National Fuel Gas Company

Hello and welcome to the National Fuel Gas Company Q1 Fiscal 2025 Earnings Conference Call. My name is Elliot and I'll be your coordinator today. If you would like to register a question during today's event, please press star 1 on your telephone ePad. And I'd like to hand over to Natalie Fisher, Director of Investor Relations. Please go ahead.

Thank you Elliot and good morning. We appreciate you joining us on today's conference call for discussion of last evening's 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 Lois, President of Seneca Resources and National Fuel Midstream. At the end of today's prepared remarks, we will open the discussion to questions. The first quarter Fiscal 2025 Earnings Call and January 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 the safe 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. Before getting into the quarter, I wanted to take a moment to recognize the team of operations employees and contractors who got us through last week's bitter Arctic blast. In the face of bitterly cold temperatures, our talented employees stepped up, as they always do, to ensure that our system from the wellhead to the burner tip performed flawlessly. Thank you for going the extra mile. Now to the quarter. Overall, we had a strong first quarter with adjusted operating results up 14% over last year. As I've said on prior calls, our focus has been on execution and our success with that across the system is evident in our results for the quarter. Of particular note, our rate-regulated subsidiaries collectively delivered approximately 30% growth in earnings per share. And as I'll discuss in a moment, the positive outcomes and rate proceedings at Distribution and Supply Corporation over the past 18 months gives us line of sight on continued long-term growth in these businesses. On the non-regulated side of the company, our upstream and gathering businesses once again posted solid operating results. During the quarter, production was up 6% sequentially and the strength of our hedge book more than mitigated the drop in pricing we experienced compared to last year's first quarter. And over the last six weeks, gas pricing has materially improved, providing momentum for the balance of the year. At the same time, Seneca's operational success is driving continued improvement in the capital efficiency of our development program. As we've discussed on recent calls, Seneca's transition to the Eastern Development Area has been their principal area of focus. The results we're seeing continue to exceed our expectations, which gives us further confidence in the strength and durability of these assets. Since fiscal 2023, capital expenditures are down 14%, while production is up 12%. These capital efficiency trends are best in class, unmatched by any of our peers in Appalachia. And I'm happy to say we expect to see still further improvement in the years ahead. Justin will have more on this later in the call. Switching back to the regulated side of the company, in December, the Public Service Commission approved the joint proposal that we filed in September to settle our New York utilities rate case. This settlement caps off a period of highly impactful rate-making activity across the system. Collectively, our New York and Pennsylvania utility rate cases, along with the settlement and our supply corp rate case last February, are expected to provide in excess of $130 million of additional margin compared to fiscal 2023. New York rate settlement, which extends through fiscal 2027, is a good outcome, both for national fuel and our customers. The allowed rate of return on equity is .7% on a 48% equity layer, which is a significant improvement over the .7% and 43% in our prior rate case. The settlement keeps the margin protection items that we've had in the past, including weather normalization, revenue decoupling, and our large volume customer revenue tracker. And it also adds an uncollectible expense tracker for the first two years of our settlement. As a multi-year agreement, we will have two additional rate increases in 2026 and 2027 to account for our ongoing monetization spending, as well as expected inflationary increases in our operating costs. This gives us great visibility to continued earnings growth in our New York utility. And it's important to note that even with these increases, our delivery rates will still be amongst the lowest in the state, which is obviously great for our customers. From a policy standpoint, the record in the case and the Commission's unanimous approval of the joint proposal clearly shows their support for natural gas utilities in New York State. Of particular note, the Chairman of the Commission emphasized the importance of our continued investment in the modernization of our distribution utility infrastructure. Despite the rhetoric from elected officials, it's clear that the state's energy experts see a long future for natural gas in New York. Switching to our Pennsylvania utility, we recently received approval to implement a Distribution System Improvement Charge, or DISC, which is the Pennsylvania Commission's version of a modernization tracking mechanism. We're permitted to begin the surcharge this month, and though the impact will be small in the first year, I expect it to grow over the next few years as we make ongoing investments in our distribution system. In our pipeline and storage business, the Tioga Pathway Project continues to move ahead according to schedule, and we expect FERC to issue its environmental assessment in the coming months, which is a key milestone for the project. As a reminder, this $190 million a day project will provide an important outlet for Seneca's growing EDA production. In addition, at our Empire Pipeline, we've had constructive discussions with our shippers on amending our existing rate settlement, which currently requires Empire to file a rate case by the end of April. Based on these discussions, we're hopeful that we'll be able to submit a negotiated settlement extension for FERC approval in the next month or so. Taken together, the multi-year New York settlement and the Pennsylvania DISC, along with future ratemaking activity at Supply Corp and additional pipeline expansions like Tioga Pathway, are expected to deliver continued growth in the coming years. Turning to the broader industry,

