NFG to Separate Integrated Upstream and Gathering Business - NATIONAL FUEL GAS CO

Financial Performance:

• National Fuel will become a 100% regulated utility post-separation with approximately $5 billion in rate base across 1.1 million customers in NY, PA, and OH.
• The company currently spends ~$200M annually on utility modernization, expected to nearly double with the Ohio acquisition; FERC pipeline business adds ~3 BCF/day of capacity historically.
• IUG (Upstream & Gathering) holds 1.1 BCF/day net production with 5 BCF of approved reserves and 1.2 million net acres, with a 25-year inventory life at <$2.25/MMBtu NYMEX break-evens.
• Both entities are projected to require no incremental equity financing for five years post-separation, supported by strong cash flow generation.
• National Fuel intends to retain a 19.9% stake in IUG, planning to monetize it tax-efficiently to strengthen its own balance sheet.
• National Fuel expects to achieve a credit rating 2–3 notches higher than its current investment grade rating, while IUG targets a sub-1x net leverage ratio within 1–2 years, stabilizing around 1x long-term.

Guidance and Future Outlook:

• Separation transaction expected to complete in the second half of calendar year 2027, subject to SEC Form 10 registration and financing arrangements.
• National Fuel projects long-term rate-based growth of 5% to 7% driven by contracted FERC expansions and system modernization, funded by internal cash flows without dilutive equity.
• IUG targets sustained capital efficiency improvements (>25% improvement since 2023) and consistent free cash flow generation through disciplined capital allocation.
• Long-term growth for IUG supported by a 25-year development inventory, low operating cost structure, and access to premium markets via firm transportation capacity (1 BCF/day currently, +0.5 BCF/day coming online).
• Management anticipates a constructive natural gas demand environment driven by LNG exports, power generation, and data center load, positioning both companies for long-term value creation.

Business Segments and Product Lines:

• National Fuel (Post-Separation): 100% rate-regulated enterprise comprising utility operations in NY, PA, and OH, plus a FERC-regulated pipeline and storage business offering 77 BCF of fully contracted storage.
• IUG (New Standalone): Integrated upstream and gathering business focused on the Northeast PA region (Tioga and Lycoming counties), including 300,000 acres in the Eastern Development Area (EDA) and 900,000 acres in the Western Development Area (WDA).
• IUG owns significant gathering infrastructure ensuring vast majority of production flows internally, maintaining a low-cost structure and high cash margins.
• New infrastructure projects include the Tioga Pathway Project (coming online next month) and two expansion projects on the "line-in" system near Pittsburgh (one online next month, another contracted).

Market and Competitive Landscape:

• IUG operates in one of the best remaining development opportunities in the Appalachian Basin, leveraging deep inventory in high-productivity Marcellus and Utica zones.
• National Fuel benefits from strategic interconnections with every long-haul pipeline in the region and sits atop the most prolific natural gas supply source in the US.
• Management highlights a shift from supply-pull to demand-pull projects, driven by utilities, data centers, and power generators seeking reliable gas supply.
• Post-separation, both companies can better attract investors by offering tailored capital structures focused on distinct strategies: regulated stability for National Fuel vs. growth and cash returns for IUG.

Risks and Challenges:

• Regulatory risks in state jurisdictions, though management cites constructive frameworks in NY, PA, and OH with mechanisms for real-time capital cost recovery.
• Commodity price volatility impacting IUG's cash flow and leverage targets, though the business has a long-term flexibility to pace development accordingly.
• Execution risk regarding the completion of the tax-free spinoff by H2 2027, subject to regulatory approvals and SEC filings.
• Potential changes in the natural gas demand outlook, though current projections suggest a durable multi-year increase.

Management Commentary and Tone:

• Management tone is highly confident and decisive, describing the separation as a "milestone" that unlocks long-term value creation for both entities.
• Leadership emphasized that financial synergies of the integrated model are less relevant today given IUG's scale and free cash flow, while operational synergies (utility/pipeline and upstream/gathering) remain intact.
• Dave Bauer (CEO) and Justin Loeweth (President of IUG) highlighted the unique ability of both companies to grow without dilutive equity, a differentiator versus peers.
• The team reiterated a focus on customer affordability and the alignment of investor interests following the split.

Analyst Questions and Answers:

• Leverage Targets: CFO Tim Silverstein clarified IUG will start with slightly over 1x leverage with a clear path to <1x within 1–2 years; National Fuel aims for 2–3 notches improvement in credit rating.
• Strategic Rationale: When asked if the split was driven by a sale offer, Dave Bauer stated the Board reviewed all alternatives including tax implications and concluded the spinoff was the superior value path.
• Growth Constraints: Neil Mehta (Goldman Sachs) noted IUG's growth was previously constrained by National Fuel's need to maintain investment-grade status; separation removes this cap, allowing independent capital raising and faster growth.
• Inventory Valuation: Analysts asked about the economic value of undeveloped acreage; management described it as a strategic advantage offering flexibility to accelerate growth and optimize balance sheet usage.
• Organic vs. Inorganic: When asked about growth sources, Justin Loeweth confirmed a "all of the above" approach, leveraging existing inventory (organic) while remaining open to inorganic opportunities like market share gains or acquisitions.

Other Key Points:

• The separation is structured as a tax-free spinoff to existing National Fuel shareholders, with investors holding pro rata shares in both companies immediately post-completion.
• National Fuel will adjust its dividend payout ratio to align with utility peers, while IUG will balance free cash flow between growth, balance sheet deleveraging, and share repurchases.
• IUG will be led by current management, with Justin Loeweth appointed as CEO of the new entity, retaining the existing operational team.
• The transaction is expected to eliminate the "cost of capital" drag on the utility side, where the cost of capital had risen as the non-regulated business grew larger than the regulated base.