National Fuel Reports Second Quarter Earnings

WILLIAMSVILLE, N.Y., May 06, 2021 (GLOBE NEWSWIRE) -- National Fuel Gas Company (“National Fuel” or the “Company”) (NYSE:NFG) today announced consolidated results for the second quarter of its 2021 fiscal year and for the six months ended March 31, 2021.

FISCAL 2021 SECOND QUARTER SUMMARY

• GAAP net income of $112.4 million, or $1.23 per share, compared to GAAP net loss of $106.1 million, or $1.23 per share, in the prior year.
• Adjusted operating results of $123.2 million, or $1.34 per share, compared to $84.2 million, or $0.97 per share, in the prior year (see non-GAAP reconciliation on page 2).
• Adjusted EBITDA of $298.4 million, an increase of 29%, compared to $231.1 million in the prior year (see non-GAAP reconciliation on page 23).
• Pipeline & Storage segment Adjusted EBITDA of $58.6 million, an increase of 19% from the prior year.
• Gathering segment Adjusted EBITDA of $41.4 million, an increase of 40% from the prior year.
• E&P segment Adjusted EBITDA of $127.1 million, an increase of 59% from the prior year.
• E&P segment net production of 85.2 Bcfe, an increase of 25.5 Bcfe, or 43%, 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 $1.09 per Mcfe, a 14% decrease from the prior year.
• Average realized natural gas prices of $2.28 per Mcf, an increase $0.16 per Mcf from the prior year.
• Average realized oil prices of $57.11 per Bbl, a decrease of $1.12 per Bbl from the prior year.
• Utility segment announced greenhouse gas emissions reduction targets for its delivery system of 75% by 2030, and 90% by 2050, from 1990 levels.
• Company is increasing its fiscal 2021 earnings guidance to a range of $3.85 to $4.05 per share, an increase of $0.15 at the midpoint, excluding items impacting comparability (see Guidance Summary on page 7).

MANAGEMENT COMMENTS

David P. Bauer, President and Chief Executive Officer of National Fuel Gas Company, stated: “National Fuel had an excellent second quarter, with significant earnings growth resulting from the ongoing expansion of our interstate pipeline systems and the continued positive impact of our Appalachian upstream and gathering acquisition completed last summer. In light of these strong operating results, we are increasing our earnings guidance for fiscal 2021 to $3.85 to $4.05 per share, representing a 35% increase from the prior year at the midpoint of the updated range.  

“During the quarter, our Pipeline and Storage business commenced construction of our FM100 expansion and modernization project, which remains on track for a late calendar 2021 in-service date. In addition to contributing $50 million in annual revenues to our FERC-regulated pipeline operations, this project, along with the companion Transco Leidy South expansion, is expected to provide additional access to premium markets in the Mid-Atlantic for Seneca’s growing production base. Additionally, we continued to make significant strides on our sustainability-focused initiatives, with our Utility business announcing substantial greenhouse gas emissions reduction goals in March, driven by ongoing investments in the modernization of our natural gas distribution network. Evidencing our commitment to the continued reduction of National Fuel’s carbon footprint, we are working towards emissions reduction targets for the Company's midstream and upstream segments, maintaining our focus on climate-risk and the energy transition, as well as National Fuel’s long-term role in the energy complex.”

RECONCILIATION OF GAAP EARNINGS TO ADJUSTED OPERATING RESULTS
		Three Months Ended								Six Months Ended
		March 31,								March 31,
(in thousands except per share amounts)		2021				2020				2021				2020
Reported GAAP Earnings		$	112,436			$	(106,068	)		$	190,210			$	(19,477	)
Items impacting comparability:
Impairment of oil and gas properties (E&P)		—				177,761				76,152				177,761
Tax impact of impairment of oil and gas properties		—				(48,503		)		(20,980		)		(48,503		)
Gain on sale of timber properties (Corporate / All Other)		—				—				(51,066		)		—
Tax impact of gain on sale of timber properties		—				—				14,069				—
Premium paid on early redemption of debt		15,715				—				15,715				—
Tax impact of premium paid on early redemption of debt		(4,321		)		—				(4,321		)		—
Deferred tax valuation allowance		—				56,770				—				56,770
Unrealized (gain) loss on other investments (Corporate / All Other)		(848		)		5,414				450				6,433
Tax impact of unrealized (gain) loss on other investments		178				(1,137		)		(94		)		(1,351		)
Adjusted Operating Results		$	123,160			$	84,237			$	220,135			$	171,633
Reported GAAP Earnings Per Share		$	1.23			$	(1.23	)		$	2.08			$	(0.23	)
Items impacting comparability:
Impairment of oil and gas properties, net of tax (E&P)		—				1.49				0.60				1.49
Gain on sale of timber properties, net of tax (Corporate / All Other)		—				—				(0.40		)		—
Premium paid on early redemption of debt, net of tax		0.12				—				0.12				—
Deferred tax valuation allowance		—				0.66				—				0.66
Unrealized (gain) loss on other investments, net of tax (Corporate / All Other)		(0.01		)		0.05				—				0.06
Adjusted Operating Results Per Share		$	1.34			$	0.97			$	2.40			$	1.98

FISCAL 2021 GUIDANCE UPDATE

National Fuel is revising its fiscal 2021 earnings guidance to reflect the results of the second fiscal quarter, along with updated commodity price and operating unit cost assumptions for the balance of the year. The Company is now projecting that earnings, excluding items impacting comparability, will be within the range of $3.85 to $4.05 per share, an increase of $0.15 per share from the midpoint of the Company’s prior guidance range.

