National Fuel Gas Company

and welcome to the National Fuel Gas Company Q2 Fiscal 2024 Earnings Conference Call. My name is Charlie and I'll be coordinating the call today. You will have the opportunity to ask a question at the end of the presentation. If you'd like to register a question, please press star followed by one on your telephone keypad. I'll now hand over to our host, Natalie Fisher, Director of Investing Relations speaking. Natalie, please go ahead.

Thank you, Charlie, and good morning. We appreciate you joining us on today's conference call for 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 Loewich, 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 2024 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 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.

Thank you, Natalie. Good morning, everyone. Last night, National Fuel reported solid second quarter results that are yet another great indicator of the strong long-term outlook for the company. Adjusted operating results were $1.79 per share, an increase of 16% from the prior year's second quarter. The combination of significant growth in our regulated businesses, which delivered a 36% increase in earnings per share, along with double-digit growth in Seneca's production and the gathering segment's throughput, drove the increase. While natural gas prices were a headwind during the quarter, our long-standing hedging program helped mitigate this impact. Tim and Justin will hit on the details of the quarter and the near-term outlook, but I want to take a few minutes to highlight the long-term opportunity set for National Fuel. Last night, we published a major refresh of our investor relations slide deck. The goal of this update is to highlight what we think is a very compelling value proposition, one that delivers strong investment returns relative to both our peers and the broader market, generates significant expected long-term growth in earnings and free cash flow, and returns capital to shareholders through both our long-standing dividend and opportunistically through our recently announced share buyback program. The foundation for this is our integrated model, with each of our businesses contributing to this simple value proposition. As we saw this past quarter, much of our near-term growth will occur in our regulated utility and pipeline businesses, where ratemaking activity is expected to drive tangible increases in both earnings and free cash flow. This past February, our FERC-regulated supply corporation subsidiary reached a settlement with its shippers to resolve the rate case we filed last summer. New rates designed to increase annual revenues by $56 million, or about 15% of last year's total revenue in the pipeline and storage segment, went into effect February 1st. No parties opposed the settlement, so we expect FERC will grant final approval of it in the coming months. There is no required stayout period, so we can file for another rate increase at any time. Given the level of modernization investment we expect at supply corps, along with the increasing cost of complying with new regulations, I expect we'll likely file another rate case within the next year. At the utility, as you know, we settled our Pennsylvania rate case last summer, and higher rates went into effect in August. We realized the bulk of the expected $23 million increase in the first half of the fiscal year, which corresponds to the winter heating season. Importantly, our rate structure now includes a weather normalization clause, which, like the mechanism we have in New York, should lessen the margin volatility we've experienced in recent years in Pennsylvania due to temperature fluctuations. Switching to New York, last fall we filed a rate case that requests an $89 million increase in annual revenue. Confidential settlement discussions have commenced and are progressing. While there isn't much we can say at this point, we are working diligently through the process with staff and the parties. Rates are expected to go into effect October 1st of this year, and by our next call I hope to have a more fulsome update, including the impact on fiscal 2025 and beyond. Added together, these three rate proceedings will have a significant impact on the near-term financial performance of our regulated businesses. Longer term, we have no shortage of investments to make. At the utility and supply corp, we have well over a decade of modernization investments in front of us. These