National Fuel Gas Company                        Financial News

 

 

NATIONAL FUEL REPORTS THIRD QUARTER EARNINGS

 

WILLIAMSVILLE, NY:  National Fuel Gas Company (“National Fuel” or the “Company”) (NYSE:NFG) today announced consolidated earnings for the third quarter of fiscal 2013 and for the nine months ended June  30, 2013.

 

HIGHLIGHTS

 

l    Earnings for the third quarter of fiscal 2013 of $58.5 million, or $0.69 per share, increased $15.3 million, or $0.17 per share, compared to $43.2 million, or $0.52 per share, for the prior year’s third quarter.  The increase is due to higher earnings across all segments. 

 

l    Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) for the third quarter of fiscal 2013 were $215.1 million compared to $164.5 million for the prior year’s third quarter, an increase of 31%.

 

l    Seneca Resources Corporation’s (“Seneca”) third quarter production of natural gas and crude oil was 34.1 billion cubic feet equivalent (“Bcfe”), an increase of 11.9 Bcfe or approximately 54%.

 

l    The Company is updating and narrowing its GAAP earnings guidance range for fiscal 2013 to a range of $3.00 to $3.10 per share.  The previous earnings guidance had been a range of $2.95 to $3.10 per share.  This revised guidance assumes flat NYMEX equivalent pricing of $3.50 per Million British Thermal Units (“MMBtu”) for natural gas (Henry Hub) and $100 per barrel (“Bbl”) for crude oil (West Texas Intermediate) for unhedged production for the remainder of the fiscal year.  Production for the entire 2013 fiscal year is projected to be between 118 and 124 Bcfe.  The previous guidance for projected production was between 110 and 118 Bcfe.

 

l    The Company’s preliminary GAAP earnings guidance for fiscal 2014 is in the range of $3.05 to $3.30 per share.  The 2014 preliminary guidance includes oil and gas production for the Exploration and Production segment in the range of 134 to 146 Bcfe and is based on an assumed flat NYMEX price of $4.00 per MMBtu for natural gas and $90 per Bbl for oil.

 

l    A conference call is scheduled for Friday, August 9, 2013, at 11 a.m. Eastern Standard Time.

 

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MANAGEMENT COMMENTS

 

Ronald J. Tanski, President and Chief Executive Officer of National Fuel Gas Company, stated:  “The third quarter was another strong quarter for National Fuel.  All of our business segments delivered impressive operating results, which translated into a 35 percent increase in consolidated quarterly earnings.

 

“The connection of new multi-well pads to our midstream production pipelines, and robust production from Seneca’s Pennsylvania wells in Tioga and Lycoming counties helped deliver a 54 percent increase in production over last year’s third quarter.  Our program to evaluate the Marcellus Shale formation across our substantial legacy acreage position also made great strides during the quarter.  Seneca achieved very promising initial results from four new delineation wells across Elk County, Pa.  While the success of these wells is certainly important for the ongoing growth of our upstream exploration and production business, continued development of this Western Development Area acreage will also create additional expansion opportunities for our midstream pipeline businesses.

 

“As we look forward to fiscal 2014, we are in a great position to achieve continued success.  With our solid financial position and considerable growth opportunities, we will remain focused on developing Seneca’s oil and natural gas reserves and building out our pipeline infrastructure to get those reserves to market.  We believe that these assets will produce long-term value for our shareholders.” 

 

 

SUMMARY OF RESULTS

 

National Fuel had consolidated earnings for the quarter ended June 30, 2013, of $58.5 million, or $0.69 per share, compared to the prior year’s third quarter of $43.2 million, or $0.52 per share, an increase of $15.3 million or $0.17 per share. The increase is due to higher earnings in all segments and the All Other category.  (Note:  All references to earnings per share are to diluted earnings per share, all amounts are stated in U.S. dollars and all amounts used in the discussion of earnings are after tax unless otherwise noted.)

 

Consolidated earnings for the nine months ended June 30, 2013, of $212.2 million, or $2.52 per share, increased $40.9 million, or $0.47 per share, from the same period in the prior year where earnings were $171.3 million or $2.05 per share.

 

 

 

 

 

 

 

 

 

 

 

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OPERATING RESULTS

 

 

 

¹See discussion of these individual items below.

 

As outlined in the table above, certain items included in GAAP earnings impacted the comparability of the Company’s financial results when comparing the nine months ended June 30, 2013, to the comparable periods in fiscal 2012.  Excluding one item in the prior fiscal year, Operating Results for the nine months ended June 30, 2013, of $175.3 million, or $2.10 per share, increased $36.9 million, or $0.42 per share, compared to the same period in the prior year.  Items impacting comparability will be discussed in more detail within the discussion of segment earnings below.