The Company is now assuming that WTI oil prices will average $60.00 per Bbl for the remainder of the year, a $7.50 increase from the $52.50 per Bbl assumed in the previous guidance. For guidance purposes, the Company’s projections approximate the current NYMEX forward markets and consider the impact of local sales point differentials and new physical firm sales, transportation, and financial hedge contracts.

Seneca currently has firm sales contracts in place for 142 Bcf, or approximately 95% of its projected remaining fiscal 2021 Appalachian production, limiting its exposure to in-basin markets. Approximately 132 Bcf of those sales, or 88% of Seneca’s expected remaining Appalachian production, are either matched by a financial hedge, including a combination of swaps and no-cost collars, or were entered into at a fixed price. Additionally, Seneca has financial hedges in place for 786 Mbbl, or approximately 72%, of its expected remaining oil production for the fiscal year.

The Company’s other guidance assumptions remain largely unchanged from the previous guidance. Additional details on the Company's updated forecast assumptions and business segment guidance for fiscal 2021 are outlined in the table on page 7.

DISCUSSION OF SECOND QUARTER RESULTS BY SEGMENT

The following earnings discussion of each operating segment for the quarter ended March 31, 2021 is summarized in a tabular form on pages 8 and 9 of this report (earnings drivers for the six months ended March 31, 2021 are summarized on pages 10 and 11). 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.

	Three Months Ended
	March 31,
(in thousands)	2021				2020				Variance
GAAP Earnings	$	36,822			$	(175,275	)		$	212,097
Premium paid on early redemption of debt, net of tax	10,710				—				10,710
Impairment of oil and gas properties, net of tax	—				129,258				(129,258		)
Deferred tax valuation allowance	—				60,463				(60,463		)
Adjusted Operating Results	$	47,532			$	14,446			$	33,086
Adjusted EBITDA	$	127,146			$	79,846			$	47,300

Seneca’s second quarter GAAP earnings increased $212.1 million versus the prior year. This was primarily attributable to the non-recurrence of two items from the prior year's second quarter, including a non-cash ceiling test impairment charge of $129.3 million (after-tax) as well as a $60.5 million state income tax valuation allowance. Excluding these items noted above, as well as a loss of $14.8 million ($10.7 million after-tax) recognized on the early redemption of long-term debt for Seneca's share of a premium paid by the Company to redeem $500 million of the Company's 4.9% notes that were scheduled to mature in December 2021, Seneca’s second quarter earnings increased $33.1 million.

Seneca produced 85.2 Bcfe during the second quarter, an increase of 25.5 Bcfe, or 43%, from the prior year. The increase was primarily driven by higher natural gas production from the Company's fourth quarter fiscal 2020 acquisition of Appalachian upstream assets, as well as production growth from Seneca's other core development areas. Net production increased 21.2 Bcf to 50.2 Bcf in the Eastern Development Area ("EDA"), primarily due to higher production from the acquisition. Net production increased 4.6 Bcf to 31.3 Bcf in Seneca’s Western Development Area ("WDA"), primarily due to the ongoing development program in the region. Oil production for the second quarter decreased 44,000 Bbls, or 7%, from the prior year primarily due to natural production declines in Seneca's Midway Sunset, Lost Hills and Pioneer development areas as a result of lower activity in response to decreased crude oil prices. These declines were partially offset by new production brought on-line in Seneca’s Coalinga and 17N development areas.

Seneca's average realized natural gas price, after the impact of hedging and transportation costs, was $2.28 per Mcf, an increase of $0.16 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 $57.11 per Bbl, a decrease of $1.12 per Bbl compared to the prior year.

Lease operating and transportation (“LOE”) expense increased $15.3 million primarily due to higher transportation costs in Appalachia from increased production. LOE expense includes $49.6 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 $1.0 million due largely to higher natural gas production, partially offset by the impact of ceiling test impairments recorded during fiscal 2020.

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 $0.18 per Mcfe, or 14%, during the quarter.

Excluding the premium paid on the early redemption of long-term debt noted above, interest expense increased by $1.3 million from the prior year, primarily driven by additional long-term borrowings from the Company's long-term debt issuance in June 2020 that was used to fund a portion of the Company's Appalachian acquisition. The increase in Seneca's effective income tax rate was largely driven by an increase to a valuation allowance for deferred tax assets that was initially established in the second quarter of fiscal 2020.

