National Fuel Gas Company (NFG)

Analyst Day

September 9, 2011


Dave Smith – Chairman and CEO

Matt Cabell – President, Seneca Resources Corporation

John McGinnis – SVP, Seneca Resources Corporation

Barry McMahan – SVP and Secretary, Seneca Resources Corporation

Ron Tanski – President and COO

Anna Marie Cellino – President, National Fuel Gas Distribution Corporation

Dave Bauer – Treasurer, National Fuel Gas Supply Corporation


Dave Smith

Good morning. Thanks for being here. We appreciate it. I know you’re busy, so thanks for taking the time to be with us today. Welcome to our Annual Analyst Day with a new fiscal (ph) number years. And you know, in the past, generally we took the opportunity to review the past year. Last two years we looked at, look forward a year or so and previewing the next year. This year we’re going to take a step further and we’re going to spend some time really looking over the next three years where we expect to be in three years from now. And really, obviously we’re going to spend a lot of time talking about our plans in the Marcellus.

Now, this is the agenda. I’ll provide a quick overview and really set the stage for the growth discussion. Matt who’s the President of Seneca, now he’s going to give an overview of the E&P Segment, John McGinnis, who many of you know, appears he’s the Head of our Exploration program, he’s Senior Vice President. And he’s really going to look at how we delineate our Marcellus acreage, what we’re looking at ring, for example, Utica Shale and the Geneseo Shale. Our new players, Barry McMahon, the Senior Vice President at Seneca, In-Charge of Operations, and he’s going to talk about our drilling operations. But in particular, he’s going to spend some time talking about costs and what we’re doing on the cost side to bring the cost. He’s also going to spend time talking about the environment and our commitment to the environment.

Ron Tanski, is going to do double duty today, and I know almost all of you know Ron, Ron’s the President and COO at National Fuel Gas Company. And he’s going to really update us on the pipeline in storage segment and also the Midstream segment and really emphasize the number of projects that we have in that arena, where we’re building infrastructure to move gas to growing markets in the east into Canada. Anna Marie Cellino, is going to talk about the utility and in particular the contribution of the utility, the financial contribution of the utility to National Fuel. And then Dave Bauer is going to wrap it all up. We are going to tell you how we plan to pay for this, over the next three years and increase our CapEx significantly but yet maintain a strong balance sheet.

Now, before I do that, I’m compelled to discuss our Safe Harbor slide. And by the way, for anybody who’s listening and you want to follow along with the slide, you have to refresh if you login before I think 7:45, so you have to refresh in order to follow along on the slides.

Now our presentations today are going to contain forward-looking statements that may vary from actual results. And they also contain non-GAAP financial measures. For more information, please refer to our 10-Q.

Now, most, probably all know that National Fuel Gas Company is an integrated gas company. We’re in regulated businesses, we’re on unregulated businesses. We’re from the well head to the burner tip, one of the few companies left. Seneca Resources, our NT subsidiary, well, it’s focused right now on growth and appellation. And our emphasis obviously is on our 745 acres in the Marcellus. And that should be overlooked as great oil assets that we have in California and frequently there over, we’ll talk about those a little bit today.

Pipeline and Storage segment which is Empire and Supply, they’re both FERC regulated. And they’ve been very busy building infrastructure and planning infrastructure to move Marcellus gas to market. And in the meantime transforming their system, I mean, there are a number of projects on the horizon. But really, probably more importantly we’ve been transforming our system from a north to a south system, where gas came in from the north and went south to a bi-directional system where it can go both ways. And we started doing that, we started looking at doing that a few years back, in part to take advantage of the strong market in Canada and that has very long term implications for National Fuel Gas and Ron Tanski is going to spend time talking about that today.

The Midstream is much as the same although it’s on a non-regulator ground. They’re putting in gather systems, primarily now for Seneca, they’re focused on Seneca but working with other producers as well, and we see that as a great business moving forward.

On the utility side, we have 728 or so customers, perhaps just the most underappreciated in our system from the financial perspective. But they’re really focused on customer service and safety and we won’t spend much time today at this seminar on because, this is a financial seminar essentially. But there in terms of their contribution or stable predictable cash flow, in order to do that, they are focused on cost controls they are focused on protection of revenue.

