Hello and welcome to the National Fuel Gas Company acquisition of CenterPoint' s Ohio Natural Gas Utility business conference call. My name is Alex, and I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, please press star followed by one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. I'll now hand it over to Natalie Fischer, Director of Investor Relations, to begin. Please go ahead.
Thank you, Alex, and good morning. We appreciate you joining us on today's conference call for a discussion of National Fuel 's acquisition of CenterPoint Energy's Ohio Natural Gas Utility business. A press release and accompanying investor presentation have been posted to our Investor Relations website. We may refer to these materials during today's call. With us on the call from National Fuel Gas Company are Dave Bauer, President and Chief Executive Officer, and Tim Silverstein, Treasurer and Chief Financial Officer. At the end of today's prepared remarks, we will open the discussion to questions. Please note that if you have any media-related inquiries, contact Karen Merkel after the call. Before we begin, I'd 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 this morning's press release as well as our IR presentation for a listing of certain specific risk factors. With that, I'll turn it over to Dave Bauer.
Thank you, Natalie. Good morning, everyone. Thanks for joining us today. Last evening, we entered into a definitive agreement to acquire 100% of the equity interest in CenterPoint 's Ohio Natural Gas Utility business for $2.62 billion on a cash-free, debt-free basis, which implies a valuation of approximately 1.6x estimated rate base at year-end 2026. The transaction will add 335,000 customers, over 5,900 mi of natural gas transmission and distribution pipelines, and $1.6 billion in rate base. We expect to close the acquisition in the fourth quarter of calendar 2026, subject to HSR review and the completion of a notice filing and review process with the Public Utilities Commission of Ohio . As I've said previously, growing the company through M&A, particularly on the regulated side of the business, has been a strategic priority.
In addition to adding scale, which is an attribute valued by investors in the credit markets, it better balances our business mix and bolsters our investment-grade credit profile, which over the long run should provide support for continued growth on both the regulated and non-regulated sides of our business. In this environment, it's an effective use of balance sheet capacity and an efficient redeployment of free cash flow from our non-regulated operations into long-duration rate-based growth. CenterPoint Ohio meets all our criteria for a great utility acquisition. First, it has the right amount of scale. It doubles the size of our existing utility business and yet is small enough that we can do it mostly with balance sheet capacity. Second, it's located in a cold-weather climate and is geographically proximate to our existing operations.
Third, it operates in a favorable jurisdiction with strong political support and a constructive regulatory framework that enables timely recovery of ongoing investments and system modernization. Lastly, it has a stable customer base and a talented operating workforce that provides outstanding customer service. With respect to financing, we have a strategy that we anticipate will generate long-term value for shareholders. As Tim will discuss later, post-close, this acquisition is expected to be immediately accretive to the company's regulated earnings per share, excluding transaction-related expenses. As you know, we generally look to the earnings and cash flows of our regulated subsidiaries to support our longstanding dividend, and the incremental earnings we expect from this transaction will only enhance our ability to extend our 55-year streak of dividend growth.
On a consolidated basis, at current natural gas prices, we expect adjusted operating results to be neutral in fiscal 2028, the first complete year after closing, and accretive thereafter. Looking beyond the near- term, our ability to fund rate-based growth utilizing free cash flow from our integrated upstream and gathering operations is a truly unique value proposition. While most of our peer utilities are operating with thin cushions to their credit ratings and are issuing equity to fund growth, National Fuel can finance our rate-based growth through free cash flow. This is a significant benefit of our integrated model. At today's multiples, every dollar of non-regulated free cash flow that we invest in rate base should translate to about $1.60 in value. Over time, this should create significant value for shareholders and further improve our investment-grade credit metrics.
Obviously, a strong balance sheet gives us flexibility to fund future organic and inorganic growth when the opportunity arises. With a nearly 125-year history of providing safe, affordable, and reliable energy supplies, we're excited to expand into the Dayton, Ohio region and look forward to serving its 335,000 natural gas customers. We also look forward to further engaging with the approximately 200-employee workforce of CenterPoint Ohio and seamlessly integrating them into the National Fuel family. Throughout this process, we've had the opportunity to engage with many of them, and it's clear they share our commitment to safety and customer service. In summary, CenterPoint Ohio is a great acquisition for National Fuel.
