National Fuel Gas : Reports 2014 Earnings

National Fuel Gas Company (“National Fuel” or the “Company”) (NYSE:NFG) today announced consolidated earnings for the fourth quarter and fiscal year ended September 30, 2014, of $57.4 million, or $0.68 per share, and $299.4 million, or $3.52 per share, respectively.

HIGHLIGHTS

• Consolidated earnings before items impacting comparability (“Operating Results”) for the fourth quarter and fiscal year ended September 30, 2014, were $50.4 million, or $0.60 per share, and $291.8 million, or $3.43 per share, respectively.
• Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) for fiscal 2014, were $953.5 million compared to $852.1 million for the prior year, an increase of 12%.
• In the Midstream businesses (which consist of the Company's Pipeline and Storage and Gathering segments), Adjusted EBITDA for fiscal 2014 were $250.1 million, a 31% increase over the prior year.
• Seneca Resources Corporation’s (“Seneca”) fourth quarter production of natural gas and crude oil was 46.0 billion cubic feet equivalent (“Bcfe”), an increase of 12.7 Bcfe or approximately 38% over the prior year’s fourth quarter. Pricing related curtailments for the quarter were approximately 5 Bcf. Average daily production during the quarter was 500 million cubic feet equivalent (“MMcfe”) per day. Total production for fiscal 2014 increased to 160.5 Bcfe, an increase of 39.8 Bcfe over the prior year.
• Seneca’s total reserves at September 30, 2014, were 1.9 trillion cubic feet equivalent (“Tcfe”), an increase of 365 Bcfe or 24%. Seneca replaced 327% of fiscal 2014 production.
• A conference call is scheduled for Friday, November 7, 2014, at 11 a.m. Eastern Time.

MANAGEMENT COMMENTS

Ronald J. Tanski, President and Chief Executive Officer of National Fuel Gas Company, stated: “I am pleased to report the results of another very successful fiscal year. While each of our business segments had a solid operating performance during our 2014 fiscal year, our midstream businesses were the main driver of our increased earnings.

“We continue to capitalize on opportunities to build midstream pipeline infrastructure to move clean-burning natural gas produced from the Marcellus Shale to the market areas.

“The exploration success that producers have enjoyed in the Appalachian Basin in both the Marcellus and Utica shales has outstripped available pipeline capacity and has placed near-term commodity pricing pressure on those producers, including our own Seneca Resources. Those pricing pressures are evidenced by our decrease in earnings guidance for our next fiscal year. Customers of our Utility segment were the primary beneficiaries of increasing production in the basin, where ample supplies of flowing natural gas and gas withdrawn from storage helped to keep heating bills low over this past winter, which was the coldest in 50 years.

“Looking ahead to 2015 and 2016, we will continue our plan to develop and build midstream projects to help alleviate capacity constraints and pricing pressures facing Seneca. In addition, Seneca’s ongoing drilling program will be designed to increase our production and fill the firm pipeline capacity that Seneca has committed to in 2016 and 2017.

“We are in a great position to continue the growth of the Company. Our integrated structure allows the ongoing efficient development of our mineral acreage, which is made more valuable by our investments in pipeline infrastructure that provides access to markets that are becoming more reliant on this abundant and clean burning fuel.”

EXPLORATION AND PRODUCTION SEGMENT OPERATIONS UPDATE

Seneca has continued to focus on the development of its Western Development Area (“WDA”) acreage in the Marcellus Shale, where Seneca is operating two of its three horizontal drilling rigs. The third rig, which is currently drilling a Utica delineation well in Tioga County, Pa., is expected to return to drilling in the WDA during the first quarter of fiscal 2015. Seneca’s Marcellus development in fiscal 2015 will be focused almost exclusively on the WDA in order to develop natural gas production to fill approximately 500 MMcfe per day of pipeline transportation capacity associated with the Northern Access 2015 and Northern Access 2016 expansion projects.

During the fourth quarter, Seneca brought on 15 new Marcellus development wells in the greater Clermont-Rich Valley area. These wells, located on Pad N and Pad H where Seneca pays no royalty and, therefore, has a 100% net working and revenue interest, had a combined average initial 24-hour production rate of 8.1 MMcfe per day. The wells had an average lateral length of 5,710 feet and were completed using a reduced cluster spacing (“RCS”) design, averaging 38 stages per well. The average capital cost to drill and complete each of these wells was approximately $6.1 million. The 9-well Pad N, brought on-line in July 2014, continues to post strong production rates that averaged 4.4 MMcf per well per day over its first 60 days of production, which is consistent with our type curve for that area.

