National Fuel Reports Third Quarter Earnings

WILLIAMSVILLE, N.Y.–(BUSINESS WIRE)–National Fuel Gas Company (“National Fuel” or the “Company”) (NYSE:NFG) today announced results for the third quarter of its 2015 fiscal year and for the nine months ended June 30, 2015.

National Fuel had a consolidated loss for the quarter ended June 30, 2015, of $293.1 million, or $3.44 per share, compared to the prior year’s third quarter earnings of $64.5 million, or $0.76 per share, a decrease of $357.6 million, or $4.20 per share. The decrease is mainly due to lower earnings in the Exploration and Production segment, largely due to a $339.8 million non-cash charge to write down the value of Seneca Resources Corporation’s (“Seneca”) oil and natural gas reserves. Excluding Seneca’s writedown and other items impacting comparability, consolidated earnings before items impacting comparability (“Operating Results”) for the third quarter were $46.7 million, or $0.55 per share, compared to $61.8 million, or $0.73 per share, in the prior year’s third quarter. (Note: All references to earnings per share are to diluted earnings per share, and all amounts used in the discussion of earnings are after tax unless otherwise noted.)

The consolidated loss for the nine months ended June 30, 2015, of $191.7 million, or $2.25 per share, compares to earnings of $242.0 million, or $2.85 per share, from the same period in the prior year. The decrease is mainly due to lower earnings in the Exploration and Production segment, largely due to $409.3 million of non-cash charges to write down the value of Seneca’s oil and natural gas reserves. Operating Results for the nine months ended June 30, 2015, were $217.6 million, or $2.55 per share, compared to $241.9 million, or $2.86 per share, in the same period of the prior year.

As outlined in the table above, certain items included in GAAP earnings impacted the comparability of the Company’s financial results when comparing the quarter and nine months ended June 30, 2015, to the comparable periods in fiscal 2014. Excluding these items, Operating Results for the current quarter of $46.7 million, or $0.55 per share, decreased $15.1 million, or $0.18 per share, from the prior year’s third quarter. Excluding these items, Operating Results for the nine months ended June 30, 2015, of $217.6 million, or $2.55 per share, decreased $24.3 million, or $0.31 per share, from the same period in the prior year. Items impacting comparability will be discussed in more detail with the discussion of segment earnings below.

MANAGEMENT COMMENTS

Ronald J. Tanski, President and Chief Executive Officer of National Fuel Gas Company, stated: “Lower crude oil and natural gas prices reduced our earnings for the current quarter, and also required us to write down the value of our oil and gas reserves in our Exploration and Production segment. As we noted last quarter, additional non-cash writedowns are expected to continue through the end of the calendar year. From an ongoing operations perspective, however, each of our business units continues to perform very well.

“Our Pipeline and Storage expansion projects, including the two Northern Access projects that will move Seneca’s production to the better-priced Dawn index and Northeastern markets, are all proceeding according to schedule. At the same time, Seneca is seeing consistent well results in its Clermont development program and continues to drive down its drilling and completion costs. The success that the entire upstream oil and gas industry has had developing additional reserves, while depressing commodity prices, has kept bills low for our utility customers, even during a record cold winter.

“We have a solid base of assets that provide strong cash flow, and our fee ownership of a high percentage of our mineral acreage allows us to invest conservatively in this low price environment. We remain focused on the execution of our Appalachian growth strategy, and we are confident that our integrated Upstream and Midstream investment activities will help us overcome the current challenging pricing environment and provide ongoing growth opportunities for National Fuel.”

DISCUSSION OF RESULTS BY SEGMENT

The following discussion of the earnings of each segment is summarized in a tabular form at pages 10 through 13 of this report. It may be helpful to refer to those tables while reviewing this discussion.

Upstream Business

Exploration and Production Segment

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

The Exploration and Production segment’s loss in the third quarter of fiscal 2015 of $323.1 million, or $3.79 per share, compares to earnings of $32.4 million, or $0.38 per share, in the prior year’s third quarter, a decrease of $355.5 million or $4.17 per share. The decrease was mainly due to a non-cash charge of $339.8 million to write down the value of Seneca’s oil and natural gas producing properties.

