WILLIAMSVILLE, N.Y., Aug. 02, 2023 (GLOBE NEWSWIRE) -- National Fuel Gas Company (“National Fuel” or the “Company”) (:NFG) today announced consolidated results for the third quarter of its 2023 fiscal year and for the nine months ended June 30, 2023.
FISCAL 2023 THIRD QUARTER SUMMARY
- GAAP net income of $92.6 million, or $1.00 per share, compared to GAAP net income of $108.2 million, or $1.17 per share, in the prior year.
- Adjusted operating results of $93.4 million, or $1.01 per share, compared to $141.9 million, or $1.54 per share, in the prior year (see non-GAAP reconciliation on page 2).
- E&P segment net Appalachian natural gas production of 94.7 Bcfe, an increase of 5.9 Bcfe, or 7%, compared to the prior year, and a 2% increase when compared to fiscal 2023 second quarter.
- Successfully closed on the purchase of three separate upstream assets that total approximately 36,000 net acres with flowing net production of approximately 16 million cubic feet per day in the E&P segment’s Eastern Development Area, for total consideration of $138.9 million.
- The Pennsylvania Public Utility Commission approved a joint settlement in the Utility segment’s Pennsylvania rate case proceeding that, effective August 1, 2023, will increase annual base rate delivery revenues by $23 million and, among other stipulations, includes a newly implemented weather normalization adjustment mechanism.
- The Company is narrowing its fiscal 2023 earnings guidance to a range of $5.15 to $5.25 per share, excluding items impacting comparability, and initiating its fiscal 2024 earnings guidance with a range of $5.50 to $6.00 per share, an increase of 11% from fiscal 2023, at the midpoint (see Guidance Summary on page 8).
MANAGEMENT COMMENTS
David P. Bauer, President and Chief Executive Officer of National Fuel Gas Company, stated: “National Fuel achieved strong operational results in the third quarter, but lower natural gas price realizations at Seneca and higher operating expenses across our regulated operations weighed on our financial results. Looking ahead to fiscal 2024, we expect significant earnings growth, driven by our integrated development program coupled with improved earnings at our rate-regulated businesses as a result of rate case outcomes.
“Longer-term, our continued investment in the modernization of our rate-regulated infrastructure, along with a disciplined approach to Seneca’s development program and an improved long-term outlook for natural gas prices, positions the Company well to deliver shareholder value through future earnings growth and increasing free cash flow generation.”
RECONCILIATION OF GAAP EARNINGS TO ADJUSTED OPERATING RESULTS
| Three Months Ended | Nine Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (in thousands except per share amounts) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Reported GAAP Earnings | $ | 92,620 | $ | 108,158 | $ | 403,189 | $ | 407,879 | ||||||||
| Items impacting comparability: | ||||||||||||||||
| Unrealized (gain) loss on derivative asset (E&P) | 1,430 | — | 3,702 | — | ||||||||||||
| Tax impact of unrealized (gain) loss on derivative asset | (392 | ) | — | (1,015 | ) | — | ||||||||||
| Unrealized (gain) loss on other investments (Corporate / All Other) | (355 | ) | 3,434 | (1,632 | ) | 10,093 | ||||||||||
| Tax impact of unrealized (gain) loss on other investments | 74 | (721 | ) | 343 | (2,120 | ) | ||||||||||
| Items impacting comparability from West Coast asset sale (E&P)(1) | — | 41,589 | — | 41,589 | ||||||||||||
| Tax impact of items impacting comparability from West Coast asset sale(1) | — | (10,533 | ) | — | (10,533 | ) | ||||||||||
| Reduction of other post-retirement regulatory liability (Utility) | — | — | — | (18,533 | ) | |||||||||||
| Tax impact of reduction of other post-retirement regulatory liability | — | — | — | 3,892 | ||||||||||||
| Adjusted Operating Results | $ | 93,377 | $ | 141,927 | $ | 404,587 | $ | 432,267 | ||||||||
| Reported GAAP Earnings Per Share | $ | 1.00 | $ | 1.17 | $ | 4.37 | $ | 4.43 | ||||||||
| Items impacting comparability: | ||||||||||||||||
| Unrealized (gain) loss on derivative asset, net of tax (E&P) | 0.01 | — | 0.03 | — | ||||||||||||
| Unrealized (gain) loss on other investments, net of tax (Corporate / All Other) | — | 0.03 | (0.01 | ) | 0.08 | |||||||||||
| Items impacting comparability from West Coast asset sale, net of tax (E&P)(1) | — | 0.34 | — | 0.34 | ||||||||||||
| Reduction of other post-retirement regulatory liability, net of tax (Utility) | — | — | — | (0.16 | ) | |||||||||||
| Rounding | — | — | (0.01 | ) | — | |||||||||||
| Adjusted Operating Results Per Share | $ | 1.01 | $ | 1.54 | $ | 4.38 | $ | 4.69 | ||||||||
(1) Refer to non-GAAP reconciliation on page 24 for a separate breakout of items impacting comparability from the West Coast asset sale.
