National Fuel Gas Company

Hello, and welcome to the National Fuel Gas Company Q2 Fiscal 2025 Earnings Conference Call. My name is Alex, and I'll be coordinating the call today. If you'd like to ask a question once the presentation has finished, please press Start, followed by 1 on your telephone keypad. I'll now hand it over to your host, Natalie Fisher, Director of Investor Relations. Please go ahead.

Thank you, Alex, 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 Chief 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 second quarter of fiscal 2025 earnings release, an April 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. National Fuel had a great second quarter, with earnings increasing more than 30% compared to last year. We continue to build on our positive momentum across each of our businesses, which drove the strong results for the quarter. At Seneca, we continue to see outstanding well results from our Utica program in Tyrokee County. Since the start of the fiscal year, we've brought online 12 wells across two paths, These wells are the best we've turned in line since the inception of our Utica program and were the main contributor to our 8% sequential growth in production. Also, as we mentioned last quarter, we recently brought online our best WDA Utica pad to date, and those wells continue to exceed our initial expectations. Given the performance of these wells, we are increasingly confident in the long-term outlook of our Appalachian development program. We have great inventory across the EDA and WDA with two decades of development locations that are economic at NYMEX prices below $2.25 in MMBTU. As we continue to optimize our well design and facilities, we expect further enhancements in both productivity and inventory life. Add to that the benefits of owning and operating our gathering facilities, and we see the ability to deliver still further improvements in capital efficiency. Switching to our regulated businesses, our utility had a particularly good quarter, with earnings per share increasing by 22 cents. The biggest driver behind the increase was the rate settlement approved by the New York PSC in December. This settlement will be a tailwind for the remainder of this year, and given its multi-year nature, will drive additional earnings growth through fiscal 2027. In Pennsylvania, we're starting to see the initial uplift from our modernization tracker. While the impact in the second quarter was small, we expect this to grow over the next two fiscal years until we hit the approximately $7 million annual cap on that program. In our FERC regulated pipeline and storage business, Supply Corporation's 2024 rate settlement continues to benefit earnings. Rates went into effect last February, so this quarter reflects the full benefit of that rate increase. At Empire Pipeline, In January, we reached an agreement with our shippers to amend our 2019 rate settlement. As you may recall, we had a mandatory comeback provision in that settlement that required us to file a rate case by May 1st of this year. We began conversations with our shippers in the fall and were able to reach an agreement, which FERC approved this quarter. This is a good outcome for both us and our shippers. We agreed to a modest, roughly $500,000 rate decrease, which will go into effect in November And in exchange, we were able to extend some key contracts with major shippers, which limits near-term recontracting risk. The settlement also gives us the ability to stay out of a rate case for another six years, but we are allowed to file as early as 2027, should we need to. Separately, we continue to make progress on our Tioga pathway project. As a reminder, this project will provide Seneca with an outlet for 190 million a day of Tioga County production and will add $15 million in annual expansion revenue for our pipeline business. In February, FERC issued its environmental assessment of the project with no significant issues noted. The project's next milestone is the 7C certificate, which is still on track for later this summer. Over the past three months, sentiment in Washington has clearly shifted towards more practical energy solutions. Many of the executive orders and early actions at agencies like EPA, DOE, and others have certainly been encouraging. But at the end of the day, building significant energy infrastructure projects still takes far too long and carries substantial regulatory and litigation risk. And it's not just natural gas facilities. Wind, solar, and electric transmission projects all face similar hurdles. I'm hopeful the new administration will work with Congress to achieve the permitting reform that's so desperately needed in this country. Moving to the broader pricing environment, the outlook for natural gas remains strong with demand increasing rapidly. The industry has line of sight on significant LNG export growth over the next few years and still further growth potential beyond that. The Woodside announcement earlier this week of reaching FID on their $17.5 billion Louisiana LNG project is a strong indication the LNG growth story is not over. In addition, domestic energy demand is robust with positive momentum from data centers, industrial growth, and the ongoing electrification of certain parts of the economy. As is becoming increasingly obvious, this demand growth can't be met with renewables alone. Natural gas and its ability to provide reliable, cost-effective baseload generation is critical to meet the growing demand for energy. National Fuel, with our integrated mix of businesses, is well positioned to play an important role in meeting this growing demand. Seneca has clear visibility on incremental firm sales and additional pipeline takeaway capacity that should allow it to continue growing production. We're in the unique position of high grading our development while other operators are moving down the inventory quality spectrum or focusing on other bases. This should naturally lead to a moderation of activity levels in Appalachia and allow Seneca to capture market share, particularly with capacity originating in the EDA. We also continue to see growing interest from data center developers and IPPs that seek reliable, cost-effective energy and timeliness to market. The depth of resource, cooler weather, and the significant amount of existing pipeline infrastructure makes Appalachia an attractive place for the next wave of data center development. National Fuel is uniquely positioned to offer solutions to meet this growing demand, whether it's utilizing our existing pipeline infrastructure to provide transportation capacity, building a short lateral to bring gas to an IPP, or contracting for a long-term gas supply agreement, we are seeing increased desires from counterparties to work with National Fuel to meet their needs. While a lot of these conversations are still in the early stages, they are ramping up, and we are optimistic they will lead to new opportunities for us in the coming years. Putting it all together, National Fuel's underlying fundamentals remain very strong and position us well to deliver continued value to shareholders. Our deep inventory of economic wells, low-cost operations, and the strong outlook for natural gas prices should deliver continued growth at Seneca and NFG midstream. At the same time, we expect the ongoing expansion and modernization of our pipeline and utility infrastructure to provide rate-based and earnings growth in our regulated subsidiaries, all of which should drive significant free cash flow generation in fiscal 2025 and beyond.