Seneca uses the full cost method of accounting for determining the book value of its oil and natural gas properties. This accounting method requires that Seneca perform a quarterly “ceiling test” to compare the present value of future revenues from its oil and natural gas reserves based on an unweighted arithmetic average of the first day of the month oil and gas prices for each month within the 12-month period prior to the end of the reporting period (“the ceiling”) with the book value of those reserves at the balance sheet date. If the book value of the reserves exceeds the ceiling, a non-cash impairment charge must be recorded in order to reduce the book value of the reserves to the calculated ceiling. Unless oil and gas prices improve significantly, Seneca expects that the book value of its oil and gas reserves will also exceed the ceiling at September 30, 2015, and December 31, 2015, resulting in additional impairment charges.

In the third quarter of fiscal 2014, Seneca’s earnings were increased by a $2.7 million reduction of an accrual for well plugging and abandonment costs. In the first half of fiscal 2014, Seneca recorded an initial accrual of $3.3 million associated with two wells on an offshore Gulf of Mexico mineral lease (High Island 74) that Seneca had farmed out to an operator who subsequently filed for bankruptcy. During the third quarter of fiscal 2014, it was determined that Seneca was not responsible for the costs to plug and abandon one of those wells.

Excluding the items above, Operating Results in the Exploration and Production segment were $16.7 million, or $0.20 per share, compared to $29.7 million, or $0.35 per share, in the prior year’s third quarter, a decrease of $13.0 million or $0.15 per share. The decrease in Operating Results is mainly due to lower commodity prices realized after hedging. The weighted average natural gas price received by Seneca (after hedging) for the quarter ended June 30, 2015, was $3.32 per thousand cubic feet (“Mcf”), a decrease of $0.23 per Mcf compared to the prior year’s third quarter. The weighted average crude oil price realized after hedging for the quarter ended June 30, 2015, was $69.65 per barrel (“Bbl”), a decrease of $27.89 per Bbl compared to the prior year’s third quarter.

Overall production of natural gas and crude oil for the current quarter of 36.2 Billion cubic feet equivalent (“Bcfe”) decreased approximately 4.4 Bcfe, compared to the prior year’s third quarter. Production from Seneca’s Appalachia properties decreased 4.3 Bcfe largely due to an estimated 12.5 Bcfe of voluntary pricing related curtailments in the current year’s third quarter. California production of 5.3 Bcfe decreased 0.1 Bcfe due to natural field declines.

On a per unit basis, quarterly depletion expense of $1.55 per Mcfe decreased $0.29 per Mcfe due to higher natural gas reserve balances at June 30, 2015, compared to the prior year’s third quarter and the ceiling test impairment charge recorded in the current year’s second quarter. On a per unit basis, lease operating and transportation expenses (“LOE”) at $1.09 per Mcfe increased $0.01 per Mcfe compared to the prior year’s third quarter. General and administrative expenses (“G&A”) increased $0.08 per Mcfe compared to the prior year’s third quarter. Both the increase in per unit LOE and G&A was largely due to lower Marcellus production resulting from pricing related curtailments.

The Exploration and Production segment’s loss for the nine months ended June 30, 2015, of $350.0 million, or $4.11 per share, compares to earnings of $87.9 million, or $1.04 per share, in the prior year’s nine-month period, a decrease of $437.9 million or $5.15 per share. The decrease was mainly due to a non-cash charge of $409.3 million recorded in the nine-month period to write down the value of Seneca’s oil and natural gas producing properties.

In addition to the ceiling test charge in the current year’s nine-month period ($409.3 million), and the net impact of the plugging and abandonment costs in the prior year’s nine-month period described above ($0.6 million), Seneca had a deferred income tax adjustment in 2014 that decreased earnings by $3.0 million. Excluding these items from the respective nine-month periods, Operating Results in the Exploration and Production segment were $59.4 million, or $0.69 per share, compared to $91.5 million, or $1.09 per share, a decrease of $32.1 million or $0.40 per share. The decrease in Operating Results is mainly due to lower commodity prices realized after hedging. The weighted average natural gas price received by Seneca (after hedging) for the nine months ended June 30, 2015, was $3.39 per Mcf, a decrease of $0.32 per Mcf compared to the prior year’s nine-month period. The weighted average crude oil price realized after hedging for the nine months ended June 30, 2015, was $71.72 per Bbl, a decrease of $24.47 per Bbl compared to the prior year’s nine-month period.

