National Fuel Reports Fourth Quarter and Full Year Fiscal 2022 Earnings

WILLIAMSVILLE, N.Y., Nov. 03, 2022 (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, 2022.

FISCAL 2022 FOURTH QUARTER SUMMARY

• GAAP net income of $158.1 million, or $1.71 per share, compared to GAAP net income of $87.0 million, or $0.95 per share, in the prior year, an increase of 80% per share.
• Adjusted operating results of $109.3 million, or $1.19 per share, an increase of 25%, compared to $0.95 per share, in the prior year (see non-GAAP reconciliation on page 2).
• Adjusted EBITDA of $271.9 million, an increase of 26%, compared to $215.9 million in the prior year (see non-GAAP reconciliation on page 26).
  

FISCAL 2022 HIGHLIGHTS

• GAAP net income of $566.0 million, or $6.15 per share, an increase of 55% per share from the prior year.
• Adjusted operating results of $541.6 million, or $5.88 per share, an increase of 37% per share from the prior year (see non-GAAP reconciliation on page 2).
• Adjusted EBITDA of $1.2 billion, an increase of 23% from the prior year (see non-GAAP reconciliation on page 26).
• E&P segment net production increased by 8% from the prior year, which includes the impact of the divestiture of our California operations.
• Gathering segment revenues increased by 11% from the prior year.
• Pipeline & Storage segment revenues increased by 10% from the prior year, primarily driven by the completion of the Company's FM100 project.
• Utility segment invested $82.6 million in system modernization and reliability, replacing over 150 miles of older vintage mains and services, and bringing 5-year total to over $377 million.
• Increased shareholder dividend for the 52nd consecutive year to an annual rate of $1.90 per share, an increase of 4.4%, continuing our long history of consecutive dividend increases and our 120th year of uninterrupted dividend payments.
• Achieved an "A" certification grade under the MiQ Standard for Methane Emissions Performance, the highest available certification level, for 100% of the Company's natural gas production.
• Continued to enhance sustainability disclosures with the publication of the inaugural Climate Report and the third annual Corporate Responsibility Report.

MANAGEMENT COMMENTS

David P. Bauer, President and Chief Executive Officer of National Fuel Gas Company, stated: “The fourth quarter was a terrific ending to a very strong fiscal year for National Fuel. Adjusted operating results for the quarter were up more than 25% compared to last year as a result of higher production at Seneca and the tailwind of improved natural gas prices.

“As we enter fiscal 2023, the outlook for National Fuel is excellent. Continued production growth at Seneca, combined with a strong outlook for natural gas prices, should translate to significant free cash flow, which will be used to deleverage the balance sheet, pursue future growth opportunities, and return capital to shareholders.”

RECONCILIATION OF GAAP EARNINGS TO ADJUSTED OPERATING RESULTS

FISCAL 2023 GUIDANCE UPDATE

National Fuel is revising its fiscal 2023 earnings guidance to reflect updated forecast assumptions and projections, including the impact of revised natural gas price expectations since the Company’s preliminary guidance was announced in August 2022. The Company is now projecting that earnings will be within the range of $6.40 to $6.90 per share, an increase of 13% from the Company’s 2022 adjusted operating results at the midpoint of the updated guidance range.

The Company is now assuming that NYMEX natural gas prices will average $6.00 per MMBtu for the first six months of fiscal 2023 (October-March) and $4.75 per MMBtu for the second half of fiscal 2023 (April-September). For guidance purposes, the Company’s updated natural gas price projections approximate the current NYMEX forward curve and consider the impact of local sales point differentials and new physical firm sales, transportation, and financial hedge contracts.

Consistent with preliminary guidance, the Exploration and Production segment’s fiscal 2023 net production guidance range of 370 to 390 Bcfe remains unchanged. Seneca currently has firm sales contracts in place for approximately 88% of its projected fiscal 2023 Appalachian production, limiting its exposure to in-basin markets. Approximately 67% of Seneca’s expected Appalachian production is either matched by a financial hedge, including a combination of swaps and no-cost collars, or were entered into at a fixed price.

The Company’s consolidated and individual segment capital expenditures guidance also remain unchanged from the preliminary guidance. Other guidance assumptions remain largely unchanged from the previous guidance. The details are outlined in the table on page 8.

DISCUSSION OF FOURTH QUARTER RESULTS BY SEGMENT

The following earnings discussion of each operating segment for the quarter ended September 30, 2022 is summarized in a tabular form on pages 9 and 10 of this report (earnings drivers for the fiscal year ended September 30, 2022 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 primarily natural gas reserves in Pennsylvania.