the

outlet for natural gas is excellent. During winter storm Enzo, national daily demand reached record levels for two consecutive days. Colder weather, along with increased industrial and power generation demand, is contributing to an expected storage withdrawal for the month of approximately one TCF, which in addition to being a record pull on storage, also helps to remove some of the overhang on pricing from recent high inventory levels. Prices for the remainder of fiscal 25 have hovered in the $3.50 area, which, absent abnormally warm weather, feels sustainable given the current level of production and the expectations for demand growth stemming from LNG, on-shoring of industry, and the continued growth in gas fire generation. This improved outlook bodes well for national fuel. At the current NIMEC strip, and assuming the hedge position set forth in our IR deck, we expect significant free cash flow in our regulated businesses, potentially upwards of $1 billion over the next three years. Over the longer term, there's clear cause for optimism. The new administration in Washington is unquestionably supportive of natural gas, and while it's still early innings, I'm hopeful they'll work with Congress to address the permitting and regulatory reform the industry so urgently needs. Additionally, as we've all read in the press, the expected growth and power demand from data centers and artificial intelligence is impressive. And without question, natural gas as a highly reliable base load fuel source will play a critical role in meeting this growing need for new generation. National fuel's operating footprint in Pennsylvania is an attractive location for data centers. It has large amounts of available land, is situated atop an abundant source of natural gas, and its relatively cooler climate can help temper power consumption. As an integrated natural gas company, National Fuel is uniquely positioned to support the needs of data center developers and power generation facilities. Our highly interconnected pipeline infrastructure, long track record of executing on expansion projects, and decades of high quality development inventory allows us to offer a range of services to developers, from routine transportation service to a fully integrated solution underpinned by long term natural gas supply contracts. Like many of our peers, we are in active discussions with key players in the data center value chain and are optimistic that this will drive additional growth opportunities in the coming years. Putting it all together, I'm excited for the future of National Fuel. We have a great collection of assets located in the lowest cost basin in North America, a great team that's focused on operational excellence and a strong investment grade balance all of which positions us to deliver significant value to shareholders over the longer term. Before turning the call over to Tim, I want to take a moment to recognize Ron Kramer, our Chief Operating Officer, who as we previously announced is retiring tomorrow. Ron has had an incredible 45 plus year career with the company and I wish him nothing but the best in retirement. With that, I'll turn the call over to Tim.