Overall production of natural gas and crude oil for the current nine-month period of 120.1 Bcfe increased approximately 5.6 Bcfe, or 4.9 percent, compared to the prior year’s nine-month period largely because of Seneca’s strong well results in Lycoming County and the Clermont-Rich Valley area. California production of 15.8 Bcfe was consistent with the prior year’s nine-month period. Pricing related curtailments in Appalachia for the current nine-month period were an estimated 32.0 Bcfe.

On a per unit basis for the nine months ended June 30, 2015, depletion expense of $1.61 per Mcfe decreased $0.27 per Mcfe due to higher natural gas reserve balances at June 30, 2015, and the ceiling test impairment charge recorded in the current year’s second quarter. On a per unit basis, LOE at $1.06 per Mcfe increased $0.02 per Mcfe due to higher intercompany gathering and compression costs associated with production delivered into the Gathering segment’s Trout Run and Clermont gathering systems in Seneca’s EDA and WDA, respectively. G&A at $0.42 per Mcfe was unchanged.

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 earnings of $17.7 million, or $0.21 per share, for the quarter ended June 30, 2015, were largely unchanged from earnings of $17.9 million, or $0.21 per share, when compared with the same period in the prior fiscal year. Higher transportation revenues from the Mercer Expansion project, which was placed in service in the current year’s first quarter was offset by higher depreciation and property tax expense.

The Pipeline and Storage segment’s earnings of $61.9 million, or $0.73 per share, for the nine months ended June 30, 2015, increased $3.4 million, or $0.04 per share, when compared with the same period in the prior fiscal year. The increase in earnings is due to higher non-affiliated revenues from the Mercer Expansion project and higher transportation revenues from additional new short-term firm transportation contracts on both the Supply Corporation and Empire systems. As a result of the ongoing pricing basis differentials in the Appalachian region, the Pipeline and Storage segment continues to see increased demand for transportation services from producers and marketers to move natural gas supplies to higher priced markets. Earnings also benefited from a higher allowance for funds used during construction (AFUDC) associated with various pipeline expansion projects. Earnings were reduced by higher depreciation expense and property taxes due to the completion of various expansion projects.

Gathering Segment

The Gathering segment’s operations are carried out by National Fuel Gas Midstream Corporation’s (“Midstream”) subsidiary limited liability companies. The Gathering segment constructs, owns and operates natural gas pipeline gathering and processing facilities in the Appalachian region and currently provides the gathering infrastructure for transporting Seneca’s Marcellus Shale production to the interstate pipeline system.

The Gathering segment’s earnings of $6.2 million, or $0.07 per share, for the quarter ended June 30, 2015, decreased $2.5 million, or $0.03 per share, when compared with the same period in the prior fiscal year. The decrease in earnings is primarily due to lower gathering revenues resulting from Seneca’s lower production volumes in Appalachia compared to the prior year’s third quarter.

The Gathering segment’s earnings of $24.3 million, or $0.28 per share, for the nine months ended June 30, 2015, increased $2.1 million, or $0.02 per share, when compared with the same period in the prior fiscal year. The increase in earnings is mainly due to higher gathering revenues from Midstream’s Trout Run and Clermont gathering systems. That increase in revenue is mostly attributable to the overall increase in Seneca’s production volumes and a change in the mix of Seneca’s production among Midstream’s three major gathering systems. Higher depreciation, operating expenses and income taxes partially offset the higher gathering revenues.

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 earnings of $5.7 million, or $0.07 per share, for the quarter ended June 30, 2015, increased $0.9 million, or $0.01 per share, when compared with the same period in the prior fiscal year. The increase in earnings is due to a lower effective income tax rate.

The Utility segment’s earnings of $66.6 million, or $0.78 per share, for the nine months ended June 30, 2015, increased $2.0 million, or $0.02 per share, when compared with the same period in the prior fiscal year. The increase in earnings was due to the impact of regulatory true-up adjustments and higher capacity release revenues offset by higher operating expenses mainly associated with the replacement of Distribution’s customer billing system.

Energy Marketing Segment

National Fuel Resources, Inc. (“NFR”) comprises the Company’s Energy Marketing segment. 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 earnings for the quarter ended June 30, 2015, of $1.5 million, or $0.02 per share, increased $0.9 million or $0.01 per share. Earnings for the nine months ended June 30, 2015, of $7.7 million, or $0.09 per share, increased $1.8 million, or $0.02 per share, compared to the prior year’s nine-month period. The increase in earnings in both the quarter and nine months ended June 30, 2015, is primarily due to higher per unit margins, which benefited from the weak pricing basis in the Northeast.

