National Fuel Gas Company

Hello, everyone, and welcome to the National Fuel Gas Company Q1 FY 2023 earnings conference call. My name is Drew, and I'll be your operator today. If you would like to ask a question during today's call, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. I would now like to turn the call over to Brandon Huffett, the Director of Investor Relations. Please go ahead.

Thank you, Drew. 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 Loweth, President of Seneca Resources and National Fuel Midstream. At the end of the prepared remarks, we'll open the discussion to questions. The first quarter fiscal 2023 earnings release and February investor presentation have been posted on our investor relations website. We may refer to these materials during today's call. We'd 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 materially. These statements speak only of the date on which they are made and 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, and good morning, everyone. National fuels fiscal year started off with a great first quarter. Adjusted operating results were $1.84 per share, an increase of 24% versus last year, with each of our four business segments contributing to the increase. Starting with our upstream business, production in Appalachia increased by 11%, which when combined with the $0.50 per MCF improvement in our natural gas price realizations, led to a 29% increase in EBITDA. This increase is particularly impressive given that last year's EBITDA includes the benefit of our California assets, which we sold last summer. Seneca's production growth also contributed to a 6 percent increase in gathering EBITDA. The combination of our valuable transportation and marketing portfolio, along with great operational execution by our team, drove the improved performance of our non-regulated businesses during the quarter. Justin will have more details on these results in a few minutes. Our regulated segments also had a good quarter. Despite the inflationary headwinds I've discussed on past calls, earnings were up in both businesses. We saw continued growth in pipeline and storage revenues, driven principally by the FM100 expansion and modernization project. As you recall, this project went in service in December 2021, so we saw the impact of a full quarter of both expansion revenues and the modernization rate increase associated with the project that went into effect last April. In the utility business, excluding some rate-making adjustments that did not impact earnings, our underlying customer margin was up about $6 million, driven by the ongoing benefits of our infrastructure modernization tracker in New York and increased usage, which was largely related to colder weather versus last year. The increase in margin more than offset the inflationary pressure on our operating expenses, leading to earnings growth for the quarter. Turning to capital allocation, our fiscal 23 capital spending guidance is unchanged at $830 to $940 million. At Seneca, we plan to continue our two-ring program. Despite the near-term drop in natural gas prices, largely due to reduced demand in the early stages of winter, the long-term outlook is still constructive. The pipeline of LNG projects expected to come online mid-decade, as well as the continued transition from coal to gas generation, support long-term base load demand. Having said that, we've remained flexible, and if market conditions warrant, we can adjust our spending to ensure we continue to generate free cash flow. As you saw in last night's release, we've lowered our NYMEX natural gas price assumption to an average of $3.25 per MMBTU for the remaining nine months of the year, which is in line with the forward markets. Obviously, this is a big decrease, but the impact is dampened by our hedging portfolio. We continue to believe in our discipline hedging strategy as a way to protect earnings and cash flows from the inherent volatility of commodity prices. Looking forward, long-term prices haven't moved quite as much as the front end of the curve. Our program economics are quite attractive at the current script and should generate robust returns and significant free cash flow, which, as I've said in the past, we expect to use to deleverage the balance sheet, pursue growth opportunities, and return capital to shareholders. As you likely saw in the media, over the Christmas weekend, we experienced exceptionally challenging weather conditions across our operating footprint, including a once-in-a-generation blizzard within our New York service territory. It's no exaggeration to say that Winter Storm Elliott wreaked havoc on our region, which is particularly noteworthy given that our region is no stranger to big snowstorms. I want to thank all of our employees who went above and beyond the call of duty to keep our system running safely. Our region needed us to deliver, and the National Fuel Team was up to the challenge. Whether it was dealing with freeze-offs at Seneca's Wells, keeping our midstream compressor stations operational, or assuring the gas supply was adequate and emergency calls were responded to at the utility, I'm very proud of the effort of our entire National Fuel Team. This storm highlights the importance of resilient, weather-hardened infrastructure. Less reliable, but critical energy sources faltered as tens of thousands of customers throughout our service territory were without power at some point during the holiday weekend. Across social media and anecdotally, people expressed their appreciation for natural gas service as they huddled around natural gas fireplaces to stay warm, continued to use natural gas stoves for food preparation, and in many cases used natural gas generators to run furnaces, appliances, or to power entire homes. Against this backdrop, it's astonishing that New York