 

DISCUSSION OF RESULTS BY SEGMENT  

 

The following discussion of the earnings of each segment is summarized in a tabular form at pages 9 through 12 of this report.  It may be helpful to refer to those tables while reviewing this discussion.

 

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 in Appalachia and California. 

 

The Exploration and Production segment’s earnings in the third quarter of fiscal 2013 of $31.7 million, or $0.38 per share, increased $9.8 million, or $0.12 per share, when compared with the prior year’s third quarter. 

 

Overall production of natural gas and crude oil for the current quarter of 34.1 Bcfe increased approximately 11.9 Bcfe, or 54.0 percent, compared to the prior year’s third quarter.  Production from Seneca’s Appalachia properties increased approximately 12.2

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Bcfe largely because of Seneca’s strong well results in Lycoming County.  California production of 5.0 Bcfe decreased 5.8 percent compared to the prior year’s third quarter primarily due to a temporary gas transportation issue and natural field decline.

 

Changes in commodity prices realized after hedging also impacted earnings.  The weighted average natural gas price received by Seneca (after hedging) for the quarter ended June 30, 2013, was $4.16 per thousand cubic feet (“Mcf”), an increase of $0.09 per Mcf compared to the prior year’s third quarter.  Higher crude oil prices realized after hedging increased earnings.  The weighted average oil price received by Seneca (after hedging) for the quarter ended June 30, 2013, was $97.90 per Bbl, an increase of $8.20 per Bbl. 

 

Depletion expense for the current year’s third quarter increased over last year’s third quarter due to the higher production activity discussed above.  On a per unit basis, depletion decreased $0.40 per thousand cubic feet equivalent (“Mcfe”) due to higher natural gas reserve balances at June 30, 2013, compared to the prior year. Lease operating and transportation expenses (“LOE”) increased due to higher production costs in Appalachia and well repair and workover costs and steam fuel costs in California.  On a per unit basis, LOE increased $0.08 per Mcfe.  General and administrative expenses (“G&A”) increased over the prior year’s third quarter due to higher labor expenses; however, on a per unit basis G&A decreased $0.13 per Mcfe. Earnings were also impacted by higher interest expense due to a higher outstanding debt balance and higher state income taxes due to increased production in Pennsylvania.  

 

The Exploration and Production segment’s earnings of $86.1 million, or $1.02 per share, for the nine months ended June 30, 2013, increased $11.7 million, or $0.13 per share, when compared with the nine months ended June 30, 2012. 

 

In February 2012, the Commonwealth of Pennsylvania passed legislation that included a “natural gas impact fee.”  The fee was retroactive and applied to wells drilled before and after the legislation was passed.  The impact fee recorded in the second quarter of fiscal 2012 that related to prior fiscal years was $6.2 million (pre-tax).  Excluding this amount from the prior year’s results, Operating Results for the nine months ended June 30, 2013, of $86.1 million, or $1.02 per share, compared to Operating Results of $78.5 million, or $0.94 per share for the prior year’s nine-month period.

 

Overall production for the nine months ended June 30, 2013, increased approximately 48.7 percent to 87.4 Bcfe.  Production from Seneca’s Appalachia properties increased approximately 29.3 Bcfe.  California production of 14.8 Bcfe decreased slightly compared with the prior year’s nine-month period for the reasons noted above.

 

Changes in commodity prices realized after hedging also impacted earnings.  The weighted average natural gas price received by Seneca (after hedging) for the nine months ended June 30, 2013, was $4.13 per Mcf, a decrease of $0.44 per Mcf compared to the prior year’s nine-month period.  Higher crude oil prices realized after hedging increased earnings.  The weighted average oil price received by Seneca (after hedging) for the nine months ended June 30, 2013, was $97.88 per Bbl, an increase of $6.38 per Bbl.

 

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Depletion, LOE and G&A for the nine months ended June 30, 2013, increased compared to the prior year’s nine-month period due to the higher production activity discussed above.  On a per unit basis, depletion, LOE and G&A decreased $0.28 per Mcfe, $0.02 per Mcfe and $0.16 per Mcfe, respectively.  Earnings were also impacted by higher interest expense due to a higher outstanding debt balance and higher state income taxes as noted above for the quarter.  

 

Pipeline and Storage Segment

 

The Pipeline and Storage segment 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 western Pennsylvania.