Corporate and All Other

The Corporate and All Other category primarily includes corporate operations. The category also includes the remaining operations of Seneca’s Northeast division that markets high quality hardwoods from Appalachian land holdings.

The Corporate and All Other category loss of $1.2 million in the quarter ended June 30, 2015, compares to earnings of less than $0.1 million, in the prior year’s third quarter. The loss is due to higher income tax expense.

The Corporate and All Other category loss of $2.2 million in the nine months ended June 30, 2015, compares to earnings of $2.9 million in the prior year’s nine-month period. The comparability of the nine-month results is impacted by a $3.6 million gain recognized on corporate-owned executive life insurance policies recorded in the prior year’s second quarter. Excluding this item, Operating Results for the nine-month period ended June 30, 2015, a loss of $2.2 million, compares to a loss of $0.7 million in the prior year’s nine-month period. The increased loss is due to lower income from Seneca’s remaining timber properties and higher income taxes.

EARNINGS GUIDANCE

The Company is updating and narrowing its earnings guidance range for fiscal 2015 to a range of $2.90 to $3.00 per share exclusive of any ceiling test impairment charges. The previous earnings guidance had been a range of $2.75 to $2.90 per share. This guidance reflects actual third quarter results, forecast oil and gas production for fiscal 2015 of 155 to 160 Bcfe (previous guidance range was 155 to 175 Bcfe), a full year DD&A rate for the Company’s Exploration and Production segment of $1.55 per Mcfe (previous range of $1.55 to $1.65 per Mcfe), firm sales and hedges currently in place, and a flat NYMEX price of $2.75 per MMBtu for natural gas and $50 per Bbl for crude oil for unhedged production for the remainder of the fiscal year. At the midpoint, the decrease in production is attributable to price related curtailments experienced during the third quarter and an assumption that the Company does not sell any natural gas production in the spot market during the fourth quarter.

The Company’s preliminary earnings guidance for fiscal 2016 is in the range of $3.00 to $3.30 per share, exclusive of any ceiling test impairment charges. For additional details and assumptions on fiscal 2016 financial and operational guidance, please refer to page 25 of this earnings release.

While the Company currently expects significant ceiling test impairment charges in the fourth quarter of fiscal 2015 and first quarter of fiscal 2016, the amount of those charges is not reasonably determinable at this time. The amount of any ceiling test charge is determined at the end of the applicable quarter and will depend on many factors, including additions to or subtractions from proved reserves, fluctuations in oil and gas prices, and income tax effects related to the differences between the book and tax basis of the Company’s oil and gas properties. Some or all of these factors are likely to be significant. Because the amount of the expected ceiling test impairment charges is not reasonably determinable at this time, the Company is unable to provide earnings guidance other than on a non-GAAP basis that excludes those charges.

EARNINGS TELECONFERENCE

The Company will host a conference call on Friday, August 7, 2015, 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 investor relations page at National Fuel’s website at investor.nationalfuelgas.com. For those without Internet access, access is also provided by dialing (toll-free) 1-800-706-7749, using passcode “28939110.” For those unable to listen to the live conference call, a replay will be available at approximately 3 p.m. Eastern Time at the same website link and by phone at (toll-free) 1-888-286-8010, using passcode “97670814.” Both the webcast and telephonic replay will be available until the close of business on Friday, August 14, 2015.

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: 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; impairments under the SEC’s full cost ceiling test for natural gas and oil reserves; changes in the price of natural gas or oil; 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; 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; 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; 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; 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; changes in demographic patterns and weather conditions; changes in the availability, price or accounting treatment of derivative financial instruments; changes in economic conditions, including global, national or regional recessions, and their effect on the demand for, and customers’ ability to pay for, the Company’s products and services; the creditworthiness or performance of the Company’s key suppliers, customers and counterparties; economic disruptions or uninsured losses resulting from major accidents, fires, severe weather, natural disasters, terrorist activities, acts of war, cyber attacks or pest infestation; significant differences between the Company’s projected and actual capital expenditures and operating expenses; 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; increasing health care costs and the resulting effect on health insurance premiums and on the obligation to provide other post-retirement benefits; 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.