investments have the potential to deliver mid- to -single-digit growth and rate rates, which in turn drives higher earnings and cash flows. In addition, we continue to develop potential expansions of our FERC-regulated assets, which provides additional upside. The Tioga Pathway project is a great example of this, and I'm optimistic we'll have additional opportunities over time. One quick note on the status of the Tioga project. We're making good progress with it and expect to file our FERC application this summer for late calendar 2026 in service day. Moving to our non-regulated operations, I'm very happy with the progress Seneca has made with its ongoing transition to an Eastern Development Area-focused program. We started this process about a year ago and have since turned in line more than 20 wells in the EDA. As you can see on page 16 of our slide deck, these wells continue to demonstrate -in-class results among our peers. Based on initial results, we expect our EDA wells will be twice as productive as those in our legacy Western Development Area. Consequently, over the next few years, we expect to modestly grow production while decreasing the amount of capital we deploy in Seneca's development program. On top of the improved capital efficiency of Seneca's standalone program, our integrated approach to developing our assets drives further cost structure improvements. While many of our peers divested midstream assets or pay significant gathering costs to third parties, from the beginning, we believe that operating an integrated gathering and upstream company is value-additive. The ability to design our development program to maximize consolidated returns allows us to deploy capital more productively, which leads to a -in-class cost structure and positions the combined Seneca and NFG midstream to generate free cash flow through nearly all natural gas price environments. We all know natural gas prices have been under pressure, but looking forward, I'm optimistic on the direction of travel. On the demand side, new energy facilities are on the immediate horizon, with significant growth coming as soon as next year. Longer term, I expect electricity demand will continue to grow, driven in large part by the massive build-out of data centers and the unshoring of manufacturing and other industrial processes, all of which need a reliable, cost-effective source of energy. Natural gas is the clear solution and will play a pivotal role in meeting these increasing energy demands, both domestically and abroad. The industry clearly has the resource to meet this increased demand, but the current regulatory environment makes building new infrastructure challenging. As a result, it seems unlikely supply and demand will be completely in sync, which could lead to significant volatility in prices. We continue to believe hedging through the cycles is the right way to navigate this potential for volatility. We typically hedge about two-thirds of our production as we move into the fiscal year, so we still have a good amount of upside should prices run. In recent months, we've taken advantage of the Contango Strip to add several new hedge positions at prices well above what we've seen this year. Predictability in near-term pricing gives greater certainty to a growing base of free cash flow at Seneca and positions us to build upon our impressive dividend track record, which we've paid for over 120 years and increased in each of the last 53. It also gives us the confidence to be opportunistic and return additional capital to shareholders through share repurchases. To that end, in March, we initiated a modestly sized $200 million buyback program. Given the strength of our balance sheet and the positive outlook for our integrated businesses, we see significant long-term value in national fuel shares. Yes, near-term natural gas prices are challenged, but the long-term outlook is strong, and I see this as a great opportunity to buy back shares at a low point in the commodity price cycle. To bring it all together, our value proposition is simple. Strong returns on capital driven by integration, line of sight visibility to growth and earnings and free cash flow, and a commitment to returning cash to shareholders through dividends and share buybacks. The team and I are incredibly optimistic about the future of national fuel and are intensely focused on executing our strategy and delivering tangible value to shareholders. With that, I'll turn the call over to Justin.

