National Fuel Reports Third Quarter Earnings and Announces Preliminary Guidance for Fiscal 2022

WILLIAMSVILLE, N.Y., Aug. 05, 2021 (GLOBE NEWSWIRE) -- National Fuel Gas Company (“National Fuel” or the “Company”) (NYSE:NFG) today announced consolidated results for the third quarter of its 2021 fiscal year and for the nine months ended June 30, 2021.

FISCAL 2021 THIRD QUARTER SUMMARY

• GAAP net income of $86.5 million, or $0.94 per share, compared to $41.3 million, or $0.47 per share, in the prior year.
• Adjusted operating results of $85.7 million, or $0.93 per share, compared to $50.0 million, or $0.57 per share, in the prior year (see non-GAAP reconciliation on page 2).
• Adjusted EBITDA of $234.2 million, an increase of 36%, compared to $171.9 million in the prior year (see non-GAAP reconciliation on page 24).
• Pipeline & Storage segment Adjusted EBITDA of $53.1 million, an increase of 5% from the prior year.
• Gathering segment Adjusted EBITDA of $39.9 million, an increase of 43% from the prior year.
• E&P segment Adjusted EBITDA of $116.1 million, an increase of 79% from the prior year.
• E&P segment net production of 83.1 Bcfe, an increase of 27.1 Bcfe, or 48%, from the prior year.
• E&P segment cash operating costs (combined G&A expenses, LOE expense, other operation and maintenance expense, and property, franchise, and other taxes), of $1.13 per Mcfe, a 5% decrease from the prior year.
• Average realized natural gas prices of $2.20 per Mcf, an increase $0.28 per Mcf from the prior year.
• Average realized oil prices of $59.22 per Bbl, an increase of $8.52 per Bbl from the prior year.
• Company is increasing its fiscal 2021 earnings guidance to a range of $4.05 to $4.15 per share, an increase of $0.15 at the midpoint, excluding items impacting comparability (see Guidance Summary on page 8).
• Company is initiating its fiscal 2022 earnings guidance with a range of $4.40 to $4.80 per share, an increase of 12% from the midpoint of the Company's updated fiscal 2021 guidance (see Guidance Summary on page 8).

MANAGEMENT COMMENTS

David P. Bauer, President and Chief Executive Officer of National Fuel Gas Company, stated: “National Fuel had a strong third quarter, with adjusted operating results per share increasing more than 60% from the prior year. As we look to fiscal 2022, the Company is poised for continued earnings growth, as evidenced by our greater than 10% projected increase in earnings per share, driven by the significantly improved outlook for natural gas prices and the expected completion of our FM100 expansion and modernization project in late calendar 2021. Once complete, this project, in addition to providing long-term system integrity and reliability benefits for our existing pipeline transportation customers, puts National Fuel on a pathway to generating significant annual free cash flow across each of our major businesses, allowing the Company to maintain the strength of its balance sheet while continuing to return cash to shareholders in the years ahead.”

RECONCILIATION OF GAAP EARNINGS TO ADJUSTED OPERATING RESULTS

DISCUSSION OF GUIDANCE UPDATE

National Fuel is revising its fiscal 2021 earnings guidance to reflect the results of the third quarter, along with updated assumptions for the balance of the year, as detailed on page 8. The Company is now projecting that earnings, excluding items impacting comparability, will be within the range of $4.05 to $4.15 per share, an increase of $0.15 per share from the midpoint of the Company’s prior guidance range.

For the balance of fiscal 2021, Seneca currently has price certainty on approximately 79% of its expected remaining Appalachian production, utilizing a combination of physical firm sales contracts and financial hedges, including swaps, and floor protection on an additional approximately 9% of its expected remaining Appalachian production via no-cost collars. Additionally, Seneca has financial hedges in place for approximately 72% of its expected remaining oil production in fiscal 2021.