It checks all the boxes in what we're looking for in a regulated asset and adds to our already great runway of organic growth opportunities, including Seneca's continued development of the EDA, where we have well over a decade of high-quality inventory, and our pipeline expansion projects like the Tioga Pathway and Shippingport Lateral projects . All of this should create meaningful long-term value for shareholders. The outlook for National Fuel is very bright. I'm excited for the future and look forward to building on our legacy in the natural gas business at a time when the outlook for the industry is as strong as we've seen in a very long time. With that, I'll turn the call over to Tim to walk through the financial highlights in terms of the transaction.
Thanks, Dave, and good morning, everyone. To reiterate what Dave said, this acquisition is highly strategic for National Fuel, adding significant scale to our regulated operations. I'll talk a bit more about the business itself and our approach to financing the acquisition, which we expect will comfortably maintain our existing investment-grade credit ratings. Starting with the regulatory and statutory framework, as Dave said, Ohio is a constructive rate-making jurisdiction and very supportive of investing in natural gas infrastructure. For example, similar to several other states, the Ohio legislature approved the ban on natural gas bans in 2021. On the rate-making front, the Ohio Commission has a robust set of mechanisms that balance the needs of customers and shareholders. They use a straight, fixed, variable-rate design, similar to what we see in our FERC-regulated pipelines. This provides a high degree of certainty on rate recovery, regardless of weather and usage trends.
The Commission has also approved and supported cost recovery for nearly 100% of its capital investments through various riders, which allow operators to recover in real-time amounts related to this spending, including an associated return. Also, in 2024, CenterPoint Ohio filed a rate proceeding, reaching a proposed settlement in July of this year with the Commission. Approval is expected in early 2026. With an agreed-upon revenue increase of nearly $60 million and an extension of the critical riders through 2029, this settlement will provide further certainty into future cash flows and earnings for the remainder of the decade. With the strength of this outlook, we expect to continue our long-term 5%- 7% regulated earnings per share growth well into the future, even starting with a significantly higher base of earnings post-closing.
Just as National Fuel has built strong relationships with our regulators in New York and Pennsylvania, we look forward to building upon CenterPoint's similarly strong relationships in Ohio and expect to actively engage with key stakeholders across the state. Moving to the financing plans for this acquisition, the structure is a bit unique, with National Fuel issuing a promissory note to CenterPoint for $1.2 billion at closing. The remainder of the purchase price will be paid in cash. The note was CenterPoint's preferred structure and is designed to help CenterPoint time the cash proceeds to meet their own financing needs. The note will have a maturity date of approximately one year post-closing and will carry an interest rate of 6.5%, both of which were incorporated into our valuation.
Over the coming quarters, National Fuel intends to begin executing its permanent financing, inclusive of the amount to repay the note to CenterPoint. We plan to fund the transaction through approximately $300 million- $400 million in common equity, along with the issuance of long-term debt, as well as expected future free cash flow from the company's integrated upstream and gathering businesses. Even though the CenterPoint note structure is not common for an investment-grade buyer, it does provide additional benefits to National Fuel. Given the longer timeline until the note's maturity, we can leverage our upstream and gathering free cash flow to fund a larger share of the proceeds. We expect to raise capital in two tranches, with the first being prior to closing and the second being closer to the maturity of the promissory note.
We've also backstopped this transaction through a fully committed bridge facility for the entire purchase price, inclusive of the repayment of the note with CenterPoint. The goal of our financing strategy is to maximize flexibility and protect against downside risk, and we believe we achieved that. Based on extensive dialogue with the rating agencies, we've designed this ultimate financing mix to maintain a strong credit profile that supports our investment-grade credit rating. Looking a little deeper at the terms of this deal, the transaction will be structured with a 338(h)(10) election for tax purposes, allowing National Fuel to step up the tax basis of this business. We do not anticipate any impact of this election on ratepayers. As we look ahead, we are confident in our ability to execute on the integration of these assets and deliver meaningful value to all of our stakeholders, including customers, communities, employees, and shareholders.