Now, we’d like these businesses and we like the standalone businesses. But we really like the way they fit together and we have for a long time, we very much like the model, we now have. And it’s taken us some time to achieve that. Some of you will remember way back when we were professionally a utility company. And then we had a work to grow the pipeline and storage and grow the E&P, and we moved through that. Then, you know, we sold our assets, our international assets, some of you may remember we had international assets and we sold those and we sold our Canadian properties, because they just didn’t fit. And more recently in the past 12 months, really past 15 to 12 months, most of them in the last year, we sold these companies. In fact that they wanted good companies, they were good companies but they were relatively small with relatively limited upside, the Gulf was relatively high risk for National Fuel Gas particularly compared to the Marcellus into California. And most importantly we’re able to focus our attention, our management attention and our financial resources, this has freed up some $200 million of capital to put into the other businesses. So, we like this model. And these are the companies we intend on continuing into the future with, obviously as the company changes its nature and it will, because we’re putting so much money into E&P, we’ll re-visit this down the road. But right now, this is the model that works for us.

It works and we know everybody doesn’t agree with this model but we see the advantage of it on a day to day basis. You know, how these subsidiaries work together to strengthen each other, to help each other. I mean, neither just some examples from an operations perspective where the pipeline to storage network, they did bring assets, and more importantly the capabilities in those arenas, greatly if Seneca can bring its production to market. You know, we have a very few wells shut in because of lack of infrastructure and as many of you know, that’s not typical when the Marcellus. And that’s because we’re able to work together with our subsidiaries.

NFR, our gas marketing company, which by the way, it doesn’t really speculate at all, the kind of market around that sense, it packs everything up. It sells gas to retail customers and pass that up. Our gas marketer, our utility, our two are two of the largest customers on our pipeline to storage system, in capacity and in storage. But perhaps, more importantly it’s the shared resources. I mean, we share facilities, we share rights away, we share systems, we share employees and allocate them across the subsidiaries. And this provides us with a terrific efficiency and an advantage, not only for our shareholders to company, our National Fuel Gas Company but for our customers as well. And there are numerous financial benefits to the model, we think that this diversity of earnings, this mix has allowed us to outperform, markets outperform our peers over the long term. In large part, it’s due to the mix of the regulated earnings which are very predictable, not commodity sensitive we pretty much know what we’re going to get on the regulated side. That provides some downside protection, but that mix with the opportunistic, upside opportunity, particularly in E&P, we think has helped us in the long run.

And, you know, I’ve talked about the pipeline and storage, and how that works together from Seneca’s perspective because of the rates in the pipeline and storage and Midstream perspective, because they know they have a good customer. If Seneca hand up for capacity, they can put the pipe in, and they know they can put the pipe in. And perhaps most importantly this mix, this diversity has really allowed us to have a low cost to capital for all of our company and that’s very helpful for our growing companies in particular.

So, let’s see just some of the advantages, needless to say, we like the model and more committed to it moving forward. As I said, we’ll spend most of our time and these speakers will moving forward. I just want to take a few moments to talk about the joint venture process that we just went through and really why we’re just starting up and move forward with this. There were a variety of considerations involved obviously, potentially a very large deal and it was certainly a very large deal and it was certainly a very large National Fuel Gas Company and we have a number of moving parts, all of those were important and these are some of the most important up here and, you know, that it concludes the price, the carrier, the operational control, who was going to control the operations, that was very important to National Fuel Gas. It didn’t include Utica if it did it, with the Utica excluded. The footprint, what was beside across what acreage position, it wasn’t across all the acreage, it wasn’t across the portion of the acreage. And what we call risk allocation, and that could include a lot of things. But in particular, there were just a lot of discussions about exit graphs. And we wanted to make sure that any joint venture partner was equally sharing the risk with National Fuel Gas.

And so, many I think, I think a focus of many analyst was on the price, was on the evaluation, the price on the carrier and in some speculation that we really didn’t receive the price per acre that we expected to receive. And the fact of the matter is what we talked about is, we talked about two deals where we are relatively close that we almost, that we’re very close to doing a deal twice. And with respect to those evaluations, we’re, you know, we wouldn’t have gotten to their point if we weren’t comfortable with evaluation. And I expect our, our expectation of evaluation higher than many of the write-offs that I read. I mean, we expected a very good price per acreage, why? We think we have great acreage. You know, we have compelling growth plans. We knew that. And perhaps, most importantly, we knew we can do this without doing the joint venture. We have a pretty good plan moving forward, we found to joint ventures. So, that essentially allowed us to trade hard, it allowed us to basically look for a very good price per acre. And frankly, allowed to say no and to move forward.

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