The Company is also initiating preliminary guidance for fiscal 2022 with earnings projected to be within a range of $4.40 to $4.80 per share, or $4.60 per share at the midpoint of the range, an increase of 12% from the midpoint of the fiscal 2021 guidance range. The anticipated increase in earnings is being driven largely by higher anticipated commodity price realizations and expected late calendar 2021 completion of the Company's FERC-regulated FM100 expansion and modernization project. This project is expected to generate approximately $50 million of annualized revenue and 330,000 Dekatherms per day of new firm transportation capacity. This incremental pipeline capacity provides a key outlet for Seneca’s natural gas production and is the primary driver behind the forecasted growth in natural gas production and the associated impact on Gathering revenues.

With this incremental transportation capacity, Seneca’s fiscal 2022 net production is increasing to an expected range of 335 to 365 Bcfe, an increase of 25 Bcfe versus fiscal 2021 at the midpoint of the respective guidance ranges. In addition, the Company anticipates its natural gas price realizations after hedging to increase by approximately $0.10 per Mcf from its estimated fiscal 2021 realizations, driven in large part by higher expected NYMEX and regional spot prices for natural gas. Overall, Seneca has firm sales contracts in place for approximately 93% of its expected fiscal 2022 Appalachian production at the midpoint of the Company's production guidance range. The Company is also well positioned with respect to potential swings in natural gas prices in fiscal 2022, with financial hedges on approximately 76% of Seneca’s projected fiscal 2022 Appalachian natural gas production.

The Company’s consolidated capital expenditures in fiscal 2022 are expected to be in a range of $640 million to $760 million, a decrease of $90 million versus the midpoint of its fiscal 2021 guidance. The primary drivers are a significant decrease in Pipeline and Storage segment capital as a result of the expected completion of its FM100 project, partially offset by a higher average activity level in the Exploration and Production segment. The Company added a second drilling rig in the second quarter of fiscal 2021 and expects to maintain its current two-rig program for the entirety of fiscal 2022 along with elevated levels of completion activity designed to efficiently utilize the entirety of Seneca’s new transportation capacity over the course of the fiscal year.

Additional details on the Company's updated forecast assumptions and business segment guidance for fiscal 2021 and fiscal 2022 are outlined in the table on page 8.

DISCUSSION OF THIRD QUARTER RESULTS BY SEGMENT

The following earnings discussion of each operating segment for the quarter ended June 30, 2021 is summarized in a tabular form on pages 9 and 10 of this report (earnings drivers for the nine months ended June 30, 2021 are summarized on pages 11 and 12). It may be helpful to refer to those tables while reviewing this discussion.

Note that management defines Adjusted Operating Results as reported GAAP earnings adjusted for items impacting comparability, and Adjusted EBITDA as reported GAAP earnings before the following items: interest expense, income taxes, depreciation, depletion and amortization, other income and deductions, impairments, and other items reflected in operating income that impact comparability.

Upstream Business

Exploration and Production Segment

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

Seneca’s third quarter GAAP earnings increased $45.4 million versus the prior year, which includes the impact of a non-cash ceiling test impairment charge of $13.2 million (after-tax) recorded in the prior year's third quarter. Excluding this item, Seneca’s third quarter earnings increased $32.2 million primarily due to the positive impacts of higher natural gas production, higher realized natural gas and crude oil prices as well as lower per unit operating costs, partially offset by lower crude oil production and a higher effective income tax rate.

Seneca produced 83.1 Bcfe during the third quarter, an increase of 27.1 Bcfe, or 48%, from the prior year. The improvement was primarily from a 27.3 Bcf increase in natural gas production, largely related to the Company's fourth quarter fiscal 2020 acquisition of Appalachian upstream assets, as well as production growth from Seneca's other core development areas, partially offset by a 4% decrease, or 26 MBbls, of crude oil production in California largely due to natural declines. Approximately 21.6 Bcf of the natural gas production increase came from the Eastern Development Area ("EDA"), with the remainder attributable to Seneca’s Western Development Area ("WDA").