DISCUSSION OF GUIDANCE UPDATE
National Fuel is revising its fiscal 2023 earnings guidance range and is now projecting that earnings, excluding items impacting comparability, will be within the range of $5.15 to $5.25 per share. This updated range reflects the results of the third quarter, along with updated assumptions for the balance of the year, as detailed on page 8.
The Exploration and Production segment’s fiscal 2023 net production is now expected to be in the range of 370 to 380 Bcfe, which reflects the impacts of over 5 Bcfe of price-related curtailments and volumes shut-in due to the operational impacts of low in-basin pricing and third-party pipeline system constraints during the third quarter. This guidance range does not incorporate any additional 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 2023 natural gas production, significantly limiting its exposure to in-basin markets. Approximately 80% of expected remaining production is either matched by a financial hedge or was entered into at a fixed price.
The Company is also initiating preliminary guidance for fiscal 2024 with earnings projected to be within a range of $5.50 to $6.00 per share, or $5.75 per share at the midpoint of the range, an increase of 11% from the midpoint of the revised fiscal 2023 guidance range. Drivers of the expected increase in earnings include anticipated higher natural gas price realizations, further growth in natural gas production and the associated impact on Gathering segment revenues, and substantial growth in earnings from the regulated segments expected as a result of anticipated base rate increases.
Seneca’s fiscal 2024 net production forecast is increasing to an expected range of 390 to 410 Bcfe, an increase of 7% versus fiscal 2023 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 $0.10 per Mcf from its estimated fiscal 2023 realizations. Overall, Seneca has firm sales contracts in place for approximately 88% of its expected fiscal 2024 natural gas production, significantly limiting its exposure to in-basin markets. Approximately 67% of expected production is supported by financial hedges or fixed price contracts, limiting exposure to potential swings in natural gas prices in fiscal 2024.
The Company’s consolidated capital expenditures in fiscal 2024 are expected to be in a range of $865 million to $975 million, which at the midpoint, is generally in line with its fiscal 2023 guidance.
Capital expenditures in the Company’s rate-regulated Pipeline and Storage and Utility segments are expected to be in the range of $250 million to $290 million for fiscal 2024, an increase of $25 million from fiscal 2023 at the midpoint. Most of this spending will be focused on ongoing infrastructure modernization programs that are geared toward enhancing the safety, reliability, and resiliency of the Company's critical infrastructure, as well as contributing to the ongoing reduction in the Company’s emissions profile. The ability to ramp up growth investments in these businesses provides for the ability to generate stable, predictable, value-accretive returns, and is an efficient means of deploying excess free cash flow generated across the Company to the long-term benefit of shareholders.
In the Exploration and Production segment, Seneca’s activity is expected to further moderate as it continues a planned transition that targets a maintenance-to-low single-digit, long-term production growth profile. Capital spending for fiscal 2024 is expected to be in the range of $525 million to $575 million, a decrease of 7% from fiscal 2023 at the midpoint. In addition to moderating long-term capital spending levels, Seneca is shifting the vast majority of its development activity to its highly prolific Eastern Development Area where, as a result of acquisitions over the past three years, it has a significant inventory of well locations that generate superior returns. As part of this transition, costs related to water management will lead to modestly higher capital spending on a per foot basis as the transition is fully executed. Further, Seneca plans to spend more than $35 million of one-time costs in fiscal 2024 related to this transition as it bolsters its seismic inventory, expands its produced water infrastructure, and increases its leasehold position in Lycoming County. In addition, the Gathering segment will continue its multi-year build out of key infrastructure in the Tioga County region and as a result, expects spending to be in the range of $90 million to $110 million, which is generally consistent with the current fiscal year.