Thanks Dave, and good morning everyone. National Fuel had a great quarter both operationally and financially with operating results of $1.66 per share, up 14% compared to last year. The success we are seeing in each segment is also driving our improved outlook for the remainder of the year. Before moving to that outlook, I did want to quickly touch on gap earnings. During the quarter, we saw the impact of non-cash impairments in the E&P segment, the majority of which was due to the ceiling test. Given the outlook for higher pricing, we are not anticipating any further impairments for the foreseeable future. This outlook for pricing also led us to increase our earnings guidance for fiscal 2025. We now expect adjusted operating results to be in a range of $6.50 to $7 per share, which at the midpoint is a 17% increase from our previous earnings guidance and a 35% increase over fiscal 2024 results. This range assumes NYMEX natural gas prices average $3.50 per M&B for the last three quarters of the fiscal year, which as of today is generally in line with the forward curve. Pricing continues to be volatile and is likely to be impacted by weather, power gen demand, and the timing of new LNG projects, but our hedge book mitigates a lot of this volatility. Keeping with our recent practice, we've provided sensitivities to our guidance based on different NYMEX assumptions. Looking at basis differentials, the combination of continued producer discipline and increased demand have led to a modest improvement in the outlook for inflation pricing. As a result, we've tightened our basis forecast for the remainder of the year, which we now expect to average $0.60 below NYMEX. Overall, this is a nice tailwind, but we do expect seasonality to continue. The recent cold snap led to significant tightening the past few weeks. However, we do expect differentials to trend wider as we exit winter, reaching levels closer to our prior guidance. Alongside the pricing tailwind, we are also seeing improvements across our operations. We've revised our E&P production guidance range and associated gathering segment revenue higher on the heels of great results at Seneca to start the year. In addition, our DD&A guidance has been revised lower to account for the impact of our Q1 ceiling test impairment. Lastly, we are expecting higher consolidated effective tax rate for the year. As prices rise, our incremental income is taxed at the statutory rate, which is marginally above the midpoint of our prior guidance. On the capital spending side, we modestly reduced the midpoint of Seneca's guidance range to account for continued capital efficiencies. On the regulated side of the business, with the bulk of pipeline construction season still in front of us, we are leaving the remainder of our capital projections unchanged for now. One last point on guidance. This was the first quarter where we saw the impact of the New York rate settlement. The settlement, which was approved in December, became effective October 1st. While we didn't start billing customers with new rates until January 1st, the order from the commission included a make-hold provision for any foregone revenues starting with the effective date. As a result, we recorded the impact of higher rates for the entire first quarter and we expect to collect the associated cash flow over the course of this calendar year. As is typical with utility rate cases, particularly in New York, there will be some noise in our financial statements over the impact of the new year's revenue on our financial details. But if there are further questions, please reach out to Natalie to walk through these items. Setting that aside, the important point to note is that earnings in the utility are expected to increase meaningfully in fiscal 2025, up approximately 30% compared to last year. And this isn't just growth in the utility. As Dave discussed, we are also seeing significant growth in each of our other businesses. We expect that these higher earnings will translate into higher free cash flow, allowing us to further improve our already strong balance sheet, continuing to return cash to shareholders through our long-standing dividend and ongoing buyback program. As it relates to the buyback, to date we've invested approximately $100 million to repurchase 1.8 million shares, or 2% of our shares outstanding from last March. This puts us right on track to complete the $200 million authorization by the end of the fiscal year. The buyback program was designed as an opportunistic means to create value for shareholders, and we've seen that play out over the past year. Given our confidence in the business and the current strength of natural gas prices, we expect continued free cash flow growth, and we'll look to identify the best use of that as we move through time. Looking to the balance sheet, we're in great shape. That being said, we do have several upcoming debt maturities that we will need to manage. With $500 million maturing this summer, and another $500 million early in 2026, we have the flexibility to find the best issuance window to start managing these maturities. While interest rates have settled at a higher level over the past year or two, credit spreads are near historic lows, and the market fundamentals support of taking some risk off the table sooner rather than later. In closing, we previously spoke about the company reaching an inflection point back in mid-2023, as the outlook for each business was set to significantly improve. The three major rate cases behind us and the transition to the EDA exceeding expectations, we have great visibility and a high degree of confidence in achieving the multi-year growth targets we set last year. That doesn't mean we plan to take our foot off the gas. Our integrated model, with the combination of strategically located infrastructure and long runway of highly economic development locations, positions us well to deliver strong growth for years to come. This growth will be seen both in the near term from projects already identified, as well as over the longer term, as demand for natural gas continues to increase. Staying true to our roots, this growth will be underpinned by disciplined capital allocation, targeting expected returns in excess of our cost of capital. With the strength of our long-term outlook, we have great confidence in our ability to continue growing our dividend, opportunistically buying back shares, and further improving our strong balance sheet. With that, I'll turn the call over to Justin.

