National Fuel Reports Third Quarter Fiscal 2024 Earnings and Announces Preliminary Guidance for Fiscal 2025

WILLIAMSVILLE, N.Y., July 31, 2024 (GLOBE NEWSWIRE) -- National Fuel Gas Company (“National Fuel” or the “Company”) (NYSE:NFG) today announced consolidated results for the third quarter of its 2024 fiscal year and for the nine months ended June 30, 2024.

FISCAL 2024 THIRD QUARTER SUMMARY

• GAAP net loss of $54.2 million, or $0.59 per share, which includes a $145.0 million non-cash, after-tax impairment charge related to the carrying value of exploration and production properties, compared to GAAP net income of $92.6 million, or $1.00 per share, in the prior year.
• Adjusted operating results of $91.7 million, or $0.99 per share, compared to $93.4 million, or $1.01 per share, in the prior year (see non-GAAP reconciliation on page 2).
• Pipeline and Storage segment net income increased $6.9 million, or 29%, from the prior year, primarily due to the resolution of the National Fuel Gas Supply Corporation (“Supply Corporation”) rate proceeding.
• Utility segment net income increased $2.5 million compared to the prior year, largely as a result of the continued impact of a rate increase in National Fuel Gas Distribution Corporation’s (“Distribution Corporation”) Pennsylvania service territory that went into effect August 2023.
• Exploration and Production segment, Seneca Resources Company, LLC (“Seneca”), produced 96.5 Bcf of natural gas, an increase of 2% from the prior year despite approximately 5.6 Bcf of price-related curtailments in the quarter.
• Realized natural gas prices of $2.28 per Mcf, an increase of $0.01 per Mcf from the prior year, as hedging gains more than offset a $0.20 per Mcf decrease in NYMEX prices from the prior year.
• Gathering segment net income increased by $0.8 million, or 3%, driven by continued growth in throughput related to Seneca’s development program.
• The Company continued to prioritize shareholder returns this quarter as the Board approved a 4% increase in the dividend, for an annual rate of $2.06 per share, while also purchasing approximately 527,000 shares year-to-date for $29 million at an average share price of $54.28, under our share repurchase program.
• The Company is narrowing its fiscal 2024 earnings guidance to a range of $5.00 to $5.10 per share, excluding items impacting comparability, and initiating its fiscal 2025 earnings guidance with a range of $5.75 to $6.25 per share, an increase of 19% from fiscal 2024, at the midpoint (see Guidance Summary on page 8). This increase in earnings growth supports the Company's average annual increase in earnings per share which is expected to exceed 10% over the next three years.
  

MANAGEMENT COMMENTS

David P. Bauer, President and Chief Executive Officer of National Fuel Gas Company, stated: “National Fuel’s solid third quarter adjusted operating results were bolstered by increased earnings from our rate-regulated businesses and our disciplined hedging program, which mitigated a large portion of the potential impact of lower natural gas prices in our upstream business. Despite this near-term commodity price challenge, National Fuel’s long-term outlook for growing earnings and free cash flow remains strong.

“Our ongoing transition to Seneca’s Eastern Development Area (“EDA”) continues to exceed expectations and positions us well to see further improvements in capital efficiency. We are also seeing significant growth in our regulated businesses as a result of recent ratemaking activity and our ongoing modernization programs. Combining our solid operational execution across our assets with the strong long-term outlook for natural gas prices, we expect to deliver greater than 10% average annual growth in earnings per share over the next three years.

“Additionally, National Fuel’s strong outlook supports our commitment to returning an increasing amount of capital to shareholders through our long-standing and growing dividend, as well as our share repurchase program authorized earlier this year. This commitment to return cash to shareholders, along with our expected growth in earnings and free cash flow, and our continued focus on delivering strong returns on capital, provide an excellent foundation to drive significant value for shareholders.”

RECONCILIATION OF GAAP EARNINGS TO ADJUSTED OPERATING RESULTS

FISCAL 2024 GUIDANCE UPDATE

National Fuel is revising its fiscal 2024 earnings guidance to a range of $5.00 to $5.10 per share, an increase of 3% at the midpoint of the Company’s prior guidance range. This updated range, which excludes items impacting comparability, reflects the results of the third quarter along with updated assumptions for the remaining three months of the year.

The Company is now assuming NYMEX natural gas prices will average $2.40 per MMBtu for the remainder of fiscal 2024, an increase of $0.40 from the prior assumption. For guidance purposes, this updated natural gas price projection approximates the current NYMEX forward curve.

