National Fuel Gas : Q3 FY 2017 Earnings Transcript

C O R P O R A T E P A R T I C I P A N T S

C O N F E R E N C E C A L L P A R T I C I P A N T S

P R E S E N T A T I O N

Good morning. My name is Leandra (phon) I will be your Conference Operator today. At this time, I would like to welcome everyone to the Q3 2017 National Fuel Gas Company Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key.

Thank you. Mr. Brian Welsch, Director of Investor Relations, you may begin your conference.

Thank you, Leandra, and good morning. We appreciate you joining us on today's conference call for a discussion of last evening's earnings release.

With us on the call from National Fuel Gas Company are Ron Tanski, President and Chief Executive Officer; Dave Bauer, Treasurer and Principal Financial Officer; and John McGinnis, President of Seneca Resources Corporation. At the end of the prepared remarks, we will open the discussion to questions.

The third quarter fiscal 2017 earnings release and August Investor Presentation have been posted on our Investor Relations website. We may refer to these materials during today's call.

We would like to remind you that today's teleconference will contain forward-looking statements. While National Fuel's expectations, beliefs and projections are made in good faith and are believed to have a reasonable basis, actual results may differ materially. These statements speak only as of the date on which they are made, and you may refer to last evening's earnings release for a listing of certain specific risk factors.

National Fuel will be participating in the Barclays Energy Conference next month in New York City. If you plan on attending, please contact me or the conference planners to schedule a meeting with the Management Team.

With that, I'll turn it over to Ron Tanski.

Thank you, Brian, and good morning, everyone. We're very pleased with our operating performance for the quarter, and as you can see from our earnings guidance, we expect that our fourth quarter results will also be in line with Street expectations. Over the summer so far, field conditions have been excellent for our construction crews undertaking our various upgrade and modernization programs in our pipelines in the Utility segment and Pipeline and Storage segments. It would have been a great construction season for our Northern Access Project also. Unfortunately, it's been the lawyers that have been very busy on that project since April.

Our appeal of the New York Department of Environmental Conservation's denial is on file in Federal Court in the Second Circuit and we have litigation filed at the New York State Court regarding the denial of the various state permits. If the timing of our litigation is similar to that of Constitution Pipeline's Second Circuit case, it could be next spring before we get an answer from the court. So as I mentioned last call, this project is on hold and if we have to go the full litigation route, that hold would likely last until 2020. However, with the quorum re-established at the Federal Energy Regulatory Commission as of yesterday, it's possible that FERC could adopt our arguments and our rehearing request and determine that the DEC waive its opportunity to act on our water quality certification by exceeding the timeframes set out in FERC's scheduling order. If that were to happen we could receive a notice to proceed from FERC much earlier.

In the Utility segment, we filed an appeal of the rate order from the New York Public Service Commission. There were a number of issues that we raised. The two primary ones being the low authorized rate of return and the low equity component. So while the lawyers are busy, field operations in both the Pipeline and Storage and Utility segments are moving along quite well and we once again expect that our systems will be in tip top shape when we enter into this year's heating season.

Looking a little farther out, we're seeing continued economic development and expansion in Pennsylvania, and that's driving a couple of our projects that are also moving along on schedule. Our

$27.5 million Line D Expansion project designed to move more gas to the Erie, Pennsylvania market area, should be coming online this November, which will add $2 million in annual revenues. We're also planning for a mid 2019 in-service date for our lateral to the Shell Cracker Plant in western Pennsylvania. That $18 million project would add another $3.25 million in annual revenues.

We're also pleased to report that we have precedent agreements in place for our Empire North Expansion Project. Given the commitments that we have, this project will be designed as a 205,000 dekatherm per day expansion of our Empire Pipeline that could be operational around November 2019 or the beginning of our 2020 fiscal year. Our initial capital cost estimates are in the $135 million range, and this project would add approximately $25 million in annual revenues. We're in the process of assembling our FERC application and we'll be making that filing over the next few months. Since this project is all compression with no major pipeline construction, we would expect that the permitting for the project should not run into major roadblocks.

At our Exploration and Production operation, Seneca is transitioning from its Marcellus Development Program to a Utica Development Program. Our initial Utica results in the Western Development Area indicate that per well reserves may be significantly higher than our Marcellus wells and drive better economics. John will get into more detail regarding this transition in a little bit, but overall we expect that our two rig Utica Program can deliver a 10% to 15% compound annual growth rate and production for at least the next three years. This production growth will drive the growth and earnings at both Seneca and our Gathering business over most of the same time period. The only exception to that earnings trajectory is our next fiscal year where we expect earnings to be down slightly. The earnings decrease is the result of a number of higher priced hedge contracts rolling off of Seneca's hedge book. Now this is not a surprise as we have regularly delineated information on all of Seneca's hedges in our earnings releases. Dave will get into more details of next year's earnings drivers later in the call.

I'll wrap up by saying that our core business plan remains intact. We've got great assets and we're continually working to make them better. Seneca continues to develop economic reserves even at today's commodity prices and has been successful at layering in firm sales to match our expected increased production levels. Our pipeline engineers are always looking at ways to expand throughput on our system and expect we'll be able to continue adding small incremental projects, like the Line D expansion I mentioned earlier, and a host of expansions that we've completed through the years along our Line N corridor.

While each individual project is not major, let me remind you that we have invested approximately $500 million in expansion pipeline projects since 2010 that have associated annual incremental revenues of

$106 million. Over the same timeframe, we've also invested $510 million in gathering pipelines that have added $110 million in incremental revenues, and that's on top of the $350 million in normal modernization investment in our system over the same period.

Our consolidated outlook for this year and next year is to live within cash flows, increase production and keep our utility customers' annual bill affordable. This past June, we increased our dividend yet again, and we plan to operate the Company to be in a position to consider another increase next year.

Now, John McGinnis will give an update on Seneca's activities.

Thanks, Ron, and good morning, everyone. Seneca produced 42.7 net Bcfe during the third quarter, a decrease of 1.3 Bcfe or 3% versus the prior year's third quarter. In Pennsylvania, we produced 38 Bcf for the quarter, a decrease of 1 Bcf or 2% versus the prior year. This decrease in gas production was due mainly to a lower operating interest on new Marcellus wells related to the IOG Joint Development Agreement in the WDA, a one-rig program since March of 2016, a natural decline over the last 12 months in the EDA where the last development pad was brought online over two years ago.

Our operated gas production during this quarter, however, actually increased 5% from the prior year. In May, we added a second rig in Pennsylvania. This rig is currently drilling wells in Lycoming County in preparation for the onset of Atlantic Sunrise. We are currently planning on drilling 17 wells on three pads in this area before moving the rig north to Tioga and begin drilling Utica wells on our DCNR 007 tract. The first Lycoming pad, which consists of seven wells, is scheduled to be online by our second quarter fiscal '18 and first production from our 007 Utica wells should occur early in fiscal '19.

In California, we produced 668,000 barrels of oil during the third quarter, a decrease of 54,000 barrels from our third quarter last year. This increase or decrease was primarily due to changes in our steam operations and a significant reduction in well workover activity beginning last year as a result of low oil prices. Quarter-over-quarter, our oil production was essentially flat and we have recently ramped up our workover activity. As a result, our total LOE increased $1.8 million this quarter or $0.07 per Mcfe on a per unit basis, driven mainly by this increase in workover activity and partially due to increased steam fuel cost. We will see higher LOE through the remainder of the year as we continue to bring on idle wells in