Seneca’s fourth quarter GAAP earnings, which increased $60.4 million versus the prior year, include the impact of several items noted in the table above. In particular, Seneca reversed a valuation allowance of $28.6 million on deferred tax assets related to certain state net operating loss and credit carryforwards as these deferred tax assets are now expected to be realized in the future. Seneca also recorded an income tax benefit of $16.2 million from the remeasurement of deferred state income taxes related to a prospective series of reductions in the Pennsylvania state corporate income tax rate that was signed into law in July 2022. In addition, during the fourth quarter, Seneca recognized an unrealized loss of $4.4 million ($3.2 million after-tax) due to a reduction in the implied fair value of an asset related to contingent consideration in connection with the June 2022 sale of Seneca's California assets.

Excluding these items noted above, Seneca’s earnings increased $18.8 million primarily due to higher realized natural gas prices and higher natural gas production, which were partially offset by the loss of earnings from Seneca's California assets that were sold in June, as well as higher Appalachian operating expenses, higher interest expense and a higher effective income tax rate.

Seneca produced 87.9 Bcfe during the fourth quarter, an increase of 8.3 Bcfe, or 10%, from the prior year. This is a result of an 11.6 Bcf increase in natural gas production primarily due to growth from Seneca's development program in Appalachia. Seneca's crude oil production decreased 545 MBbls versus the prior year due to Seneca's aforementioned sale of its California assets in June 2022.

Seneca's average realized natural gas price, after the impact of hedging and transportation costs, was $2.84 per Mcf, an increase of $0.47 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.

Lease operating and transportation ("LOE") expense was $0.71 per Mcfe, a decrease of $0.14 per Mcfe from the prior year. General and administrative expense was $0.18 per Mcfe, a decrease of $0.03 per Mcfe from the prior year. Depreciation, depletion and amortization ("DD&A") expense was $0.60 per Mcfe, an increase of $0.03 per Mcfe from the prior year.

On an absolute basis, LOE expense decreased $5.3 million primarily due to the impact of the third quarter sale of Seneca's California assets, partly offset by increases in LOE expense from higher transportation and gathering costs in Appalachia as a result of increased production, as well as higher workover and rental expenses in Appalachia. LOE expense includes $52.1 million in intercompany expense for gathering and compression services used to connect Seneca's Appalachian production to sales points along interstate pipelines. The decrease in Seneca's other operating expenses of $3.1 million was also primarily due to the impact of the third quarter sale of Seneca's California assets. DD&A expense increased $7.8 million due to higher natural gas production and a higher per unit DD&A rate, which was driven by an increase in capitalized costs in Seneca's full cost pool.

Interest expense increased $2.5 million due primarily to a higher weighted average interest rate on intercompany short-term borrowings. Excluding the impact of the elimination of the valuation allowance and remeasurement of deferred income taxes from the reduction in the state income tax rate in Pennsylvania, both of which are discussed above, Seneca's effective income tax rate increased. This increase was primarily driven by a reduction to the valuation allowance recorded in the fiscal 2021 fourth quarter.

Proved Reserves Year-End Update

Seneca’s total proved reserves at September 30, 2022 were 4,172 Bcfe, an increase of 319 Bcfe, or 8%, from September 30, 2021. Seneca sold 154 Bcfe of proved reserves (81% of which were oil reserves) with the sale of its California assets, which represented substantially all of Seneca's oil reserves. As a result of the sale, the proved reserves base is now comprised of approximately 100% natural gas. Seneca also sold another 21 Bcfe of proved reserves during fiscal 2022 related to the sale of certain gas assets in Tioga County, Pennsylvania. Seneca’s proved developed reserves at the end of fiscal 2022 were 3,314 Bcfe, representing 79% of total proved reserves, compared to 84% a year ago. In fiscal 2022, Seneca recorded 839 Bcfe of proved reserve extensions and discoveries, and 8 Bcfe of net positive revisions due primarily to certain price-related revisions, improvements in well performance and changes in development plans. Adjusting for sales, Seneca replaced 240% of its fiscal 2022 production.

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 GAAP earnings increased $3.8 million versus the prior year primarily due to an increase in operating revenues, partially offset by higher operation and maintenance ("O&M") expense, higher DD&A expense and a higher effective income tax rate. The increase in operating revenues of $12.7 million was primarily attributable to higher transportation revenues from Supply Corporation's FM100 Project, which was placed in service in December 2021. O&M expense increased $2.1 million primarily due to an increase in personnel costs and compressor station maintenance costs. The increase in DD&A expense of $1.7 million was primarily attributable to incremental depreciation expense from the FM100 Project. The increase in the Pipeline and Storage segment's effective income tax rate was primarily driven by a reduction in benefits associated with the tax sharing agreement with affiliated companies combined with higher state income taxes due to higher pre-tax earnings.