We are fully aligned with CenterPoint on ensuring a smooth integration and will have the benefit of working through the process alongside an experienced counterpart who has a track record as a great utility operator and has also successfully divested multiple gas LDCs over the past few years. In closing, I'd like to first thank the team we worked with at CenterPoint. It is clear they take pride in maintaining quality operations in Ohio. We are excited to work with them throughout the transition process and welcome the Ohio team into the National Fuel family. I also want to thank our entire team here at National Fuel. Their depth of knowledge, dedication, and collaboration have allowed us to execute on this strategic opportunity that complements our existing portfolio of assets.
It's not every day that a business comes to market that so clearly meets our strategic acquisition criteria, but here we have the unique opportunity to acquire a high-quality business that we believe will be accretive to regulated earnings per share and credit supported over the long- term. It expands our operations into a neighboring cold-weather state with a constructive regulatory and political backdrop. Supported by this strong foundation, we are confident that our acquisition of the CenterPoint Ohio will deliver long-term value for all of our stakeholders for decades to come. With that, operator, I'd like to open the call for Q&A.
Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. If you'd like to remove your question, that's star followed by two. Please ensure you're unmuted locally when asking your question. Our first question for today comes from Zach Parham of JPMorgan. Your line's now open. Please go ahead.
Hey, Tim. Thanks for taking my questions and congrats on the deal. First, I just wanted to ask on the equity portion of financing, why do you believe $300 million- $400 million is the right amount, and any thoughts on timing of that potential financing?
Thanks, Zach. We've done a lot of work around this. We've had a lot of conversations with the rating agencies, and we think that at $300 million- $400 million, it really balances the desire to keep our balance sheet in strong shape, consistent with how we've always operated the business. Through those conversations, we really landed on that number being the right number as we sit here today. As it relates to timing, given the size of this transaction, there are some requirements that we will need to accomplish, particularly around putting together pro forma financial statements. We don't expect that we will be going to the market for raising capital until the early part of next year at the earliest. That's the plan as it sits today.
Thanks, Tim. My follow-up, you mentioned 2.5x- 3x leverage expected post the deal close. Are you comfortable going forward at that level of leverage, or would the plan be to further reduce leverage from that level with free cash flow generation? I'm just trying to think about how you'll allocate free cash flow on a pro forma basis going forward.
Yeah, that's a good question. We expect to come out of the gate, if you look at the script today, closer to that 2.5x EBITDA. If you look at the profile of our business and the success we're seeing on the upstream and gathering side and the cash flow generation, that gives us a lot of flexibility to push our credit metrics and deploy that cash flow towards the balance sheet first and foremost until we're in a very comfortable spot. That would be the immediate plan. Obviously, we'll continue to evolve that as we continue to stay focused on our capital allocation strategy, which is, first and foremost, balance sheet strength, and then looking at other ways to deploy the capital in the future.
Thanks, Tim. Congrats again on the deal.
Thanks, Zach.
Thank you. Our next question comes from Neil Mehta of Goldman Sachs . Your line's now open. Please go ahead.
Thank you so much. First question is better understanding some of the areas where you will be deploying incremental capital to drive rate base at [ CenterPoint] Ohio . I think your capital program is expected to be $150 million- $200 million. Where do you expect those dollars to be spent? What are specific projects or opportunities that you're excited about in terms of driving rate base higher?
That's a good question, Neil. You know, the nice thing about the CenterPoint Ohio assets is it looks very similar to the assets we have today in Western New York and Northwestern Pennsylvania. It's very much a modernization, safety, reliability investment strategy. There's also some good opportunities we see down the road for growth. This service territory is situated right between Columbus and Cincinnati. You're seeing a lot of sprawl and investment in Ohio around those two regions. We see some nice growth opportunities as we look out to the latter part of the decade as a way to deploy some growth capital. That baseline $150 million - $200 million is really principally tied to their ongoing modernization and investing in safety and reliability.
I know with any regulated transaction, approvals tend to take a little bit longer. Can you just remind us again what approvals will be required, and will you have to work with the PUCO around getting this transaction done?
Yeah. There's a notice requirement, or I guess less of an approval requirement, but more of a practical notice to the Commission. We'll plan to file that here in the coming months. If we look at some of the precedent, that has historically taken, you know, say in that four to six-month area to seek approval, which would put us comfortably in line to reach the closing date that we've talked about, which is the fourth quarter of calendar 2026.