The Exploration and Production segment’s fiscal 2024 net production is now expected to be in the range of 390 to 400 Bcf, a decrease of 2.5 Bcf from previous guidance at the midpoint. This decrease is driven by the impact of approximately 5.6 Bcf of price-related curtailments due to low in-basin pricing during the third quarter, partially offset by better-than-expected results in the EDA. This guidance range does not incorporate any future price-related curtailments over the remainder of the fiscal year. Seneca currently has firm sales contracts in place for approximately 95% of its projected remaining fiscal 2024 natural gas production, significantly limiting its exposure to in-basin markets. Approximately 73% of expected remaining production is either matched by a financial hedge or was entered into at a fixed price.

Seneca is also reducing its fiscal 2024 capital guidance by $10 million at the top end of the range, or $5 million at the midpoint of guidance. This is the second consecutive quarter of capital reductions at Seneca as a result of operational efficiencies associated with the ongoing transition to the EDA and is indicative of the capital efficiency trends we are realizing as we head into fiscal 2025.

The Company’s other fiscal 2024 guidance assumptions remain largely unchanged and are detailed in the table on page 8.

INITIATION OF FISCAL 2025 PRELIMINARY GUIDANCE

In the non-regulated Exploration and Production and Gathering segments, the ongoing transition to the highly prolific EDA and lower activity compared to fiscal 2024 is anticipated to drive modest long-term production growth (0-5% annually) and reduce capital expenditures, furthering the trend of enhancing capital efficiency. Combining this with the outlook for higher natural gas prices, these segments are positioned to generate increasing earnings and free cash flow in fiscal 2025. In addition, recent and ongoing ratemaking activity, along with continued investments in system modernization, is expected to drive meaningful growth in rate base and earnings at the Company’s rate-regulated segments.

As a result of these factors, the Company is initiating preliminary earnings guidance for fiscal 2025 with a range of $5.75 to $6.25 per share, or $6.00 per share at the midpoint, an increase of 19% from the midpoint of the revised fiscal 2024 guidance range.

Seneca’s fiscal 2025 net production is expected to increase to a range of 400 to 420 Bcf, an increase of 4% versus fiscal 2024 at the midpoint of the guidance range. In addition, the Company is assuming NYMEX natural gas prices of $3.25 per MMBtu for the year, which will drive expected natural gas price realizations after hedging to increase by approximately $0.20 per Mcf from estimated fiscal 2024 realizations.

Overall, Seneca has firm sales contracts in place for approximately 88% of its expected fiscal 2025 natural gas production, significantly limiting its exposure to in-basin markets. Approximately 60% of expected production is supported by financial hedges or fixed price contracts, balancing downside protection with upside opportunity. To the extent that NYMEX increases $0.25 per MMBtu for the year, we would expect earnings per share to increase by approximately $0.35 per share, whereas a decrease to prices of $0.25 per MMBtu would reduce projected earnings per share by $0.30.

In the Company’s regulated segments, the impact of the recently settled Supply Corporation rate case is expected to drive continued revenue growth in the Pipeline and Storage segment, with revenues projected to be in a range of $415 million to $435 million, which at the midpoint represents a 4% increase from the fiscal 2024 guidance range. In addition, in the Utility segment, the Company is proceeding with the rate case filed in late 2023 in its New York jurisdiction. The impact of the expected base rate increase is expected to further contribute to growing margin and net income in this segment.

The Company’s consolidated capital expenditures in fiscal 2025 are expected to be in a range of $885 million to $970 million, which is largely in line with fiscal 2024 guidance.

Capital expenditures in the Company’s rate-regulated Pipeline and Storage and Utility segments, collectively, are expected to be in the range of $295 million to $335 million for fiscal 2025, an increase of 8% from fiscal 2024 at the midpoint. Most of this spending will be focused on modernization programs that further enhance the safety, reliability, and resiliency of the Company’s critical infrastructure, and contribute to the ongoing reduction in the Company’s emissions profile. Investments in these businesses, combined with ongoing ratemaking activity to timely recovery on these investments, provide for the ability to generate stable, predictable, value-accretive returns, and are an efficient means of deploying cash flow generated across the Company to the long-term benefit of shareholders.