Thanks, Dave, and good morning, everyone. Seneca and NFT Midstream continued last quarter's momentum with a third consecutive quarter of record production and throughput, supported by strong operational results. During Q2, we turned in line six EDA wells, all of which demonstrated excellent initial productivity. Quarterly production was 103 BCFE, a 10% increase over the second quarter of fiscal 23, in spite of voluntary pricing curtailments of over 5 BCF due to low in-base pricing. You're also seeing positive momentum in achieving our capital reduction target. As announced last night, Seneca is reducing the top end of its fiscal 24 guidance by $20 million to a range of $525 to $555 million. The midpoint of guidance now represents an almost $50 million reduction over last year. There are two principal drivers of this decrease. First, we are incorporating service cost reductions, both realized and expected, through the balance of the year. Second, operational efficiencies associated with our transition to the EDA are exceeding initial expectations, which should provide continued benefits in the years to come. Turning to production, as a result of voluntary pricing curtailments during the quarter, we are decreasing Seneca's fiscal 24 production guidance by 5 BCF to a range of 390 to 405 BCFE. Please recall that we do not incorporate the impact of potential future pricing curtailments into our production guidance. In anticipation of higher gas prices, we plan to delay the turn-in line date for one pad until next fiscal year. Thus, we assume a modest sequential decline in production throughout the rest of this year. However, we do retain flexibility in our program to accelerate till activity later this summer should prices rebound. Given the near-term supply demand and storage fundamentals, we believe that natural gas prices will remain under pressure over the near term. However, we are well insulated from this potential price weakness, with 95% of our expected fiscal 24 production protected by firm transportation and firm sales agreements. We've been only about 10 BCF exposed to local spot markets based on the midpoint of our guidance range. Beyond fiscal 24, we are bullish on natural gas prices. L&G export projects are making continued progress towards completion, and longer term tailwinds on natural gas power generation demand are coming into focus. We are well positioned to capitalize on these tailwinds, as Seneca's firm transportation capacity connects to mid-Atlantic and Northeast markets that are expected to experience a disproportionate amount of load growth, both from AI data centers and remaining coal plant retirements. And, our low emissions intensity, responsibly sourced gas, provides the opportunity to meet this growing demand with reliable, sustainable, affordable energy. With this backdrop, our long-term development plans remain on track. Our transition to an EDA-focused development plan is exceeding expectations. Our paths to date have delivered excellent well productivity, and we have a deep inventory of well-delineated, highly prolific future development locations. Further, capital expenditure levels are declining, while production is forecasted at low to mid-single digit growth on average in the coming years. Overall, we're very pleased with our progress in the EDA, and see opportunities for additional efficiency gains. Moving to NFG midstream, throughput increased 15% year over year to approximately 126 BCF, driven by Seneca and third-party production growth. Our focus remains in expanding the Tioga gathering system as production volumes ramp. We have several major projects underway that will expand the capacity and connectivity to multiple interstate pipelines, and we are also making progress on a large centralized compressor station that will go in service later this year. In conclusion, the Seneca and midstream teams have continued to deliver production, throughput, and EBITDA growth, despite a particularly challenging price environment. These achievements reflect a culture of excellence and the benefits of an integrated business model that provides enhanced margins, low-cost operations, and a disciplined approach to risk management. In turn, Seneca and NFG midstream are enhancing returns with less downside risk through the commodity cycles, while maintaining significant upside to higher commodity prices expected in fiscal 25 and beyond. With that, I'll turn the call over to Tim.