Additional details on the Company’s updated forecast assumptions and business segment guidance for fiscal 2023 and fiscal 2024 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, 2023 is summarized in a tabular form on pages 9 and 10 of this report (earnings drivers for the nine months ended June 30, 2023 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 Resources Company, LLC (“Seneca”). Seneca explores for, develops and produces primarily natural gas reserves in Pennsylvania.
| Three Months Ended | ||||||||||
| June 30 | ||||||||||
| (in thousands) | 2023 | 2022 | Variance | |||||||
| GAAP Earnings | $ | 43,329 | $ | 56,497 | $ | (13,168 | ) | |||
| Unrealized (gain) loss on derivative asset, net of tax | 1,038 | — | 1,038 | |||||||
| Gain on sale of West Coast assets, net of tax | — | (9,511 | ) | 9,511 | ||||||
| Loss from discontinuance of crude oil cash flow hedges, net of tax | — | 33,329 | (33,329 | ) | ||||||
| Transaction and severance costs related to West Coast asset sale, net of tax | — | 7,238 | (7,238 | ) | ||||||
| Adjusted Operating Results | $ | 44,367 | $ | 87,553 | $ | (43,186 | ) | |||
| Adjusted EBITDA | $ | 134,236 | $ | 184,622 | $ | (50,386 | ) | |||
Seneca’s third quarter GAAP earnings decreased $13.2 million versus the prior year. Last year’s third quarter earnings included several one-time items impacting comparability shown in the table above related to the divestiture of Seneca’s California assets in June 2022 that did not recur this year. Earnings were also impacted by an unrealized loss of $1.4 million ($1.0 million after-tax) recognized during the current-year third quarter from a reduction in the implied fair value of an asset related to the contingent consideration in connection with this divestiture. Excluding these items, Seneca’s earnings decreased $43.2 million. Higher natural gas production was more than offset by lower Appalachian realized natural gas prices and the loss of earnings related to the divestiture of Seneca’s crude oil production in California.
Seneca produced 94.8 Bcfe during the third quarter, an increase of 2.3 Bcfe, or 3%, from the prior year. Despite the combined impact of approximately 5 Bcfe of price-related curtailments and other volumes shut-in due to the operational impacts of low in-basin pricing and third-party pipeline system constraints, production in Appalachia increased 5.9 Bcfe, or 7%. This increase was partially offset by a 3.5 Bcfe decrease in production related to the aforementioned California sale.
Seneca’s average realized natural gas price, after the impact of hedging and transportation costs, was $2.27 per Mcf, a decrease of $0.60 per Mcf from the prior year. Lower natural gas prices, before the impact of hedging, were partially offset by an increase in the weighted average hedge price compared to the prior-year third quarter.
On an absolute basis, lease operating and transportation expense (“LOE”) decreased $17.7 million primarily due to the California sale, slightly offset by increases in LOE from higher well repair costs in Appalachia. LOE expense includes $54.3 million in intercompany expense for gathering and compression services used to connect Seneca’s production to sales points along interstate pipelines. On a per unit basis, LOE was $0.65 per Mcfe, a decrease of $0.21 per Mcfe from the prior year.
The decrease in Seneca’s other operating expense of $6.5 million was primarily due to the prior-year third quarter, non-recurring accrual of plugging and abandonment expenses related to certain formerly owned offshore Gulf of Mexico wells that were sold in prior years, as well as the sale of Seneca’s California assets. Other taxes decreased $4.8 million largely attributable to both the impact of the sale of Seneca's California assets as well as lower Impact Fees in Pennsylvania due to the decrease in NYMEX natural gas prices.
Depreciation, depletion and amortization (“DD&A”) expense increased $5.4 million due to higher natural gas production and a higher per unit DD&A rate, which was driven by an increase in capitalized costs in Seneca’s full cost pool. DD&A expense was $0.64 per Mcfe, an increase of $0.04 per Mcfe from the prior year.