The Company projects fiscal 2025 capital expenditures in its Exploration and Production and Gathering segments, collectively, to be in the range of $590 million to $635 million, a decrease of $25 million, or 4%, from fiscal 2024 at the midpoint. This capital program assumes a pace of development driven by operating a single, dedicated frac fleet throughout the year. Further, Seneca plans to operate one to two horizontal rigs and intermittently operate a top hole rig. In addition, the Gathering segment will continue its multi-year build out of key centralized infrastructure in the Tioga County region, which supports Seneca’s EDA development activity.

Additional details on the Company’s updated forecast assumptions and business segment guidance for fiscal 2024 and fiscal 2025 are outlined in the table on page 8.

DISCUSSION OF THIRD QUARTER RESULTS BY SEGMENT

The following earnings discussion of each operating segment for the quarter ended June 30, 2024 is summarized in a tabular form on pages 9 and 10 of this report (earnings drivers for the nine months ended June 30, 2024 are summarized on pages 11 and 12). It may be helpful to refer to those tables while reviewing this discussion.

Note that management defines adjusted operating results as reported GAAP earnings adjusted for items impacting comparability, and adjusted EBITDA as reported GAAP earnings before the following items: interest expense, income taxes, depreciation, depletion and amortization, other income and deductions, impairments, and other items reflected in operating income that impact comparability.

Upstream Business

Exploration and Production Segment

The Exploration and Production segment operations are carried out by Seneca. Seneca explores for, develops and produces primarily natural gas reserves in Pennsylvania.

Seneca’s third quarter GAAP earnings decreased $155.4 million versus the prior year. This was primarily driven by a non-cash, pre-tax impairment charge of $200.7 million ($145.0 million after-tax) to write-down the carrying value of Seneca’s reserves under the full cost method of accounting. This method requires Seneca to perform a quarterly “ceiling test” comparing the present value of future net revenues from its reserves based on an unweighted arithmetic average of first day of the month pricing 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. For purposes of the ceiling test, the 12-month average of first day of the month pricing for NYMEX natural gas for period ended June 30, 2024 was $2.32 per MMBtu. Seneca could potentially record non-cash impairments in future quarters depending on the commodity price environment.

Excluding this item, as well as the net impact of unrealized losses recorded quarter-over-quarter related to reductions in the fair value of contingent consideration received in connection with the June 2022 divestiture of Seneca’s California asset (see table above), Seneca's adjusted operating results decreased $10.5 million as higher natural gas production was more than offset by increases in per unit operating expenses.

During the third quarter, Seneca produced 96.5 Bcf of natural gas, an increase of 1.8 Bcf, or 2%, from the prior year, despite the impact of approximately 5.6 Bcf of price-related curtailments due to low in-basin pricing. The increase in production was largely due to production from new Marcellus and Utica wells in Seneca’s EDA.

Seneca’s average realized natural gas price, after the impact of hedging and transportation costs, was $2.28 per Mcf, an increase of $0.01 per Mcf from the prior year. Pre-hedging realized natural gas prices decreased 10% from the prior year; however, Seneca’s hedging portfolio, which experienced a gain of $0.78 per Mcf during the quarter, more than offset this impact.

On a per unit basis, lease operating and transportation expense (“LOE”) was $0.69 per Mcf, an increase of $0.04 per Mcf from the prior year. On an absolute basis, LOE increased $4.8 million primarily due to higher transportation and gathering costs as a result of increased production. LOE included $55.0 million for gathering and compression services from the Company’s Gathering segment to connect Seneca’s production to sales points along interstate pipelines.

General and administrative (“G&A”) expense was $0.19 per Mcf, an increase of $0.02 per Mcf from the prior year. On an absolute basis, Seneca’s G&A expense increased $2.3 million primarily due to an increase in personnel costs.

Depreciation, depletion and amortization (“DD&A”) expense was $0.71 per Mcf, an increase of $0.07 per Mcf from the prior year. Absolute DD&A expense increased $8.2 million due to a higher per unit DD&A rate and higher natural gas production. The higher per unit rate was driven by an increase in Seneca’s full cost pool due to a combination of higher capitalized costs and an increase in estimated future development costs related to proved undeveloped wells.

Seneca’s all other operating and maintenance (“O&M”) expense increased $2.2 million due primarily to an increase in an accrual for estimated plugging and abandonment expenses related to certain offshore Gulf of Mexico wells that were sold by Seneca to an operator that has since gone bankrupt. As a result, a portion of the cost of abandoning the wells is expected to revert back to Seneca.

Midstream Businesses

Pipeline and Storage Segment

The Pipeline and Storage segment’s operations are carried out by 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 third quarter GAAP earnings increased $6.9 million versus the prior year primarily due to higher operating revenues, partly offset by higher O&M, DD&A, and interest expenses.