Thanks, Justin, and good morning, everyone. National Fuel had a great second quarter, with adjusted operating results increasing 16% from the prior fiscal year. It was evident from these results that our inflection towards meaningful and predictable growth in our regulated subsidiaries, combined with increasing capital efficiency in our upstream and gathering businesses, can deliver strong results well into the future. Starting with our regulated businesses, pipeline storage segment earnings were up 29% versus last year. This was driven by significant top-line growth, with revenues up $13 million, largely as a result of the settlement reached in our supply corporation rate case. In addition, we recorded $3.5 million in revenue related to the true up of a surcharge that permitted us to recover costs related to certain pipeline safety and greenhouse gas related expenditures. As a result of our new rate settlement, this surcharge mechanism ended. We are also running ahead of our projections with respect to short-term revenue. Given our optimally located infrastructure in the heart of the Appalachian Basin, we are well positioned to take advantage of periods of increasing volatility, both in storage valuations as well as basis differentials across the region. We've made a concerted effort to capitalize on this, and as a result, we've seen a decent amount of success this year, largely from marketers willing to be opportunistic with shorter-term contracts. Taken together, the settlement of our supply corporate case and the success we've achieved in our short-term business have allowed us to increase our full-year revenue guidance by $10 million at the midpoint. In our utility, the growth we've been projecting is coming to fruition. Earnings improved meaningfully, up 41% compared to last year's second quarter. Principally driving this strong performance was growth in margin, which was up $14 million. Much of this growth was in our Pennsylvania jurisdiction, where we saw the continued impact of our $23 million delivery rate increase that went into effect last August. For the quarter, temperatures were largely consistent with last year. However, the addition of weather normalization in Pennsylvania protected approximately $5 million in margin that would have otherwise been lost given the warm weather during the quarter. Shifting to expenses in the regulated businesses, we've had great success hiring and retaining employees, more so than we've seen since the beginning of the pandemic. This may cause labor-related costs to be slightly over our original projections. However, we are certainly happy to be adding high-quality individuals to our already talented workforce. We are also seeing some cost headwinds as it relates to compliance with new and expanding regulations. One recent example is the New York prevailing wage requirements that we discussed last quarter. Previously, we focused on the bigger impact, which was the increase to capital expenditures at our utility business. It also has a knock-on effect to certain &M-related costs that are being passed on to us by our contractors. As a result, O&M may increase modestly above our initial projections in these segments. Despite these increases, our top-line growth is significantly higher, which will lead to continued strength in earnings and cash flow as we look out over the next couple of years. Furthermore, we are in the middle of our New York rate case and have the right to file for new rates in each of our other regulated subsidiaries. So, we expect to be able to recover any higher costs with minimal regulatory lag. Switching to our other companies, adjusted EBITDA for the E&P and gathering segments was up 12%. When pairing this with our ongoing reduction in capital spending, you can see why we are excited about the outlook for growing free cash flow. Given the meaningful decline in natural gas prices over the past year, the ability to increase EBITDA is a testament to our operating approach within these businesses. Productivity is increasing meaningfully as we transition to the EDA, and we've maintained our long-standing focus on managing our cost structure, with cash unit costs down 6% -over-year. Furthermore, our approach to hedging, with a focus on mitigating near-term volatility, minimized the impact of lower natural gas prices. Despite NIMEX dropping by more than a third from last year, our after-hedge realized price was down 2 cents per MCF, or less than 1%. Pulling this all together, quarterly financial results were strong, and operationally things remain on track. Undoubtedly, lower commodity prices remain a near-term headwind, but this is largely mitigated by having 74% of our remaining production fully hedged at prices well north of the current strip. We are assuming NIMEX averages $2 per MBTU for the remainder of the year, which is a drop of 40 cents from last quarter. Given this, we revised our earnings guidance range down 15 cents at the midpoint, such that we now expect operating results, excluding items impacting comparability, to be between $4.75 and $5.05 per share. Our guidance does not assume any additional price-related curtailments, however, we do have a modest amount of in-basin exposure remaining, roughly 10 BCF over the next two quarters. Moving to CAPEX, we've modestly reduced the midpoint of our consolidated capital guidance by $10 million, driven by the change at Seneca that Justin discussed. In the rest of our subsidiaries, we are moving into peak construction season, so the vast majority of our spending is still out in front of us. As a result, we are maintaining our prior capital guidance ranges for these segments. In conclusion, we see the outlook for national fuel is increasingly constructive. The expected growth in our regulated businesses, the improving capital efficiency from our and the strong longer-term outlook for natural gas prices are all very positive. We remain focused on investing in our business, where risk-adjusted returns are highly attractive. We also remain committed to returning cash to shareholders through our long-standing dividend, which has increased each of the last 53 years, and through our recently initiated share buyback program. Today, these represent an expected 6% return of capital yield, which when adjusting for considering our growth outlook is strong compared to both our upstream and utility peers. Taking it all together, our investment-grade balance sheet, growing long-term earnings in free cash flow, and commitment to returning cash to shareholders positions us well to deliver meaningful value over the long term. With that, I'll ask the operator to open the line for questions.

Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure you're unmuted locally. As a reminder, that's star followed by one on your telephone keypad. Our first question comes from Zach Palm of JP Morgan. Zach, your line is open. Please go ahead.

Hey, thanks for taking my question. One, maybe for Justin first, can you talk a little bit more about your outlook for curtailments? One of your peers in Appalachia talked about curtailments for two Q of the calendar year that were expected to be about twice as high as one Q curtailments. We're already through a month of the quarter and local pricing was pretty weak in April. Just trying to get a sense of what curtailments could look like this quarter.

Yeah, sure, Zach. I'd start just by highlighting that from April 4th to the balance of our year, we really have minimal exposure. Our credit to our operations and marketing teams on getting ahead of this. We were pretty concerned about what in-base and pricing could look like, and we were very active in locking a lot of our exposure. Now, through the balance of the year, we only have about 10 BCF exposed. We've locked in and quantified what the likely max impact could be. That's relatively evenly split between Q3 and Q4. You can take half and half of that 11-ish BCF number of what would be exposed at the midpoint of our guidance. It's overall minimal. You're not going to see, we're not expecting those, like you've heard from others, we're not expecting those kinds of curtailments. We really got ahead of it. I think we're in a good spot.

Thanks, Justin. Then maybe one just on the utility, you got into utility operating income growth of 7% to 10% year over year. That compares to the prior guide at 15% year over year growth. I know part of this is weather related, but can you just walk us through the moving pieces there that are driving that change?

Sure, Zach. To your point, it wasn't anything fundamentally changing in the business. It's really two pieces. One is weather. As Dave noted, it minimizes volatility, but it doesn't eliminate it. For example, in Pennsylvania, we have a plus or minus 3% dead band, and given where weather was in the second quarter, we were certainly outside of that dead band, so there was a weather impact in our PA jurisdiction. New York, the way weather norm works there, it's a bit more complicated. But needless to say, when you get more wider variability in temperatures, the weather normalization doesn't fully protect you. Together in the quarter, that was roughly $3 million or so. The other item is in our New York jurisdiction, dating back to our last rate case, we have this mechanism in place where we're allowed to recover if our lost and unaccounted for gas is below a certain threshold. Given the success of our modernization program, we've been able to take advantage of that. But there's really two components to that mechanism. One is volume, which is consistent in line with our expectation, but the other is pricing, and it's driven by the price that our customers are ultimately paying for gas, which is obviously meaningfully lower since we started the fiscal year. So those two together make up the bulk of it, and then I hit on the O&M headwinds we're facing, and that's sort of what's driving the range between 7% and 10%.

Great. Thanks, Tim. Thanks, Justin. You bet.

Thank you. As another reminder, if you'd like to ask your question, please press star followed by one on your telephone keypad now. Our next question comes from Neil Mehta of Goldman Sachs. Neil, your line is open. Please go ahead.

Yeah, good morning, team, and a nice quarter here. First question would be just how you're thinking about M&A in the current environment, something we've talked about in the past, about whether it makes sense to continue to grow the utility business, just any broad perspectives on that. Thank

you. Yeah, Neil, it's something we're still interested in, really no change in our views on that. Adding regulated assets we think would be a good thing for the company, and we keep our eye open for opportunities that'll be out there.

Thank you. We'll be looking at it. And then, Stan, on the regulated side, how should we think about modeling the rate increases here over the course of the next year? Any guidance in terms of trajectory and any increase that we need to be thinking about from a modeling perspective?

Yeah, Neil, PA, like we talked about, obviously, we know that increase, the rates, both for PA and ultimately for New York, once we hopefully reach a settlement there. The impact is volumetric, so obviously, there's a bigger impact in Q1 and Q2 and a smaller impact in Q3 and Q4, whereas in the pipeline business, it's a bit more radically spread over the course of the year.

Alright, team, thanks again.

Perfect, thank you. As a final reminder, if you'd like to ask a question, please dial star followed by one on your telephone keypad. At this stage, we have no further questions registered via the telephone line, so I'll hand back over to Natalie Fisher for any final or closing remarks.

Thank you, Charlie. We'd like to thank everyone for taking the time to be with us today. A replay of this call will be available this afternoon on both our website and by telephone and will run through the close of business on Thursday, May 9th. To access the replay online, please visit our investor relations website at .nationalfuelgas.com and to access by telephone, call -813-9403 and provide access code 407-920. This concludes our conference call for today. Thank you and have a nice day.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.