State policymakers are unwavering in their push for a rapid transformation to a predominantly electric future powered primarily by intermittent wind and solar. In December of last year, the state's Climate Action Council finalized its scoping plan as required by the Climate Act that was enacted in 2019. If adopted as written, the scoping plan would remake the way energy is produced, distributed, and consumed in most every element of the state economy. The breadth of what's contemplated is truly remarkable. On the demand side, the scoping plan would have New Yorkers electrify almost everything at any cost. This will cause the demand for electricity to skyrocket. Electrifying just the space heating demand in our service territory would require a near quadrupling of the electric grid. On the supply side, The scoping plan foresees this increased demand for electricity being met almost entirely with new wind and solar generation. The scale of what's required is truly unprecedented. Currently, there's approximately 2 gigawatts of wind and solar capacity in the state, which was installed over the course of the last two decades. To meet its targets, the state will need to install, on average, more than 4 gigawatts of wind and solar every year for each of the next 18 years. Stop and think about that. It's taken us decades to get to our current two gigawatts of capacity, but we'll somehow be able to build double that amount each and every year for the next two decades. While many might consider that incredibly aggressive, the scoping plan sees it as a sure thing. And even if more than 80 gigawatts of wind and solar is built as planned, there will still be as much as a 45 gigawatt shortfall in winter electric generation that cannot be met with existing technologies. Then you have to consider the cost to build the electric transmission infrastructure needed to deliver these increasing power supplies. And utilities will need to make unprecedented investments in system modernization to upgrade electric service in our neighborhoods and address critical grid constraints that exist across our region today, all of which will almost certainly cause electric prices in New York to climb sharply. On top of that, consumers will bear the cost of converting, which could be as much as $50,000 per household. Within our service territory, those costs could be crippling with the median income in Erie County at just over $62,000 and well below that level in the city of Buffalo. Despite all of this, the scoping plan urges policies to encourage a rapid transformation by specific dates that aren't tied to any reliability milestones. This is an incredibly irresponsible approach. It makes no sense to mandate the electrification of space seating in western New York when it's uncertain the necessary power and electric infrastructure will be there to meet the increased demand for electricity that will result. Instead, the state should embrace a more reasoned approach to the energy transition, one that sets electrification targets that are linked to generation and reliability milestones, while also continuously evaluating the cost effectiveness of these actions and their impact on customer affordability. And I could see it happening in phases. In the near term, the focus should be on proving that wind and solar can be built at the pace contemplated by the scoping plan. And during that period, consumers should be free to electrify based on their preferences, but there shouldn't be a mandate to do so. And in the meantime, policymakers should encourage no-regret solutions like energy efficiency and improved building installation, both of which will be required regardless of the energy used in the home and workplace. It should also scale existing technologies like renewable natural gas that can achieve significant emissions reductions now. And it should support research and development for new technologies like hydrogen, which will be critical for hard-to-carbonize sectors of the economy. Once we're satisfied that the wind and solar contemplated is feasible, the state can then move on to another phase where it encourages hybrid solutions for heating at a pace that's consistent with the build-out of generations. Our own pathway study has shown that by including a hybrid approach to heating and an all-of-the-above energy strategy, emissions from our system can be reduced by more than the 85% called for in the New York climate legislation. And most importantly, by continuing to leverage the natural gas system, this approach is far less costly and goes a long way to ensuring energy reliability in the winter when it's needed most. Only once the state has developed a cost-effective solution to the 45 gigawatt in winter generation capacity should it even consider moving to full electrification. Based on current technologies, that's likely many decades away. Again, forcing electrification before reliability is assured is an incredibly risky proposition. Imagine enduring a winter storm with no heat or no reliable means of transportation. The administration in Albany acknowledges the scoping plan is not a legally binding document. Rather, it's intended to serve as a blueprint for the future of energy in the state. The laws and regulations to achieve that blueprint will be written in the months and years to come. We will be proactive in urging legislators and policymakers to forego the scoping plan's risky all-in approach that tries to do everything all at once, yet still falls dangerously short, and instead embrace a more incremental, all of the above approach that sets realistic targets based on existing technologies and builds upon them as technologies improve. So I've gone on quite a bit on regulatory policy, so now let's bring it back to the quarter. I'll turn it over to Justin for an update on our non-regulated businesses.