National Fuel Gas (NYSE:NFG) plans to separate its integrated upstream and gathering business into a standalone publicly traded company through a tax-free spinoff to shareholders, a transaction the company expects to complete in the second half of calendar 2027.
President and Chief Executive Officer Dave Bauer said the separation will create two independent businesses: a fully rate-regulated National Fuel and a new Appalachian natural gas producer and gathering company referred to as IUG. Following the spinoff, existing National Fuel investors are expected to own shares in both companies on a pro rata basis.
National Fuel to Become Fully Regulated Business
After the separation, National Fuel will operate as a 100% rate-regulated enterprise with approximately $5 billion of rate base, management said. Its utility operations will serve about 1.1 million customers in Ohio, New York and Pennsylvania, while its FERC-regulated pipeline and storage operations will provide nearly 5 billion cubic feet per day of gas transmission services and 77 Bcf of fully contracted storage capacity.
The company expects long-term rate-base growth of 5% to 7% under its current capital-spending plans. Treasurer and Chief Financial Officer Tim Silverstein said National Fuel currently spends about $200 million annually across its New York and Pennsylvania utilities and expects annual investments to nearly double following the addition of its Ohio utility business.
National Fuel also said it has 700,000 dekatherms per day of new pipeline capacity under contract, nearly 400,000 dekatherms per day of which is expected to enter service next month. Management cited demand from utilities, data center developers and power-generation facilities as drivers of recent pipeline expansion activity.
Bauer said separating the businesses is expected to lower the regulated company’s cost of capital relative to the combined company. He said this could support modernization and expansion projects, affordability efforts and potential future merger-and-acquisition opportunities.
IUG Positioned as Appalachian Gas Producer and Gatherer
The proposed IUG company will include Seneca Resources and NFG Midstream. It currently produces 1.1 Bcf per day of net natural gas and holds 5 trillion cubic feet of proved reserves across 1.2 million net acres in Pennsylvania, according to management.
IUG’s acreage includes more than 300,000 acres in its Eastern Development Area, concentrated in Tioga and Lycoming counties, and more than 900,000 acres in its Western Development Area. Justin Loweth, president of Seneca Resources and National Fuel Gas Midstream, said much of the western acreage is owned in fee, meaning the company does not pay royalties and does not face drilling requirements to retain the land.
Management said IUG has more than 25 years of prospective Marcellus and Utica drilling inventory at its current pace, with break-even prices below $2.25 per million British thermal units based on NYMEX pricing. The company also owns gathering infrastructure that transports most of its production, which it said supports a low-cost operating structure.
Loweth said IUG has approximately 1 Bcf per day of firm transportation capacity to high-value markets and has contracted for another 0.5 Bcf per day expected to enter service over the next several years. The first portion of that capacity, the Tioga Pathway Project, is expected to be available next month.
Loweth, who will become chief executive officer of IUG after the separation, said the standalone structure will provide greater flexibility to consider organic and inorganic growth opportunities. He pointed to IUG’s acreage position, production potential and subsurface knowledge in Tioga County as potential advantages.
Capital Structure and Shareholder Returns
National Fuel intends to retain up to a 19.9% interest in IUG following the spinoff. Silverstein said the company expects to monetize that stake in a tax-efficient manner after the separation and use the proceeds to further strengthen National Fuel’s balance sheet.
Management said National Fuel expects to generate free cash flow in most years and does not anticipate a need for incremental equity financing over the next five years. Silverstein said the company expects its credit rating, after monetizing the retained IUG stake, to be two to three notches higher than its current investment-grade rating.
IUG is expected to begin with leverage slightly above one times and target a long-term leverage ratio at or below one times. Silverstein said management believes the new company could reach leverage below one times within one or two years after the separation, based on expected free cash flow generation and current natural-gas strip prices.
National Fuel expects its dividend to be adjusted to a payout ratio in line with utility peers, while IUG expects to balance free cash flow among balance-sheet optimization, growth investment and share repurchases.
About National Fuel Gas (NYSE:NFG)
National Fuel Gas Company (NYSE:NFG) is a diversified energy company engaged in the exploration, production, gathering, transportation, storage and marketing of natural gas. Through its subsidiaries, the company operates across multiple segments of the natural gas value chain, with a concentration in the Appalachian Basin and the northeastern United States.
National Fuel’s exploration and production operations are conducted primarily through Seneca Resources Company, which develops and produces natural gas in the Appalachian region.