Thank you, Tim, and good morning, everyone. First, before I get to the quarter, I want to echo Dave and take a moment to recognize our Seneca and Midstream Operations teams and our vendors for maintaining our production with no safety incidents or major disruptions through the recent extreme cold weather event, where wind chill temperatures exceeded 20 degrees below zero. Thank you. On to the quarter, Seneca and Midstream continued their run of solid operational execution. They drove a strong start to fiscal 25. Our planned production ramp into the core winter heating months coincided with strong natural gas prices and in-base in demand. As a result, production at Seneca increased by 6% over the fourth quarter, 98 BCFE, as we brought online some of our most productive pads to date. At NFU Midstream, throughput increased sequentially to 121 BCF, which reflects Seneca's higher production and growing third-party volumes. Throughout the first quarter, our team delivered greater well productivity and improving capital efficiency. Both in the EDA and WDA, optimized well designs and production management strategies led to stronger Utica well performance. In the EDA, we brought online two of our best pads to date, with initial production rates per well that are 25 to 50% higher than our prior Tioga Utica development pads. We expect to realize similar results in the EDA going forward as we employ our Gen 3 well design combined with enhanced production facilities and coordinated midstream infrastructure development. Therefore, we've increased our Tioga Utica EUR expectations to 2.5 BCF per thousand feet, as highlighted in our investor presentation posted last evening. In the WDA, we also achieved our best pad performance to date in our Beachwood area, which gives us further confidence in the long-term value offered by our WDA acreage, which as a reminder is almost entirely held in fee. Taken together, the productivity improvements we achieved in both the EDA and WDA this quarter are a testament to our team's ability to capture greater capital efficiencies from the integrated development of our highly prolific asset base. In light of the strong well performance across our development program in the first quarter, we are revising production guidance upward to a range of 410 to 425 BCFE. This represents an increase of 7.5 BCF at the midpoint relative to the previous quarter's guidance range into a .5% annual increase over fiscal 24 production. For the remainder of the fiscal year, we plan to bring online 14 net additional wells, mostly in Tioga County, and expect production to continue rising through our third quarter before slightly declining in the fourth quarter. We are also updating Seneca's capital guidance for the year by lowering the high end of guidance by 10 million to a new range of 495 to 515 million as we continue to capture operational efficiencies and value from our integrated development program. We anticipate capital expenditures to be somewhat weighted toward the second half of the year due to higher activity levels during that period of time. Looking forward ahead, our long-term strategy remains unchanged. We plan to operate a similar pace of development, turning in line around 20 to 30 wells per year, concentrating on our highest returning areas in the EDA and delivering low to mid single digit production growth. Turning to natural gas pricing, we remain optimistic for the remainder of the fiscal year, given the unique combination of producer discipline, ramping LNG exports, increasing electricity demand, and declining storage levels. These factors have contributed to a recent rise in pricing that has allowed us to opportunistically layer in incremental swaps and collars, which protect cash flows while maintaining upside exposure. As you can see in our investor relations materials, we have significant upside to higher prices throughout the year and into 26 and beyond. With respect to physical sales, our marketing team continues to focus on minimizing our sales portfolio. Currently, we have nearly 90% of Seneca's remaining forecasted fiscal 25 production safeguarded by firm transportation and firm sales agreements. In addition to providing access to premium markets, these firm sales minimize exposure to in-basin pricing and the potential for curtailments. That was evident in Q1, where despite lower in-basin prices in October and November, voluntary price curtailments were minimal. Looking out longer term, during the quarter we were successful in securing 50 million a day of incremental firm transportation capacity that will reach the Gulf Coast. Given evolving conditions in Northeast Pennsylvania related to both operator activity and firm transportation contract renewals, we believe we'll find more opportunities to secure additional long-term firm transportation and firm sales. Doing so opens the potential to access premium markets and consider accelerating development to bring forward the value of our deep inventory of highly economic development locations. At NFV Midstream, our activity remains focused on growing throughput by supporting Seneca development and adding third-party volumes. Last quarter, I discussed the commissioning of several value enhancing projects that support development in Tioga County. Incremental interconnection capacity with the Eastern system has allowed Seneca to increase deliveries into this outlet and take advantage of marketing optimization and price arbitrage opportunities. Our Keeneyville facility that went in service in October 2024 has gone from zero to over 300 million per day of throughput in less than three months as Seneca brought online two prolific pads. Further leveraging the benefits of our integrated model where we focus on consolidated midstream and Seneca economics, we recently completed a multi-year compressor swap and unit reduction plan upgrading facilities and equipment acquired in 2020. This initiative allowed midstream to lower suction pressure for Seneca's PDP wells, following the rate of decline for Seneca's production. Altogether, these projects drove Tioga system gathering throughput growth of 18% sequentially to a record 51 BCF and Q1, and I expect these investments will support the development of Seneca's highly prolific acreage for many years to come. Looking ahead, we believe Seneca and few midstream are well positioned for long-term growth and sustained success. Our talented workforce, integrated business model, and deep inventory of highly economic future development locations differentiate us in today's market. We believe our culture of operational excellence and focus on leadership and safety and sustainability alongside our strong asset base and execution sets us up for considerable success in fiscal 25 and the years to come. With that, I'll ask the reader to open the line for questions.

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask a question, please ensure your device is unmuted locally. Our first question comes from Noah Hungness with Bank of America. Your line is open. Please go ahead.

Good morning, guys. I guess the first question I had was on if you could provide any incremental color on the types of conversations you're having around data centers and really how far along those conversations are and maybe any timing, rough timing when we could think we could hear an announcement.

Yeah, I'd say we're still relatively early innings on those types of discussions, but we do have a team that's very active in meeting, as I said in my remarks, across the value chain. We get a lot of interest because we are unique in that we can provide a suite of different services to developers. So nothing to announce now, but we're working at it.