Seneca's average realized natural gas price, after the impact of hedging and transportation costs, was $2.20 per Mcf, an increase of $0.28 per Mcf from the prior year. This increase was primarily due to higher NYMEX prices and higher spot prices at local sales points in Pennsylvania. Seneca's average realized oil price, after the impact of hedging, was $59.22 per Bbl, an increase of $8.52 per Bbl compared to the prior year. The improvement in oil price realizations was primarily due to stronger commodity pricing.

Lease operating and transportation (“LOE”) expense increased $20.6 million primarily due to higher transportation costs in Appalachia from increased production, as well as higher well repairs, workover activity and steam fuel costs in California. LOE expense includes $48.1 million in intercompany expense for gathering and compression services used to connect Seneca’s Marcellus and Utica production to sales points along interstate pipelines. DD&A expense increased $6.5 million due largely to higher natural gas production, partially offset by the impact of ceiling test impairments recorded during fiscal 2020. Seneca's general and administrative ("G&A") expense increased $2.2 million due primarily to higher personnel costs and technology-related expenses. Other taxes increased $3.5 million primarily due to higher impact fee accruals in Pennsylvania, driven by higher expected NYMEX natural gas prices for calendar 2021. The increase in Seneca's effective income tax rate was primarily driven by a higher effective state income tax rate as a result of the Company's Appalachian acquisition that caused a change in the mix of earnings between state jurisdictions.

On a unit of production basis, Seneca's combined general and administrative ("G&A"), LOE, other operation and maintenance ("O&M") expense, and Property, Franchise, and Other Taxes decreased $0.06 per Mcfe, or 5%, during the quarter.

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 third quarter GAAP earnings decreased $0.7 million versus the prior year as higher operating revenues were more than offset by the negative impacts of higher O&M expense, higher DD&A expense and higher interest expense. The increase in operating revenues of $6.3 million, or 8%, was largely due to new demand charges for transportation service from the Company's Empire North expansion project, which was placed in service near the end of the fourth quarter of fiscal 2020, combined with an increase in revenues from a surcharge for pipeline safety and greenhouse gas regulatory costs, which went into effect in November 2020 in accordance with Supply Corporation's fiscal 2020 rate case settlement. Additionally, the Company recognized increased revenue from a surcharge mechanism for power costs related to electric motor drive compression on the Empire North project, for which offsetting O&M expense was recognized during the quarter. These positive items were partially offset by a modest decrease in transportation revenue from miscellaneous contract revisions. O&M expense increased $3.7 million primarily due to higher pipeline integrity costs, higher compressor and facility maintenance costs, and higher personnel costs, as well as the aforementioned Empire power costs. The increase in DD&A expense of $1.3 million was primarily attributable to incremental depreciation from the Empire North expansion project. The increase in interest expense of $2.3 million was primarily driven by additional long-term borrowings from the Company's long-term debt issuance in June 2020.

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 primarily delivers Seneca’s gross Appalachian production to the interstate pipeline system.

The Gathering segment’s third quarter GAAP earnings increased $5.2 million versus the prior year. The earnings increase was primarily driven by higher operating revenues, which was partially offset by higher DD&A expense, higher O&M expense, higher interest expense and a higher effective income tax rate. Operating revenues increased $15.4 million, or 46%, primarily due to increased gathering throughput resulting from the Company's Appalachian acquisition in the fourth quarter of fiscal 2020 and from new Marcellus and Utica wells that were brought on-line. The increase in DD&A expense of $2.9 million was primarily attributable to incremental depreciation expense related to the Company's Appalachian acquisition, as well as higher average depreciable plant in service compared to the prior year. Compression leasing expenses, as well as higher facility, personnel and contractor costs, all associated with the Appalachian acquisition, were primarily responsible for the $3.3 million increase in O&M expense. Interest expense increased by $1.7 million from the prior year, primarily driven by additional long-term borrowings from the Company's long-term debt issuances in June 2020 and February 2021. The increase in the Gathering segment's effective income tax rate was primarily driven by a higher effective state income tax rate as a result of the Company's Appalachian acquisition that caused a change in the mix of earnings between state jurisdictions.

