National Fuel Gas Company

Good afternoon everyone. I would like to welcome you all to the National Fuel Gas Company Q2 fiscal year 2023 earnings conference call. My name is Rika and I will be your event specialist operating today's call. After the speaker's presentation today we'll conduct a question and answer session. To ask a question at this point please press star then one on your telephone keypad. If you change your mind and would like to withdraw your question, please press star then two. And for operator assistance at any point, it's star zero. Thank you. I would now like to hand the conference over to our host for today, Brandon Hasnett, Director of Investor Relations. So, Brandon, you may begin your conference call.

Thank you, Brika, 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, Tim Silverstein, Treasurer and Principal Financial Officer, and Justin Loweth, President of Seneca Resources and National Fuel Midstream. At the end of the prepared remarks, we will open the discussion to questions. The second quarter fiscal 2023 earnings release and May 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 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.

Thank you, Brandon, and good morning, everyone. Overall, the second quarter was a good one for national fuel. with strong operational execution across our businesses. Seneca and NFG Midstream had a particularly good quarter. Seneca continues to see excellent results from its development program, which has driven both production and gathering volumes to record levels. Capital spending and per unit operating costs were very much in line with expectations. Pricing was obviously a headwind for the quarter and will likely continue to be challenging in the quarters to come, but we are well hedged for the remainder of this year and for next year. Justin will have a complete update on Seneca's operations later in the call. Seneca was active during the quarter on the land acquisition front. As we announced in our earnings release yesterday, we're acquiring some smaller but highly strategic bolt-on opportunities in our eastern development area. As I've said on past calls, our A&D strategy in Appalachia is focused on assets that are geographically contiguous, that provide an opportunity to leverage our midstream infrastructure, and it can be purchased at a reasonable price. These acquisitions check each of those boxes. Across the three transactions, we're adding approximately 36,000 largely contiguous acres, most all of which are undeveloped. In addition, we're acquiring approximately 20 million cubic feet per day of flowing production and a PDNP well that can be connected to our Lycoming County gathering system at a relatively low cost. These assets add approximately 50 to 70 EDA locations in some of the most highly prolific parts of the basin. In addition, these assets allow us the ability to drill longer laterals off more than 20 of our existing development locations, which should further enhance the capital efficiency and returns of our program. Although these acquisitions will increase our capital outlay for the year, they should be covered entirely by cash from operations. And even considering the transactions, our remaining free cash flow is expected to be sufficient to fund our dividend and to make headway in our goal to reduce absolute levels of debt. Turning to our regulated businesses, operationally our utility and pipeline and storage segments performed well during the quarter, though warmer weather had a negative impact on the utility's financial results. Higher O&M costs across the board were also a headwind, but the higher costs were expected and are the main reason we filed a rate case in Pennsylvania and will likely file in New York and with FERC. Tim will have more to say on this later in the call. In March, we reached a settlement in our Pennsylvania rate case. Under that agreement, the parties agreed to, among other things, a $23 million revenue increase, effective August 1st, and the addition of a weather normalization mechanism. We've had weather norm in New York for many years, but the Pennsylvania Commission has only recently begun to adopt them. This addition is a win-win for both our customers and the company, helping to mitigate the volatility in earnings and cash flows resulting from fluctuations in the weather. The settlement, which was unopposed by the parties to the case, was filed with the Commission a few weeks ago and is expected to be approved at a summer session. All in all, I think this is a good settlement for everyone, and I'd like to thank all of our employees that were involved in this proceeding, which was our first rate case in Pennsylvania in over 15 years. In New York, despite widespread opposition from the public, legislators in Albany continue to pursue natural gas bans. Siena College recently polled individuals throughout New York State, and the results were clear. In our service territory, about 70% of the population is opposed to any type of natural gas ban, whether it be for new construction or in existing homes. And statewide, nearly 90% of the people surveyed are concerned about the costs associated with moving away from natural gas. Nevertheless, despite this clear message, earlier this week the state enacted a budget bill that bans natural gas equipment and building systems in new construction starting in 2026. Governor Hochul, who has advocated for gas bans, signed the legislation and the law. On the surface, this appears to be a significant step towards 100 percent electrification. However, when you dig a little deeper, you find the state tacitly acknowledges the public safety risks of rushing electrification. For one, the new rules contain a litany of exemptions, including for backup natural gas generators, hospitals, medical facilities, commercial kitchens, and industrial and manufacturing uses. Further, the measure includes a provision that exempts natural gas for new construction in areas where the electric grid cannot support the increased load. which at least in the near term may be much of the state. By its own exemptions, it appears the state recognizes that natural gas is critical for both energy reliability and economic prosperity, which is encouraging. In my view, it's not a big leap to see this list of exemptions expanded to include hybrid heating solutions like we've proposed as part of an all of the above approach to decarbonization. Nor is it a stretch to see rules and regulations that consider regional differences in the state. Upstate New York is more than 50% colder than downstate and our housing stock is generally older. Continued use of natural gas in Western New York makes perfect sense. It saves money for consumers and improves energy reliability. And the use of the natural gas system to deliver low and no carbon fuels in the future will build on the significant emissions reductions we've already achieved in our area of the state. So how will this legislation affect national fuel? From a practical standpoint, I don't see any significant impact for the foreseeable future. For one, the bans don't apply to existing buildings, and about 90% of the buildings in our service territory already heat with natural gas. Further, western New York isn't seeing major population growth. In fact, much of our construction growth is the result of repurposing of older commercial and industrial buildings to residential or mixed-use facilities. And lastly, as I stated earlier, industrial uses of natural gas are exempt from the bans. While the threats of more bans and other ill-advised electrification actions will continue to exist so long as the legislature remains in session, it's clear that Albany legislators, and perhaps even the governor herself, are acknowledging the very real fact that imposing gas bans on an increasingly concerned public especially when other more pragmatic solutions are known and achievable? Is it best premature, and at worst, too much of a risk to businesses and residents in New York? In closing, we continue to execute on our development plans across the system and are seeing great results. As we look forward, we remain focused on the efficient allocation of capital towards investments that can deliver strong returns through commodity price cycles and generate significant and sustainable free cash flow that further strengthens our investment-grade balance sheet and improves our financial flexibility. Before turning the call over to Justin, I want to take a moment to recognize Karen Camiolo, who retired last Friday. Karen had a terrific 29-year career with the company, serving as controller and chief accounting officer for nearly 15 years and CFO for the last four. I wish her the very best in retirement. With that, I'll turn the call over to Justin.