Gotcha. And then for the second question, I kind of wanted to better understand your thought process here of choosing to grow production versus maybe taking the gains that you guys have seen and that production flat and take the incremental capex savings and if this was enabled by the 50 million a day of additional egress that you guys captured.

Sure, Noah. Yeah, I'm happy to speak to that. So the production increase is really a result of just the outstanding results that we experienced in the first quarter. As I kind of noted in my remarks, we have been making continual changes to our well design in Taito-Utica as we get more and more development. Those changes have resulted in enhanced both near-term productivity, so we're seeing the ability to flow these wells at higher rates for long sustained flat periods, as well as higher EUR estimates over time. And so this recent increase in production is really just driven by the great results as opposed to any sort of change in our overall level of activity. As we look forward, as I've noted many times in the past, we will only grow our production to the extent we have access to takeaway markets. There is a level of spot that we're very comfortable with, but we like to have a very good portfolio of firm transportation and firm sales. The recent transaction or firm transport that we were able to enter into, which starts next year, is part of that. But at this point, we're not inflicting our growth any more than we've previously relayed, so expect kind of that low to mid single digits with continued improvements in capital efficiency and looking to drive capital down even further into the future.

Dave, Justin, Tim, thanks so much for answering our questions. Thank

you. As another reminder, if you'd like to ask a question, please press star one and telephone keypad now. We now turn to Greta Dreska with Goldman Sachs. Your line is open. Please go ahead.

Good morning and thank you for taking my questions. As we think about the outlook for capital returns from here, how would you characterize your view on the potential for incremental return of capital through increasing the share repurchase authorization relative to the current capital dividends? Alternatively, do you expect incremental debt reduction to become a larger focus in the next year or two? How should we be thinking about the uses of free cash flow generation in 2025 and 2026? Thanks.

Yeah, sure, Greta. As we think about the buyback program, like I mentioned in my remarks, we're about halfway through, so we still have about $100 million remaining on our existing authorization. I think the good thing is the strength of the business and the outlook for gas prices certainly supports incremental free cash flow generation. As we go through the course of this year and get closer to wrapping up our existing buyback program, we'll look for the best use of that capital. Obviously, we have our long-standing dividend and we have a great balance sheet, so to the extent it makes sense to continue that buyback beyond this year, we'll evaluate that and communicate that to the street over time.

It makes a lot of sense. Thank you. Then I guess as M&A has remained very top of mind for the energy investing universe, how do you frame your outlook for M&A and the industry more broadly, as well as the role for M&A for energy specifically? Is the preference still directed potentially towards scaling the regulated segment of the business?

Yeah, really no change from our previous discussion of this where we'd like to be a bigger company adding on the regulated side, we think would make sense, but that doesn't rule us out from looking at call it smaller bolt-on acquisitions on the E&P side of the business.

Thank you.

We now turn to Timothy Winter with Capelli & Company. Your line is open. Please go ahead.

Hi, good morning and congratulations on a solid quarter, guys. I was wondering, Dave, if you could follow up a little bit more on the data center. When you say you offer a full suite of products or services, can you provide a little more color? Are you talking like maybe helping to site or construct a gas-fired plant or marketing or what are some of the suite of services you're talking about?

Yeah, so at the most basic level, it would be providing incremental pipeline transportation capacity to a developer, but then moving back to the wellhead, we could also do a long-term supply contract or we could do a pipeline contract with a long-term supply contract. That's in the most basic level. We're also talking with power developers to potentially partner to offer a single source of energy, if you will, to the plants. Those are the principal ways that we're thinking about it.

Okay, great. Then on the improved sediment for gas and maybe some help greenlining development, is there any thought of Northern Access coming back and being a potential project to get production out of the Appalachia?

Yeah, not in the near term. As you may recall, we did not file for a certificate extension in earlier, I guess later last year. That being said, the project is conceived and we do have rights away and whatnot, so to the extent that there was interest, we could restart it and do it, but that would take a bit of time. We'll see how that plays out over time.

Okay, thank you guys.

Yvette?

We have no further questions. I'll now hand back to Natalie Fisher for any final remarks.

Thank you, Elliot. 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 we'll run through the close of business on Thursday, February 6th. Please feel free to reach out if you have any follow-up questions. Otherwise, we look forward to speaking with you again next quarter. Thank you and have a nice day.

Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.