Company’s New York service territory.   O&M expense increased $2.1 million due primarily to higher payroll costs and bad debt expense, offset partially by lower pension and other post-retirement benefit expenses.

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 net loss of $1.1 million increased $0.4 million over the prior year due largely to lower margins (operating revenues less purchased gas costs).  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 fourth quarter of fiscal 2018, the Corporate and All Other category had a net loss of $3.6 million, a $0.8 million increase over the $2.8 million net loss in the prior year.

EARNINGS TELECONFERENCE

The Company will host a conference call on Friday, November 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 “5899309.”  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 “5899309.”  Both the webcast and a telephonic replay will be available until the close of business on Friday, November 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; 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, capital expenditure and operational 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 revised fiscal 2019 earnings guidance does not include any impact to the remeasurement of deferred income taxes resulting from the 2017 Tax Reform Act.  While it is possible that the Company will record additional adjustments to its deferred income taxes as a result of the 2017 Tax Reform Act during the first three months of fiscal 2019, 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 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 possible technical corrections.  Some or all of these factors may be significant.