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 third quarter GAAP earnings decreased $1.4 million versus the prior year primarily due to lower customer margins (operating revenues less purchased gas sold) and higher DD&A expense. The decline in customer margin was due primarily to warmer weather in Distribution's Pennsylvania service territory that resulted in a decrease in customer usage, partially offset by higher revenues earned through the Company's system modernization tracking mechanism in its New York service territory. Weather in Distribution's Pennsylvania service territory was 20% warmer on average than last year. The impact of weather variations on earnings for the quarter in Distribution's New York service territory is largely mitigated by that jurisdiction's weather normalization clause. The $0.6 million increase in DD&A expense was primarily attributable to higher average depreciable plant in service compared to the prior year.

Corporate and All Other

The Company’s operations that are included in Corporate and All Other generated combined earnings of $0.2 million in the current year third quarter, which was $3.4 million lower than the combined earnings of $3.6 million in the prior-year third quarter. The decrease in earnings was primarily driven by lower unrealized gains on investment securities quarter over quarter.

EARNINGS TELECONFERENCE

The Company will host a conference call on Friday, August 6, 2021, at 11 a.m. Eastern Time to discuss this announcement. Pre-registration is required to access the teleconference by phone in a listen-only mode by following this link: http://www.directeventreg.com/registration/event/1368175. To access the webcast, visit the Events Calendar under the News & Events page on the NFG Investor Relations website at investor.nationalfuelgas.com. A replay of the conference call will be available approximately two hours following the teleconference at the same website link and by phone (toll-free) at 800-585-8367 using conference ID number “1368175”. Both the webcast and conference call replay will be available until the close of business on Friday, August 13, 2021.

National Fuel is an integrated energy company reporting financial results for four operating segments: Exploration and Production, Pipeline and Storage, Gathering, and Utility. 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: 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; 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; the length and severity of the ongoing COVID-19 pandemic, including its impacts across our businesses on demand, operations, global supply chains and liquidity; 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; changes in the price of natural gas or oil; impairments under the SEC’s full cost ceiling test for natural gas and oil reserves; the creditworthiness or performance of the Company’s key suppliers, customers and counterparties; 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; delays or changes in costs or plans with respect to Company projects or related projects of other companies, including disruptions due to the COVID-19 pandemic, as well as difficulties or delays in obtaining necessary governmental approvals, permits or orders or in obtaining the cooperation of interconnecting facility operators; the Company's ability to complete planned strategic transactions; the Company's ability to successfully integrate acquired assets and achieve expected cost synergies; 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; the impact of information technology disruptions, cybersecurity or data security breaches; 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; 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; economic disruptions or uninsured losses resulting from major accidents, fires, severe weather, natural disasters, terrorist activities or acts of war; significant differences between the Company’s projected and actual capital expenditures and operating expenses; or increasing costs of insurance, changes in coverage and the ability to obtain insurance. The Company disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date thereof.

NATIONAL FUEL GAS COMPANY
AND SUBSIDIARIES

GUIDANCE SUMMARY

As discussed on page 2, the Company is revising its earnings guidance for fiscal 2021 and initiating preliminary guidance for fiscal 2022. Additional details on the Company's forecast assumptions and business segment guidance for fiscal 2021 and fiscal 2022 are outlined in the table below.

The revised earnings guidance range does not include the impact of certain items that impacted the comparability of earnings during the nine months ended June 30, 2021, including: (1) the after-tax impairment of oil and gas properties, which reduced earnings by $0.60 per share; (2) the after-tax gain on sale of timber properties, which increased earnings by $0.40 per share; and (3) the after-tax premium paid on early redemption of debt, which reduced earnings by $0.12 per share. While the Company expects to record certain adjustments to unrealized gain or loss on investments during the three months ending September 30, 2021, the amounts of these and other potential adjustments are not reasonably determinable at this time. As such, the Company is unable to provide earnings guidance other than on a non-GAAP basis.

* Fiscal 2021 commodity price assumptions are for the remaining 3 months of the fiscal year.