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.

	Three Months Ended
	March 31,
(in thousands)	2021				2020				Variance
GAAP Earnings	$	24,928			$	22,087			$	2,841
Adjusted EBITDA	$	58,570			$	49,102			$	9,468

The Pipeline and Storage segment’s second quarter GAAP earnings increased $2.8 million versus the prior year primarily due to higher operating revenues and lower O&M expense, partially offset by higher DD&A expense and higher interest expense. The increase in operating revenues of $7.5 million, or 9%, 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, coupled with an increase in Supply Corporation's transportation and storage rates effective February 1, 2020, in accordance with Supply Corporation's 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. O&M expense decreased $2.3 million primarily due to a decrease in the reserve for preliminary project costs, which was partially offset by an increase in operating costs, largely the aforementioned Empire power costs. The increase in DD&A expense of $2.4 million was primarily attributable to incremental depreciation from the Empire North expansion project combined with an increase in Supply Corporation's depreciation rates associated with its rate case settlement. The increase in interest expense of $3.4 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.

	Three Months Ended
	March 31,
(in thousands)	2021				2020				Variance
GAAP Earnings	$	20,700			$	19,898			$	802
Premium paid on early redemption of debt, net of tax	684				—				684
Deferred tax valuation allowance	—				(3,769		)		3,769
Adjusted Operating Results	$	21,384			$	16,129			$	5,255
Adjusted EBITDA	$	41,424			$	29,541			$	11,883

The Gathering segment’s second quarter GAAP earnings increased $0.8 million versus the prior year. Excluding a $3.8 million income tax benefit that was recorded as an offset to the valuation allowance recognized by the Exploration and Production segment during the prior year second quarter that did not recur in the current quarter, as well as a $0.7 million after-tax loss recognized on the early redemption of long-term debt for Midstream Company's share of a premium paid by the Company to redeem $500 million of the Company's 4.9% notes that were scheduled to mature in December 2021, the Gathering segment's earnings increased $5.3 million.

The Gathering segment's earnings increase was primarily driven by higher operating revenues, which was partially offset by higher DD&A expense, higher O&M expenses and higher interest expense. Operating revenues increased $15.0 million, or 43%, 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 $2.8 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 and personnel costs, all associated with the Appalachian acquisition, were primarily responsible for the $3.1 million increase in O&M expense. Excluding the premium paid on the early redemption of long-term debt noted above, interest expense increased by $2.1 million from the prior year, primarily driven by additional long-term borrowings from the Company's long-term debt issuance in June 2020 that was used to fund a portion of the Appalachian acquisition.

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.

	Three Months Ended
	March 31,
(in thousands)	2021				2020				Variance
GAAP Earnings	$	32,044			$	31,499			$	545
Adjusted EBITDA	$	73,885			$	73,192			$	693

The Utility segment’s second quarter GAAP earnings increased $0.5 million versus the prior year primarily due to higher customer margins (operating revenues less purchased gas sold), partially offset by higher O&M expense. The increase in customer margin was due primarily to higher revenues earned through the Company's system modernization tracking mechanism in its New York service territory and colder weather in Distribution's Pennsylvania service territory that resulted in an increase in customer usage. These positive items were partially offset by the impact of adjustments recorded in the prior year for certain regulatory revenue and cost recovery mechanisms that did not occur in the current year. Weather in Distribution's Pennsylvania service territory was 8% colder on average than last year. The impact of weather variations on earnings in Distribution's New York service territory is largely mitigated by that jurisdiction's weather normalization clause. The $1.8 million increase in O&M expense was primarily attributable to incremental expense recorded to increase the allowance for uncollectible accounts due to the potential for higher customer non-payment resulting from the current economic backdrop brought on by COVID-19, as well as higher personnel costs.

Corporate and All Other

The Company’s operations that are included in Corporate and All Other generated a combined net loss of $2.1 million in the current year second quarter, which was $2.2 million lower than the combined loss of $4.3 million in the prior-year second quarter. The reduction in net loss was primarily driven by unrealized gains on investment securities recognized in the current quarter compared to unrealized losses on investment securities in the prior year second quarter.

EARNINGS TELECONFERENCE

The Company will host a conference call on Friday, May 7, 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/2524688. 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 “2524688”. Both the webcast and conference call replay will be available until the close of business on Friday, May 14, 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.

Analyst Contact:	Kenneth E. Webster	716-857-7067
Media Contact:	Karen L. Merkel	716-857-7654

 

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: the length and severity of the recent 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; 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; the Company's ability to estimate accurately the time and resources necessary to meet emissions targets; disallowance by applicable regulatory bodies of appropriate rate recovery for system modernization; moves to reduce or eliminate reliance on natural gas; 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; governmental/regulatory actions, initia