The increase in operating revenues of $13.0 million, or 14%, was primarily attributable to an increase in Supply Corporation’s transportation and storage rates effective February 1, 2024, in accordance with its rate case settlement.

O&M expense increased $1.9 million primarily due to an increase in personnel costs. The increase in DD&A expense of $0.7 million was attributable to higher average depreciable plant in service compared to the prior year, partially offset by a modest adjustment to depreciation expense related to the final regulatory approval of Supply Corporation’s rate case settlement. Interest expense increased $1.0 million primarily due to a higher average amount of net borrowings.

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 delivers Seneca and other non-affiliated Appalachian production to the interstate pipeline system.

The Gathering segment’s third quarter GAAP earnings increased $0.8 million versus the prior year primarily due to higher operating revenues, partly offset by higher DD&A expense. Operating revenues increased $1.2 million, or 2%, which was the result of a $2.2 million increase in revenue from Seneca and a $1.0 million decrease in revenue from non-affiliated parties. DD&A expense increased $0.7 million primarily due to higher average depreciable plant in service compared to the prior year.

Downstream Business

Utility Segment

The Utility segment operations are carried out by Distribution Corporation, which sells or transports natural gas to customers located in western New York and northwestern Pennsylvania.

The Utility segment’s third quarter GAAP earnings increased $2.5 million versus the prior year due to higher customer margins (operating revenues less purchased gas sold) and a lower effective income tax rate, partially offset by an increase in O&M and DD&A expenses.

The $3.4 million increase in customer margin for the quarter was primarily due to the impact of the base rate increase in Distribution Corporation’s Pennsylvania jurisdiction. Higher revenues from the Company’s system modernization tracking mechanisms in its New York service territory also contributed to the increase. These increases were partially offset by a decrease in customer usage due primarily to warmer weather as compared to the prior-year third quarter. Weather was 35.3% and 28.3% warmer than the prior-year third quarter in Pennsylvania and New York, respectively. As part of Distribution Corporation’s rate settlement in Pennsylvania, the Company received approval to implement a weather normalization adjustment (“WNA”), which serves to help mitigate the impact of temperature fluctuations on usage and margin revenues billed to residential and small commercial customers during the months of October through May (subject to a 3% deadband). The Company recovered approximately $1.7 million from the Pennsylvania WNA mechanism in the current quarter. Distribution Corporation continues to benefit from a WNA mechanism in its New York jurisdiction, which generated revenue of $2.1 million during the quarter, an increase of $1.4 million over the prior year, which also helped to mitigate the impact of warmer weather on margins.

O&M expense increased by $3.4 million, primarily driven by higher personnel costs largely due to an increase in headcount and a slight increase in wage rates. Increases in professional and legal fees related to the current New York rate case proceeding and higher technology-related costs also contributed to the increase. These increases were partially offset by a decline in the accrual for uncollectible accounts due to a decrease in the natural gas commodity component of customer bills. DD&A expense increased $1.4 million primarily due to higher average depreciable plant in service compared to the prior year.

The reduction in the Utility segment’s effective income tax rate was primarily driven by an increase in tax deductions related to certain repairs and maintenance expenditures as a result of updated IRS guidance published in 2023.

Corporate and All Other

The Company’s operations that are included in Corporate and All Other generated a combined net loss of $0.4 million in the current-year third quarter, which was $1.7 million lower than the combined earnings of $1.3 million in the prior-year third quarter. The reduction in earnings was primarily driven by a $1.0 million decrease in investment income on marketable securities and corporate-owned life insurance policies.

EARNINGS TELECONFERENCE

The Company will host a conference call on Thursday, August 1, 2024, at 10 a.m. Eastern Time to discuss this announcement. All participants must pre-register to join this conference using the Participant Registration link. Once registered, an email will be sent with important details for this conference, as well as a unique Registrant ID. A webcast link to the conference call will be provided under the Events Calendar on the NFG Investor Relations website at investor.nationalfuelgas.com. A replay will be available following the call through the end of the day, Thursday, August 8, 2024. To access the replay, dial 1-800-770-2030 and provide Playback ID 99768.

National Fuel is an integrated energy company reporting financial results for four operating segments: Exploration and Production, Pipeline and Storage, Gathering, and Utility. Additional information about National Fuel is available at www.nationalfuelgas.com.

