National Fuel Gas Company

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 National Fuel Gas Company earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then 1 on your telephone keypad. Please advise that today's conference is being recorded. If you require further assistance, please press star 0. I would now like to hand the conference over to your speaker today. and Ken Webster, Director of Investor Relations. Please go ahead, sir.

Thank you, Ian, 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 Dave Bauer, President and Chief Executive Officer, Karen Camiolo, Treasurer and Principal Financial Officer, and John McGinnis, President of Seneca Resources. At the end of the prepared remarks, we will open the discussion to questions. The third quarter fiscal 2020 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 fuels expectations, beliefs, and projections are made in good faith, and are believed to have a reasonable basis. Actual results may differ only as of the date on which they are made and you may refer to last evening's certain specific risk factors. National Fuel will be participating in the Barclays Energy Conference in September. Please contact me or the conference planners to schedule a meeting with the management team. With that, I'll turn it over to Dave Bauer.

Thanks, Dan. Good morning, everyone. As with most oil and gas companies, Lower commodity prices weighed on the third quarter, gathering business. However, the remainder of the system had a very solid third quarter, with pipeline earnings up nearly 45% on the strength of supply corporations' recent rate settlement and stable utility earnings in spite of the COVID pandemic. All told, the quarter was another great example of the benefits of our integrated, diversified model, where the earnings and cash flows of our regulated businesses provided a strong measure of stability against the more variable earnings of our E&P business. Operationally, this was a really significant quarter for National Fuel, one in which we reached several important milestones that make us well positioned to deliver meaningful growth in the years to come. First and foremost, last week we closed on the acquisition of Shell's upstream and midstream properties in Appalachia. This is a terrific opportunity to check all the boxes we were looking for in an acquisition. From start to finish, it was the result of the exceptional work of dozens of employees across our upstream and midstream operations. Hats off to the team on a job well done. The acquisition meaningfully increases our presence in Appalachia. In fact, earlier this week, Seneca's gross natural gas production crossed the 1 BCF per day threshold. This is a great milestone. To put it in perspective, in fiscal 2018, our average daily production was only about half that. With the added scale, we expect to realize immediate cost synergies, and you can see that in our guidance on cash operating costs, which we expect will be down about $0.05 per MCFD in 21. The financing kudos to our finance team and the banks that supported them for getting the deals done in the face of a challenging backdrop in the capital markets. It's a challenge for us to finance the deal with roughly 50-50 debt and equity, and I'm happy to say that we achieved that objective. In May, we issued $500 million of bonds, the proceeds from which, and to term out our revolver. Under $175 million, it was done at a better price than we would have received under the equity backstop arrangement available to us under the shell purchase and sale agreement. And lastly, earlier this week, we signed an agreement to divest substantially all of our Appalachian timber properties for approximately $116 million, which will fund the remaining equity needed for the transaction. The timber properties are a non-core asset that we've held for some time. The earnings and cash flows associated with them are modest, in fact, pretty close to break even. Reinvesting the proceeds from the sale allows us to avoid issuing another roughly 2 million common shares at the midpoint of our fiscal 2021 guidance That saves approximately $0.08 per share of dilution. In addition, the timber properties have a very low tax basis. By selling them now, we're able to structure the timber sale and shell acquisition as a like-kind exchange, and by doing so, defer a large tax gain. The remainder of Seneca's operations continue to run smoothly, and John will have a full update later on the call. but I'd like to emphasize the improvement we expect in this business in fiscal 21. As you can see in last night's release, the midpoint of our production guidance is 320 BCFE, a 32% increase over our expected production for fiscal 2020. In addition, with the NIMAC strip in the 265 to 275 area, there's cause for optimism on natural gas prices and we've been aggressive with our hedging program. At this point, about two-thirds of our fiscal 21 gas production is hedged. Both of these factors should cause cash flow operations to grow meaningfully. On top of that, as a result of moving to a single-rig program, capital spending at Seneca and NFG Midstream is expected to decrease by $105 million, or about 25%. Assuming the current strip, next year we expect more than $150 million in free cash flow. from our E&P and gathering businesses. Pipeline and storage segment is also positioned to deliver meaningful growth in 2021 and beyond, and several noteworthy events occurred during the quarter to help make that a reality. On the expansion front, we placed a portion of our Empire North project into service ahead of schedule, which allows us to capture some modest short-term revenue opportunities this summer. Once it's fully in service, which we expect will occur by the end of September. This project will add $25 million in annual revenues. In July, we received our FERC certificate for the FM 100 project and Transco also received their FERC approval for the companion Lighty South project. Both projects are on track for a late calendar 2021 in-service date. And as a reminder, the expansion portion of this project is expected to add $35 million in annual revenue. Lastly, in early June, FERC approved the settlement of Supply Corporation's rate case. As I discussed on last quarter's call, new rates went into effect this past February and are expected to add $35 million in annual revenues. The settlement also addressed the rate-making treatment of the modernization component of the FM100 project. On the later of the in-service date of that project, or April 2022, a step-up in rates will go into effect, providing an incremental $15 million in annual revenues. In total, the expansion projects and rate case settlement are expected to provide in excess of $100 million of incremental annual revenues for our pipeline business by mid-2022. To put that in perspective, our fiscal 2019 pipeline revenues were $288 million. So we're looking at some really meaningful growth in the next two years. In addition to improving earnings and cash flows, the growth in our pipeline business will help us maintain relative balance between the regulated and non-regulated portions of our company. On the utility front, despite the pandemic, our operations and financial performance remain right in line with our expectations. With the reopening of most of the economies in our New York and Pennsylvania service territories, our capital program has returned to pre-pandemic levels. We continue to focus on modernization projects that enhance the safety and reliability of our system, while at the same time reducing emissions. In New York, our system modernization tracker allows us to do this in a manner that minimizes the regulatory lag to recover these large investments. Given that we can add rate base to this tracker through March of 2021, we expect to maintain consistent returns at our utility for at least the next few years. Lastly, a few words on the COVID-19 pandemic. Thankfully, infection rates have been relatively moderate in western New York and western Pennsylvania, where the vast majority of our employees and customers reside. Overall, the business continues to run smoothly across the system. Employees who can work from home are doing so, and those who cannot, mostly our field personnel, have been provided appropriate PPE and are practicing social distancing. It's been an incredible effort by our employee group to get us where we are today, and I'd like to thank all of them for their hard work and dedication. In closing, despite the backdrop of a pandemic, it's an exciting time for National Fuel. We just closed the most significant acquisition in the company's history, and next year we'll start construction on what will be our largest pipeline expansion project to date. Our balance sheet is strong and will likely get stronger as we generate free cash flow. And we've extended our impressive dividend track record, having increased it in June for the 50th consecutive year. All of this makes National Fuel well positioned to deliver significant value to our shareholders in the coming years. With that, I'll turn it over to John for an update on our upstream operations.