 

The Pipeline and Storage segment’s earnings of $14.1 million, or $0.17 per share, for the quarter ended June 30, 2013, increased $1.4 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 non-affiliated transportation revenues from the Northern Access and Line N 2012 Expansion projects, which were completed and placed in service in the current year’s first quarter.  Earnings also increased due to lower depreciation expense, which was largely driven by a reduction in Supply Corporation’s depreciation rates as required by its 2012 rate case settlement.  Earnings were reduced by higher operating expenses, higher income taxes and a lower allowance for funds used during construction (due to the completion of the expansion projects mentioned above).

 

The Pipeline and Storage segment’s earnings of $47.8 million, or $0.57 per share, for the nine months ended June 30, 2013, increased $12.4 million, or $0.15 per share, when compared with the same period in the prior fiscal year.  The increase was mostly due to higher non-affiliated transportation revenues from the Northern Access and Line N 2012 Expansion projects and lower depreciation expense as required by Supply Corporation’s 2012 rate case settlement.  Earnings were reduced by higher operating expenses, higher income taxes and lower AFUDC as noted above for the quarter.

 

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 $7.6 million, or $0.09 per share, for the quarter ended June 30, 2013, increased $2.5 million or $0.03 per share.   Colder weather combined with higher usage in Pennsylvania was the primary reason for the increase in earnings in the current year’s third quarter.  Temperatures in Pennsylvania were 5.3 percent colder in the current year’s third quarter than the third quarter of 2012.  In New York, the impact of weather variations on earnings is mitigated by that jurisdiction’s weather normalization clause. 

 

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The Utility segment’s earnings of $65.0 million, or $0.77 per share, for the nine months ended June 30, 2013, increased from earnings of $52.7 million, or $0.63 per share, for the nine months ended June 30, 2012.  Colder weather in Pennsylvania was the main reason for the increase in earnings in the current nine-month period.  Temperatures in Pennsylvania were 18.1 percent colder in the nine months ended June 30, 2013, than in the prior year’s nine-month period.  Lower operating expenses (mainly attributable to a decrease in bad debt expense), lower interest expense (mainly due to a lower outstanding debt balance) and a lower effective tax rate (as a result of a settlement with taxing authorities), also contributed to higher earnings in the Utility segment.

 

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, 2013, of $1.0 million increased by less than $0.1 million from the prior year’s third quarter earnings.  Earnings for the nine months ended June 30, 2013, of $5.7 million increased $1.1 million compared to the prior year’s nine-month period.  The increase in earnings for the nine-month period was mainly due to higher average margins largely driven by a greater benefit derived from the Energy Marketing segment’s contracts for storage capacity.

 

Corporate and All Other

 

The Corporate and All Other category includes the following active, wholly owned subsidiaries of the Company:  National Fuel Gas Midstream Corporation (“Midstream”), formed to build, own and operate natural gas processing and pipeline gathering facilities in the Appalachian region and the Northeast division of Seneca Resources Corporation that markets high quality hardwoods from Appalachian land holdings.

 

The Corporate and All Other category earnings of $4.1 million, for the quarter ended June 30, 2013, increased $1.5 million compared to the prior year’s third quarter.  Earnings for the nine months ended June 30, 2013, of $7.5 million increased $3.4 million compared to the prior year’s nine-month period.  The increase in earnings in both the current quarter and nine-month period is mainly due to higher earnings from Midstream’s pipeline gathering and natural gas processing operation.  Midstream’s Trout Run gathering system in Lycoming County, Pa., and its Covington gathering system in Tioga County, Pa., have provided the critical gathering infrastructure for transporting Seneca’s Marcellus Shale production to the interstate pipeline system.

 

 

EARNINGS GUIDANCE

 

The Company is updating and narrowing its GAAP earnings guidance range for fiscal 2013 to a range of $3.00 to $3.10 per share.  The previous earnings guidance had been a range of $2.95 to $3.10 per share.  This revised guidance assumes flat NYMEX

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equivalent pricing of $3.50 per MMBtu for natural gas (Henry Hub) and $100 per Bbl for crude oil (West Texas Intermediate) for unhedged production for the remainder of the fiscal year.  Production for the entire 2013 fiscal year is projected to be between 118 and 124 Bcfe.  The previous guidance for projected production was between 110 and 118 Bcfe.

 

The Company’s preliminary GAAP earnings guidance for fiscal 2014 is in the range of $3.05 to $3.30 per share.  This includes oil and gas production for the Exploration and Production segment in the range of 134 to 146 Bcfe and is based on an assumed flat NYMEX price of $4.00 per MMBtu for natural gas and $90 per Bbl for crude oil.

 

 

EARNINGS TELECONFERENCE

 

The Company will host a conference call on Friday, August 9, 2013, 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) 1-866-788-0542, and using the passcode “45174998.”  For those unable to listen to the live conference call, a replay will be available at approximately 2 p.m. (Eastern Time) at the same website link and by phone at (toll-free) 1-888-286-8010 using passcode “99154741.”  Both the webcast and telephonic replay will be available until the close of business on Friday, August 16, 2013.