Certain statements contained herein, including statements identified by the use of the words “anticipates,” “estimates,” “expects,” “forecasts,” “intends,” “plans,” “predicts,” “projects,” “believes,” “seeks,” “will,” “may” and similar expressions, and statements which are other than statements of historical facts, are “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. The Company’s expectations, beliefs and projections contained herein are expressed in good faith and are believed to have a reasonable basis, but there can be no assurance that such expectations, beliefs or projections will result or be achieved or accomplished. In addition to other factors, the following are important factors that could cause actual results to differ materially from those discussed in the forward-looking statements: impairments under the SEC’s full cost ceiling test for natural gas reserves; changes in the price of natural gas; changes in laws, regulations or judicial interpretations to which the Company is subject, including those involving derivatives, taxes, safety, employment, climate change, other environmental matters, real property, and exploration and production activities such as hydraulic fracturing; governmental/regulatory actions, initiatives and proceedings, including those involving rate cases (which address, among other things, target rates of return, rate design, retained natural gas and system modernization), environmental/safety requirements, affiliate relationships, industry structure, and franchise renewal; the Company’s ability to estimate accurately the time and resources necessary to meet emissions targets; governmental/regulatory actions and/or market pressures to reduce or eliminate reliance on natural gas; increased costs or delays or changes in plans with respect to Company projects or related projects of other companies, as well as difficulties or delays in obtaining necessary governmental approvals, permits or orders or in obtaining the cooperation of interconnecting facility operators; changes in economic conditions, including inflationary pressures, supply chain issues, liquidity challenges, and global, national or regional recessions, and their effect on the demand for, and customers’ ability to pay for, the Company’s products and services; 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 price differentials between similar quantities of natural gas sold at different geographic locations, and the effect of such changes on commodity production, revenues and demand for pipeline transportation capacity to or from such locations; the impact of information technology disruptions, cybersecurity or data security breaches; factors affecting the Company’s ability to successfully identify, drill for and produce economically viable natural gas reserves, including among others geology, lease availability and costs, title disputes, weather conditions, water availability and disposal or recycling opportunities of used water, 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; the Company’s ability to complete strategic transactions; increasing health care costs and the resulting effect on health insurance premiums and on the obligation to provide other post-retirement benefits; other changes in price differentials between similar quantities of natural gas having different quality, heating value, hydrocarbon mix or delivery date; the cost and effects of legal and administrative claims against the Company or activist shareholder campaigns to effect changes at the Company; negotiations with the collective bargaining units representing the Company’s workforce, including potential work stoppages during negotiations; uncertainty of natural gas reserve estimates; significant differences between the Company’s projected and actual production levels for natural gas; changes in demographic patterns and weather conditions (including those related to climate change); changes in the availability, price or accounting treatment of derivative financial instruments; changes in laws, actuarial assumptions, the interest rate environment and the return on plan/trust assets related to the Company’s pension and other post-retirement benefits, which can affect future funding obligations and costs and plan liabilities; economic disruptions or uninsured losses resulting from major accidents, fires, severe weather, natural disasters, terrorist activities or acts of war, as well as economic and operational disruptions due to third-party outages; significant differences between the Company’s projected and actual capital expenditures and operating expenses; or increasing costs of insurance, changes in coverage and the ability to obtain insurance. The Company disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date thereof.

NATIONAL FUEL GAS COMPANY
AND SUBSIDIARIES

GUIDANCE SUMMARY

As discussed on page 2, the Company is revising its earnings guidance for fiscal 2024 and initiating guidance for fiscal 2025. Additional details on the Company's forecast assumptions and business segment guidance for fiscal 2024 and fiscal 2025 are outlined in the table below.

The revised earnings guidance range does not include the impact of certain items that impacted the comparability of earnings during the nine months ended June 30, 2024, including: (1) the after tax impairment of exploration and production properties, which reduced earnings by $1.57 per share; (2) after-tax unrealized losses on a derivative asset, which reduced earnings by $0.04 per share; and (3) after-tax unrealized gains on other investments, which increased earnings by $0.02 per share. While the Company expects to record certain adjustments to unrealized gain or loss on a derivative asset and unrealized gain or loss on investments during the three months ending September 30, 2024, the amounts of these and other potential adjustments and charges, including ceiling test impairments, are not reasonably determinable at this time. As such, the Company is unable to provide earnings guidance other than on a non-GAAP basis.

* Fiscal 2024 commodity price assumptions are for the remaining three months of the fiscal year.