National Fuel Gas Company

Good morning. My name is Joanne, and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2022 National Fuel Gas Company earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Brandon Hepbit, you may begin your conference.

Thank you, Joanne, 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 Justin Lois, President of Seneca Resources National Fuel Midstream. At the end of the prepared remarks, we will open the discussion to questions. The third quarter fiscal 2022 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. With that, I'll turn it over to Dave Bauer.

Thanks, Brandon. Good morning, everyone. National fuel had a great third quarter, with earnings and cash flows up significantly over last year. Looking at each of the segments, Seneca had a particularly good quarter. Overall production increased by 90 CFA which along with higher commodity price realizations contributed to a nearly 60% increase in adjusted EBITDA. Higher production also benefited our gathering business, where adjusted EBITDA was up 16% over last year. The regulated pipeline and storage business had a great quarter as well. Revenues from the FM 100 expansion and modernization project drove an 18% increase in adjusted EBITDA versus last year. This is the first quarter in which we saw the full impact of FM 100. On April 1st, in accordance with Supply Corporation's last rate agreement, the rate increase associated with the modernization component of the project went into effect. Combined with the expansion revenues that commenced in December when the project went in service, the FM100 project will deliver approximately $50 million in annual revenues. Utility earnings were generally flat year over year. We continue to see margin growth as a result of our system modernization tracker in New York, but rising costs, driven mostly by inflation, offset much of that benefit. Looking forward, the outlook for our business continues to improve. As you saw in last night's release, we're initiating preliminary 2023 earnings guidance with a range of $7.25 to $7.75 per share, which at the midpoint is a 27% increase year over year. And it's important to remember that fiscal 22 includes three-quarters of California operations. And so our ability to increase projected earnings by this level, despite the divestiture, is a testament to the strength of our ongoing operations. Switching to capital, we've made some modest refinements to our expected spending levels for the remainder of fiscal 22. The midpoint of our updated guidance is a little over $800 million, up 1% compared to our previous guidance. Looking to next year and beyond, I expect our capital allocation strategy to stay consistent with what we've communicated in the past. The availability of capital and the ability to generate strong risk-adjusted return on capital are the main drivers of our decision making. In the upstream and gathering businesses, we have decades of development inventory, but the principal governor of Seneca's activity level is the ability to sell incremental production through firm transportation or farm sales. On the regulated side, our capital allocation balances the need for continued modernization with the desire to keep rates affordable for our customers. while also finding opportunities to expand our system. With that approach in mind, looking to 2023, total capital spending is projected to be between $830 and $940 million, at the midpoint up just under 10% from fiscal 22. Roughly two-thirds of this increase is related to our integrated upstream and gathering development program. Seneca currently has two rigs running in Appalachia, split relatively evenly between the EDA and WDA. Looking to next year, we plan to maintain the two-rig development program, but we'll shift more of our overall activity to Tioga County. We've had great success on the initial development of the acreage we acquired there, so it makes sense to overweight that area. While this change will not have a material impact on our level of upstream spending, it will drive a near-term increase in gathering-related capital, primarily in 23 and 24, to build out the necessary infrastructure to move this production to the interstate pipeline system. Our gathering company will also complete several compression optimization projects to take advantage of the attractive gas price environment. After this near-term jump in capital, gathering segment capital should return to more historic levels. All in all, these are great investments that will benefit our operations both near and long term. Over the next few years, Seneca's production and NFG Midstream's throughput should grow at a CAGR that's in the mid to high single digits. Our marketing team has done a great job securing firm sales to ensure this production reaches the market. And at a longer-term gas price of $4 per MMBTU, I expect Seneca's program will deliver consistent increases in free cash flow. Justin will have more details on Seneca's plans later in the call. On the regulated side of the company, we expect to modestly increase the pace at which we're upgrading our infrastructure. In exchange for growing rate base, Our longstanding modernization program delivers two key benefits to stakeholders. It enhances the safety, reliability, and resilience of our facilities, and it further reduces our emissions footprint. Whether it's eliminating leaks through the replacement of older infrastructure or modernizing valves and pneumatic devices to decrease methane emissions, these efforts are critical to our long-term goal of reducing the methane intensity and overall greenhouse gas emissions of our operations. Capital spending at the utilities is expected to increase by about $15 million. While part of that increase is due to inflation, most of it is driven by an expected increase in our pipeline replacement program in Pennsylvania. We're getting closer to filing a case in that jurisdiction, and when we do file, we plan to seek a modernization tracking mechanism to recover the cost of our program on more of a real-time basis. And again, this is a win-win for both us and for our customers. particularly with respect to emissions. Given the events of the last several months, I think there's a new appreciation for the importance of natural gas infrastructure, particularly in our service territory. Policymakers would like their constituents to believe the economy can be electrified virtually overnight, but the practical realities paint a much different picture. It's clear that consumers are concerned with costs and reliability issues that come with electrification. And most everyone I talk with from my barber to CEOs of other local companies, doesn't want their natural gas taken away. We all know natural gas can be part of a long-term energy solution. But for that to happen, we must reduce the emissions on our system. And our modernization programs in both states go a long way to making that happen. Pipeline and storage capital is forecast to be in the range of $110 to $130 million. As I've said in the past, Our spending in this segment generally falls into a few main categories. Routine annual maintenance, which is roughly $50 million per year, and system modernization and emissions reduction spending that varies based on the projects undertaken each year, but typically will be in the range of $40 to $70 million per year. Fiscal 23's modernization is toward the high end of that range because of a couple of larger pipeline replacement projects. But the timing of that spending is good, given the supply corporation has a mandatory rate case come back in 2024. Ideally, we'd also have expansion capital in our budget, but with the completion of FM 100, fiscal 23 will be a light year for expansion spending. Having said that, we do continue to pursue opportunities for new projects. Earlier in the year, we commenced an open season on our line end system that would expand our ability to move gas from the southern end of our system to several markets, including the Rover system at Burgettstown and Tennessee system at Mercer. The earlier responses are positive, and we hope to have more news in the coming quarters. With the completion of the FM 100 project, National Fuel is entering a period of significant free cash flow generation. For fiscal 22, funds from operations should exceed capital spending by about $300 million. On top of that, on June 30th, Seneca closed on the sale of its California operations, receiving net proceeds of just under $200 million. Looking to next year, even with the roughly $75 million expected increase in capital spending, free cash flow should increase to approximately $375 million. This outlook gives us considerable flexibility to both deleverage and to return capital to shareholders. As Karen will describe later, we expect to repay both our short-term debt and our 2023 long-term debt maturities without the need for additional long-term debt issuances. And as we announced in June, we've doubled the rate of increase of our dividend. In conclusion, National Fuel had a great third quarter across the system. And looking to the future, we're in the very enviable position in which our sizable free cash flow will allow us to simultaneously grow the business, deleverage, and increase the amount of capital returned to shareholders, all of which will deliver considerable value over the years to come. With that, I'll turn the call over to Justin.