In addition, Seneca began producing from a new 10-well pad at DCNR Tract 100 in Lycoming County, Pa., and a new 5-well pad at DCNR Tract 595 in Tioga County, Pa. On the new DCNR 100 Pad T, Seneca drilled its most successful Marcellus well to date, which produced at a 24-hour peak rate of 25.7 MMcf per day.

During fiscal year 2014, Seneca replaced 327% of production to reach a total of 1.914 Tcfe of proved crude oil and natural gas reserves as of September 30, 2014. Seneca’s success through the drill bit in the Marcellus Shale led to a 383 Bcf, or 30% increase in natural gas reserves, which totaled 1.683 Tcf at fiscal year end. Crude oil reserves, which decreased by 8% largely due to production, totaled 38.5 million barrels (“Bbls”) at September 30, 2014. Consolidated finding and development costs for the year were $1.15 per thousand cubic feet equivalent (“Mcfe”), down from fiscal 2013’s $1.31 per Mcfe.

Of the total reserves, 73% were classified as proved developed reserves. This is an increase from 71% proved developed reserves as of September 30, 2013. Proved undeveloped (“PUD”) reserves totaled 27% of the total reserves at the end of the fiscal year.

SUMMARY OF RESULTS

National Fuel Gas had consolidated earnings for the quarter ended September 30, 2014, of $57.4 million, or $0.68 per share, compared to the prior year’s fourth quarter of $47.8 million, or $0.57 per share, an increase of $9.6 million, or $0.11 per share. The increase is mainly due to higher earnings in the Midstream and Upstream businesses. (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.)

Consolidated earnings for the fiscal year ended September 30, 2014, of $299.4 million, or $3.52 per share, increased $39.4 million, or $0.44 per share, from the same period in the prior year where earnings were $260.0 million or $3.08 per share.

¹ See 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 quarter and fiscal year ended September 30, 2014, to the comparable periods in fiscal 2013. Excluding these items, Operating Results for the current quarter of $50.4 million, or $0.60 per share, decreased $2.1 million, or $0.03 per share, from the prior year’s fourth quarter where Operating Results were $52.5 million or $0.63 per share. Excluding these items, Operating Results for the fiscal year ended September 30, 2014, of $291.8 million, or $3.43 per share, increased $21.9 million, or $0.23 per share, from the prior year where Operating Results were $269.9 million or $3.20 per share. Items impacting comparability will be discussed in more detail with 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 11 through 14 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 earnings in the fourth quarter of fiscal 2014 of $33.7 million, or $0.40 per share, increased $4.4 million, or $0.05 per share, when compared with the prior year’s fourth quarter. In the current year’s fourth quarter Seneca reduced its state deferred income tax liability by $7.0 million. The decrease in income taxes was largely due to an anticipated increase in firm transportation of natural gas to Canadian delivery points, which decreased the effective tax rate used in the calculation of deferred tax expense. Excluding this adjustment, Operating Results in the Exploration and Production segment of $26.7 million, or $0.32 per share, decreased $2.6 million, or $0.03 per share, when compared to the prior year’s fourth quarter.

Overall production of natural gas and crude oil for the current quarter of 46.0 Bcfe increased approximately 12.7 Bcfe, or 38.3 percent, compared to the prior year’s fourth quarter. Production from Seneca’s Appalachia properties increased approximately 12.3 Bcfe or 43.8 percent. California production of 5.5 Bcfe increased 7.3 percent compared with the prior year’s fourth quarter due to increased development activities, primarily in the East Coalinga and South Midway Sunset fields.

Lower commodity prices realized after hedging reduced Operating Results. The weighted average natural gas price received by Seneca (after hedging) for the quarter ended September 30, 2014, was $3.19 per thousand cubic feet (“Mcf”), a decrease of $0.80 per Mcf compared to the prior year’s fourth quarter. The weighted average crude oil price realized after hedging for the quarter ended September 30, 2014, was $93.70 per Bbl, a decrease of $5.50 per Bbl compared to the prior year’s fourth quarter.