Thank you. As a reminder, if you'd like to ask a question, that's star followed by one on your telephone keypad. Our next question comes from Kalei Akamine of Bank of America . Your line's now open. Please go ahead.
Hey, good morning, guys. In your materials, you mentioned that the impact on adjusted operating results will be neutral in fiscal 2028. My question is, what is earnings from this business today? Is it growing under CenterPoint 's stewardship? After you take it over, does growth inflect into fiscal 2029?
Yeah. I think I got your question there, Kalei . They have, as we put in our materials, historically, net income of about $65 million. As we talked about in our remarks, they're in the process of finalizing a rate case that will have a couple of things. One, it will have a general step up in base rates, but it also has built-in riders, like I alluded to, that really allow the continued investment and corresponding growth over the next five years. Those riders extend through 2029. There will be the ability to deploy that capital over the next five years and have essentially built-in increases that are supported and agreed upon by the Commission, CenterPoint when they negotiated it, and all the other intervening parties.
There are some things in motion there. The other thing I noticed about this deal is that it's a step out geographically. In [Northwestern Pennsylvania] and Western New York, you guys operate in an upstream position. Are there any benefits to establishing an upstream business in Ohio, noting that there are several packages on the market today?
Yeah. We think the geographic proximity in a neighboring state is certainly a good benefit for us overall. We think it fits with our existing business and how we operate our business. We aren't expecting a lot of significant benefits in terms of cost structure in the immediate term, but we do believe that we will be able to create value for both shareholders as well as customers over the long- term as we get through the broader integration of this business.
Got it. I appreciate it. Thank you.
Thanks.
Thank you. Our next question comes from Timothy Winter of Gabelli & Company . Your line's now open. Please go ahead.
Good morning, guys, and congratulations on the transaction. I have two questions.
Thanks, Tim.
Hello. One, can you clarify the earnings accretion, the timeline for the regulated utility, and the differences to why it's neutral on a consolidated basis in 2028?
Yeah, Tim. Sure, I can take that. From a regulated perspective, it's immediately accretive, and it's pretty significant from an overall earnings per share at the regulated. We expect double-digit accretion within those businesses right out of the gate. Obviously, it's a sizable transaction for us, doubling the utility rate base and increasing their overall rate base by 50%. That, as Dave and I talked about, will be an immediate benefit right out of the gate. From a consolidated perspective, there are a couple of moving pieces there. We expect consolidated EPS to be neutral in 2028 based on the first full year of operations after the expected closing. It's possible it could be accretive as well.
Ultimately, it will come down to the placement of the cost of capital and our long-term debt, as well as where natural gas prices go, and if there's more free cash flow that we can put into the financing mix over long-term debt, for example. It's possible it could be better than neutral in 2028. Thereafter, we expect it to be meaningfully accretive as we look out to the future.
Okay. Gotcha. With the acquisition, you mentioned you're going to be 40%-5 0% regulated. As you look longer term, is there a targeted business mix that you guys are looking for? With current gas prices, do you expect the E&P business to grow faster than the regulated utility business?
Yeah. Tim, this is Dave. We don't have a specific target for each of the businesses. Rather, over time, we do our best to invest capital in ways that will best benefit our shareholders, right? In the 2010s, we were really growing our Marcellus program. That's matured, and we find ourselves in a good spot now where we've got balance sheet capacity and a lot of free cash flow and an opportunity to acquire an asset on the regulated side of the business that is going to be great for us over time, because it'll make us a bigger company with better earnings and a better credit profile. Now is the right time in our view to invest in this asset.
Over time, depending on where gas prices go, depending on what opportunities are out there, we'll deploy capital in the parts of the business that will get the best returns for our shareholders.
Okay. Great. Congratulations and thank you.
Thanks.
Thank you. At this time, we currently have no further questions, so I'll hand back to Natalie Fischer for any further remarks.
Thank you for your interest in learning more about this exciting acquisition for National Fuel . A replay of this call will be available later today on both our website and by telephone, and will run through the close of business on Tuesday, October 28. Please reach out to me as the team and I are available to answer any questions you may have. Thank you and have a great day.
Thank you all for joining today's call. You may now disconnect your lines.