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 fourth quarter GAAP earnings increased $12.6 million versus the prior year. Earnings were positively impacted by an $11.9 million income tax benefit recorded due to the remeasurement of deferred income taxes related to the aforementioned reduction in the Pennsylvania corporate income tax rate. Earnings were also impacted by the Gathering segment's recognition of a $3.7 million increase in income tax expense that was recorded as an offset to the reversal of a valuation allowance described above in the Exploration and Production segment due to the Gathering and Exploration and Production segments' subsidiaries filing a combined state tax return. Excluding these items, the Gathering segment's earnings increased $4.5 million. The increase was primarily driven by higher operating revenues, which were partially offset by higher O&M expense. Operating revenues increased $6.7 million, or 14%, primarily driven by a 14.0 Bcf increase in gathered volumes due to an increase in natural gas production from both Seneca and non-affiliated parties. The increase in O&M expense of $1.3 million was primarily due to higher costs for materials and higher compression leasing expenses, which are both primarily attributable to higher throughput, as well as an increase in personnel costs.

Downstream Business

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 fourth quarter net loss was $5.3 million higher than the net loss in the prior-year fourth quarter primarily due to higher O&M and interest expense, partially offset by higher customer margin (operating revenues less purchased gas sold) and a decrease in non-service post-retirement benefit costs recorded in other income (deductions). The increase in O&M expense of $6.5 million was primarily attributable to higher personnel costs and higher pipeline integrity expenses. Interest expense increased $1.7 million due primarily to a higher weighted average interest rate on intercompany short-term borrowings. The increase in customer margin was due primarily to the positive impact of adjustments related to certain regulatory rate and cost recovery mechanisms subject to annual reconciliation, partially offset by a reduction in base rates in Pennsylvania as a result of a rate proceeding that concluded in the second quarter whereby the Utility agreed to lower the amount of other post-employment benefit (“OPEB”) expense it recovers in rates. With the elimination of OPEB expenses in rates, there was also a decrease in non-service post-retirement benefit costs recorded in other income (deductions).

Corporate and All Other

The Company’s operations that are included in Corporate and All Other generated a combined net loss of $3.6 million in the current year fourth quarter, which was $0.4 million higher than the combined net loss of $3.2 million in the prior-year fourth quarter. The increase in net loss was primarily driven by a higher amount of unrealized losses on investment securities recognized in the current quarter as compared to the prior-year fourth quarter.

EARNINGS TELECONFERENCE

The Company will host a conference call on Friday, November 4, 2022, at 11 a.m. Eastern Time to discuss this announcement. To pre-register for this call (recommended), please visit https://www.netroadshow.com/events/login?show=d40ff074&confId=42546. After registering, you will receive your access details via email. To join by telephone on the day of the call, dial U.S. toll free 1-844–200–6205 and provide Access Code 879958. The teleconference will be simultaneously webcast online and can be accessed on the NFG Investor Relations website at investor.nationalfuelgas.com. An audio replay of the teleconference call will be available until Friday November 11, 2022. To access the telephone replay, dial U.S. toll free 866-813-9403 and provide Access Code 533110.

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, retained natural gas and system modernization), environmental/safety requirements, affiliate relationships, industry structure, and franchise renewal; the Company’s ability to estimate accurately the time and resources necessary to meet emissions targets; governmental/regulatory actions and/or market pressures to reduce or eliminate reliance on natural gas; changes in economic conditions, including inflationary pressures, supply chain issues, liquidity challenges, and 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; 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; impairments under the SEC’s full cost ceiling test for natural gas reserves; increased costs or delays or changes in plans with respect to Company projects or related projects of other companies, 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 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 reserves, including among others geology, lease availability and costs, 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 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; negotiations with the collective bargaining units representing the Company's workforce, including potential work stoppages during negotiations; uncertainty of gas reserve estimates; significant differences between the Company’s projected and actual production levels for natural gas; changes in demographic patterns and weather conditions (including those related to climate change); 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, as well as economic and operational disruptions due to third-party outages; 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 2023. Additional details on the Company's forecast assumptions and business segment guidance are outlined in the table below.

While the Company expects to record certain adjustments to unrealized gain or loss on a derivative asset and unrealized gain or loss on investments during the fiscal year ending September 30, 2023, 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.