On a per unit basis, quarterly depletion expense of $1.76 per Mcfe, decreased $0.20 per Mcfe due to higher natural gas reserve balances at September 30, 2014, compared to the prior year’s fourth quarter. On a per unit basis, lease operating and transportation expenses (“LOE”) at $1.02 per Mcfe increased $0.06 per Mcfe compared to the prior year’s fourth quarter due to higher intercompany gathering and compression costs associated with production from Tract 100 in Lycoming County, Pa., and the Clermont-Rich Valley area in Seneca’s WDA. Higher well repair and steam fuel costs in California also contributed to the per unit increase. General and administrative expenses (“G&A”) decreased $0.11 per Mcfe compared to the prior year’s fourth quarter, due to higher production. Operating Results were increased by a $4.7 million change in Seneca’s quarterly mark to market adjustment relating to hedging ineffectiveness associated with certain crude oil and natural gas hedges.

The Exploration and Production segment’s earnings were $121.6 million, or $1.43 per share, for the fiscal year ended September 30, 2014, compared to earnings of $115.4 million, or $1.37 per share, for the fiscal year ended September 30, 2013. Including the deferred income tax adjustment described above for the quarter, Seneca had deferred income tax adjustments in both fiscal 2013 and 2014, the sum of which decreased earnings by $5.0 million and increased earnings by $4.0 million, respectively. Excluding these items, Operating Results in the Exploration and Production segment of $117.6 million, or $1.38 per share, decreased $2.8 million, or $0.05 per share, when compared to the prior year.

Overall production of natural gas and crude oil for the fiscal year ended September 30, 2014, of 160.5 Bcfe increased approximately 39.8 Bcfe, or 33.0 percent, compared to the prior year. Production from Seneca’s Appalachia properties increased approximately 38.5 Bcfe or 38.2 percent. California production of 21.2 Bcfe increased 6.9 percent compared with the prior year.

Lower commodity prices realized after hedging in the current fiscal year reduced earnings. The weighted average natural gas price received by Seneca (after hedging) for the fiscal year ended September 30, 2014, was $3.56 per Mcf, a decrease of $0.54 per Mcf compared to the prior year. The weighted average crude oil price realized after hedging for the fiscal year ended September 30, 2014, was $95.55 per Bbl, a decrease of $2.66 per Bbl.

On a per unit basis for the fiscal year ended September 30, 2014, depletion expense of $1.85 per Mcfe decreased $0.17 per Mcfe due to higher natural gas reserve balances at September 30, 2014. LOE of $1.03 per Mcfe increased $0.04 per Mcfe due to higher intercompany transportation costs in Appalachia and higher steam fuel costs in California, and G&A of $0.40 per Mcfe decreased $0.12 per Mcfe compared to the prior year, due to higher production. Operating Results for the fiscal year ended September 30, 2014, were reduced by higher property taxes in California, a higher Pennsylvania impact fee, and higher interest expense due to a higher outstanding debt balance. These factors were partially offset by a net $2.3 million change in the derivative mark to market adjustment associated with certain crude oil and natural gas hedges.

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 $19.1 million, or $0.22 per share, for the quarter ended September 30, 2014, increased $3.7 million, or $0.04 per share, when compared with the same period in the prior fiscal year. The increase in earnings reflects higher non-affiliated transportation revenues from new transportation contracts. As a result of the ongoing pricing basis differentials in the Marcellus basin, the Pipeline and Storage segment continues to see increased demand for transportation services from producers and marketers. Earnings for the quarter also benefitted from lower pension and other post retirement benefit costs.

The Pipeline and Storage segment’s earnings of $77.6 million, or $0.91 per share, for the fiscal year ended September 30, 2014, increased $14.3 million, or $0.16 per share, when compared with the same period in the prior fiscal year. The increase was mostly due to higher non-affiliated transportation revenues and lower pension and other post retirement benefit costs. The increase in transportation revenues was due to the Company's recent expansion projects as well as an overall increase in demand for short-term transportation services as a result of the cold winter of 2013-14.

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 critical gathering infrastructure for transporting Seneca’s Marcellus Shale production to the interstate pipeline system.

The Gathering segment’s earnings of $10.5 million, or $0.12 per share, for the quarter ended September 30, 2014, increased $6.6 million, or $0.07 per share, when compared with the same period in the prior fiscal year. Earnings of $32.7 million, or $0.39 per share, for the fiscal year ended September 30, 2014, increased $19.4 million, or $0.23 per share, when compared with the same period in the prior fiscal year. The increase in earnings for the quarter and the fiscal year is mainly due to higher gathering revenues from Midstream’s Trout Run and Clermont gathering systems. That increase in revenue was directly related to the increase in Seneca’s production volumes as described above.