Midstream Businesses
Pipeline and Storage Segment
The Pipeline and Storage segment’s operations are carried out by National Fuel Gas Supply Corporation (“Supply Corporation”) and Empire Pipeline, Inc. (“Empire”). The Pipeline and Storage segment provides natural gas transportation and storage services to affiliated and non-affiliated companies through an integrated system of pipelines and underground natural gas storage fields in western New York and Pennsylvania.
| Three Months Ended | |||||||||
| June 30 | |||||||||
| (in thousands) | 2023 | 2022 | Variance | ||||||
| GAAP Earnings | $ | 23,813 | $ | 26,599 | $ | (2,786 | ) | ||
| Adjusted EBITDA | $ | 57,636 | $ | 62,565 | $ | (4,929 | ) | ||
The Pipeline and Storage segment’s third quarter GAAP earnings decreased $2.8 million versus the prior year primarily due to lower operating revenues and higher operation and maintenance (“O&M”) expense, partially offset by an increase in other income. The decrease in operating revenues of $3.2 million was primarily attributable to contract expirations, partially offset by an increase in new short-term contracts. O&M expense increased $1.6 million primarily due to higher pipeline integrity and personnel costs. The increase in other income of $1.7 million was primarily attributable to a higher weighted average interest rate on intercompany short-term notes receivables.
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.
| Three Months Ended | |||||||||
| June 30 | |||||||||
| (in thousands) | 2023 | 2022 | Variance | ||||||
| GAAP Earnings | $ | 24,135 | $ | 24,658 | $ | (523 | ) | ||
| Adjusted EBITDA | $ | 46,032 | $ | 46,151 | $ | (119 | ) | ||
The Gathering segment’s third quarter GAAP earnings decreased $0.5 million versus the prior year primarily due to higher O&M expense and higher income tax expense, both of which were almost entirely offset by higher operating revenues. Operating revenues increased $3.0 million, or 5%, which was the result of an 8.9 Bcf increase in gathered volumes due to an increase in natural gas production from both Seneca and non-affiliated parties. The increase in O&M expense of $3.1 million was due to an increase in compressor station preventative maintenance activity and higher compression leasing expenses, as well as increases in personnel expenses and costs for materials. The increase in material costs primarily reflects a higher amount of materials being purchased as a result of the increase in gathered volume, and to a lesser extent, rising costs from inflation. The increase in income tax expense was primarily driven by a higher effective state income tax rate.
Downstream Business
Utility Segment
The Utility segment operations are carried out by National Fuel Gas Distribution Corporation (“Distribution”), which sells or transports natural gas to customers located in western New York and northwestern Pennsylvania.
| Three Months Ended | |||||||||
| June 30 | |||||||||
| (in thousands) | 2023 | 2022 | Variance | ||||||
| GAAP Earnings | $ | 37 | $ | 4,622 | $ | (4,585 | ) | ||
| Adjusted EBITDA | $ | 20,912 | $ | 27,042 | $ | (6,130 | ) | ||
The Utility segment’s third quarter GAAP earnings decreased $4.6 million versus the prior year primarily due to lower customer margins (operating revenues less purchased gas sold), as well as increases in O&M and interest expense, partially offset by a decrease in non-service pension and OPEB costs and higher other income.
The decline in customer margin of $2.9 million was due primarily to a $2.6 million reduction in base rates in New York as a result of a rate proceeding that became effective October 1, 2022 which temporarily reduced the Utility’s recovery of pension and other post-employment benefit (“OPEB”) expenses to zero. In addition to lowering rates, the proceeding mandated a corresponding decrease in pension and OPEB expense, most of which had been previously recorded in “below the line” non-service pension and OPEB costs. This decrease was partially offset by higher revenues from the Company’s system modernization and improvement tracking mechanisms in its New York service territory.
O&M expense increased by $3.7 million due primarily to higher personnel costs and an increase in legal and consulting expenses. An increase in the cost of materials and transportation expenses, primarily as a result of rising costs from inflation, also contributed to higher O&M expense for the quarter. Interest expense increased $2.4 million due primarily to a higher weighted average interest rate on intercompany short-term borrowings. The increase in other income of $1.3 million was primarily attributable to interest earned on deferred gas costs.
Corporate and All Other
The Company’s operations that are included in Corporate and All Other generated combined earnings of $1.3 million in the current quarter, which was a $5.5 million increase over the combined net loss of $4.2 million in the prior-year third quarter. The increase in earnings was primarily driven by unrealized gains on investment securities recog