 

National Fuel is an integrated energy company with $6.3 billion in assets comprised of the following four operating segments: Exploration and Production, Pipeline and Storage, 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; 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

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activities such as hydraulic fracturing; changes in the price of natural gas or oil; impairments under the SEC’s full cost ceiling test for natural gas and oil reserves; 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; governmental/regulatory actions, initiatives and proceedings, including those involving rate cases (which address, among other things, allowed rates of return, rate design and retained natural gas), environmental/safety requirements, affiliate relationships, industry structure, and franchise renewal; 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; 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 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; changes in price differential between similar quantities of natural gas at different geographic locations, and the effect of such changes on the demand for pipeline transportation capacity to or from such locations; other changes in price differentials between similar quantities of oil or natural gas having different quality, heating value, geographic location or delivery date; 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; the cost and effects of legal and administrative claims against the Company or activist shareholder campaigns to effect changes at the Company; 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.

 

 

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⁽²⁾  Capital expenditures for the nine months ended June 30, 2013 exclude capital expenditures of $38.9 million, $12.7 million, $3.2 million and $12.7 million in the Exploration and Production segment, Pipeline and Storage segment, Utility segment and the All Other category, respectively.  These amounts were in accounts payable and accrued liabilities at September 30, 2012 and paid during the nine months ended June 30, 2013.     These amounts were excluded from the Consolidated Statement of Cash Flows at September 30, 2012 since they represented non-cash investing activities at that date.  These amounts have been included in the Consolidated Statement of Cash Flows at June 30, 2013. 

 

⁽³⁾   Capital expenditures for the quarter and nine months ended June 30, 2012 include accounts payable and accrued liabilities related to capital expenditures of $92.2 million, $8.6 million, $1.0 million and $16.8 million in the Exploration and Production segment, Pipeline and Storage segment, Utility segment and the All Other category, respectively. These amounts have been excluded from the Consolidated Statement of Cash Flows at June 30, 2012 since they represented non-cash investing activities at that date.

 

⁽⁴⁾  Capital expenditures for the nine months ended June 30, 2012 exclude capital expenditures of $103.3 million, $16.4 million, $2.3 million and $3.1 million in the Exploration and Production segment, Pipeline and Storage segment, Utility segment and the All Other category, respectively.  These amounts were in accounts payable and accrued liabilities at September 30, 2011 and paid during the nine months ended June  30, 2012.  These amounts were excluded from the Consolidated Statements of Cash Flows at September  30, 2011 since they represented non-cash investing activities at that date.  These amounts have been included in the Consolidated Statement of Cash Flows at June 30, 2012.

 

 

 

 

 

 

 

 

 

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*    Please refer to forward looking statement footnote beginning at page 7 of document.

 

^  This sensitivity table is current as of August 8, 2013 and only considers revenue from the Exploration and Production segment's crude oil and natural gas sales.  This revenue is based upon pricing used in the Company's earnings forecast.  For its fiscal 2014 earnings forecast, the Company is utilizing flat NYMEX equivalent commodity pricing, exclusive of basis differential, of $4.00 per MMBtu for natural gas and $90 per Bbl for crude oil.  The sensitivities will become obsolete with the passage of time, changes in Seneca's production forecast, changes in basis differential, as additional hedging contracts are entered into, and with the settling of hedge contracts at their maturity. 

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NATIONAL FUEL GAS COMPANY

AND SUBSIDIARIES

 

ADJUSTED EBITDA

 

In addition to financial measures calculated in accordance with generally accepted accounting principles (GAAP), this press release contains information regarding Adjusted EBITDA, which is a non-GAAP financial measure.  The Company believes that this non-GAAP financial measure is useful to investors because it provides an alternative method for assessing the Company's ongoing operating results.  The Company's management uses this non-GAAP financial measure for the same purpose, and for planning and forecasting purposes.  The presentation of non-GAAP financial measures is not meant to be a substitute for financial measures in accordance with GAAP. 

 

Management defines Adjusted EBITDA as reported GAAP earnings before the following items:  interest expense, depreciation, depletion and amortization, interest and other income, impairments, items impacting comparability and income taxes.  Management believes Adjusted EBITDA is an important measure of the Company’s cash flow and liquidity, and a key measure for comparing the Company’s financial performance to other companies.

 

The following tables reconcile National Fuel's net income to Adjusted EBITDA for the three and nine months ended June 30, 2013:

 

 

 

 

 

 

 

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