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 loss of $0.5 million, or $0.01 per share, for the quarter ended September 30, 2014, compared to earnings of $0.7 million, or $0.01 per share, in the prior year’s fourth quarter, a decrease in earnings of $1.2 million or $0.02 per share. During the prior year’s fourth quarter, Distribution recorded a reserve of $4.7 million in connection with various issues raised in the recent New York rate proceeding. Excluding this reserve, Operating Results in the Utility segment decreased $5.9 million, or $0.08 per share, primarily as a result of higher operating costs. The increase in operating costs was mostly attributable to higher bad debt, pension and other post retirement benefit expenses. In addition, Distribution’s new rate agreement in New York contains an earnings sharing mechanism under which Distribution shares a portion of its earnings above a 9.5 percent return on equity. During the quarter, Distribution recorded a $0.8 million reserve for earnings sharing.

The Utility segment’s earnings of $64.1 million, or $0.75 per share, for the fiscal year ended September 30, 2014, decreased $1.6 million, or $0.03 per share, when compared with the prior fiscal year. Excluding a total $4.9 million reserve recorded in the prior fiscal year in connection with the New York rate proceeding noted above, Operating Results decreased $6.5 million, or $0.09 per share, due to higher operating expenses, consisting mostly of higher bad debt, pension and other post retirement benefit related costs, and, a reserve for earnings sharing. Higher income taxes which were the result of a non-recurring tax benefit recorded in the prior year also reduced earnings. Colder weather in Pennsylvania increased earnings in the current year. Temperatures in Pennsylvania were 14.5 percent colder during the fiscal year ended September 30, 2014, than in the prior year. In New York, the impact of weather variations on earnings is mitigated by that jurisdiction’s weather normalization clause.

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 September 30, 2014, of $0.7 million increased $1.8 million compared to the prior year’s fourth quarter due to higher per unit margins. Earnings for the fiscal year ended September 30, 2014, of $6.6 million increased $2.0 million due to higher per unit margins and higher volumes sold resulting from weather that was significantly colder than the prior year.

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 $6.0 million in the quarter ended September 30, 2014, compares to a loss of $0.3 million in the prior year’s fourth quarter. The increase in the loss in the fourth quarter is mainly due to higher income taxes due to an intercompany deferred tax reallocation in the prior year’s fourth quarter.

The Corporate and All Other category loss of $3.1 million, for the fiscal year ended September 30, 2014, compares to a loss of $2.2 million in the prior year. The comparability of the fiscal year results is impacted by a $3.6 million gain recognized on corporate-owned executive life insurance policies. Excluding this item, Operating Results for the fiscal year ended September 30, 2014, a loss of $6.7 million, compares to a loss of $2.2 million in the prior year. The increase in the loss for the in the current fiscal year is mainly due to higher income taxes due to an intercompany deferred tax reallocation in the prior year.

EARNINGS GUIDANCE

The Company is updating its GAAP earnings guidance range for fiscal 2015 to a range of $3.05 to $3.35 per share. The previous earnings guidance had been a range of $3.30 to $3.60 per share. Substantially all of the change is attributable to a decrease in the commodity price assumptions reflected in the forecast. In particular:

• The Company is now assuming Marcellus spot pricing averages between $2.50 and $2.75 per Mcf, down $0.25 per Mcf from the previous range of $2.75 and $3.00 per Mcf. At the midpoint, this change reduced earnings expectations by approximately $0.14 per share.
• NYMEX natural gas prices are now assumed to average $4.00 per MMBtu for the fiscal year, down $0.25 from the previous forecast. However, because substantially all of Seneca's firm sales have been hedged, this change had minimal impact on earnings expectations.
• The Company is now assuming NYMEX crude oil prices average $85 per Bbl for the fiscal year, down $10.00 from the previous forecast. At the midpoint, this change reduced earnings expectations by approximately $0.10 per share.

The Company's forecast oil and gas production for fiscal 2015 is unchanged at 180 to 220 Bcfe.

EARNINGS TELECONFERENCE

The Company will host a conference call on Friday, November 7, 2014, 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) 1-866-202-3048, using passcode “36011529.” 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 “40197121.” Both the webcast and telephonic replay will be available until the close of business on Friday, November 14, 2014.

National Fuel is an integrated energy company with $6.7 billion in assets, including the following 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; 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, allowed rates of return, rate design and retained natural gas), environmental/safety requirements, affiliate relationships, industry structure, and franchise renewal; changes in the price of natural gas or oil; changes in price differential 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 and oil having different quality, heating value, hydrocarbon mix or delivery date; 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; 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; 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; 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.