내셔널 퓨얼 가스(NFG) 2026 회계연도 4분기 실적 발표 콘퍼런스콜: 2027 회계연도 가이던스 및 세네카 분사

핵심 요약

• 내셔널 퓨얼 가스 컴퍼니(National Fuel Gas Company)는 2026 회계연도 4분기 GAAP EPS 1.02달러, 조정 EPS 1.22달러를 기록했다고 발표했다. 연간 조정 EPS는 9% 증가한 7.55달러를 기록했다.
• 경영진은 2026 회계연도 대비 0.80달러 하락한 MMBtu당 2.85달러의 NYMEX 천연가스 가격 가정을 바탕으로 2027 회계연도 EPS 가이던스를 6.00~6.40달러로 제시했다.
• 세네카 리소스(Seneca Resources)는 2027 회계연도 생산량을 중간값 기준 전년과 대체로 비슷한 400~435 Bcf로 예상하고 있다. 예상 생산량의 약 3분의 2는 MMBtu당 3.80달러의 가중평균 하한가로 헤지되어 있다.
• 신규 파이프라인 확장, 서플라이 코퍼레이션(Supply Corporation)의 요금 심리 절차, 인수한 오하이오 유틸리티 사업이 2027 회계연도 실적에 기여함에 따라 규제 사업 부문이 강화될 것으로 예상된다.
• 내셔널 퓨얼은 2027년 하반기에 세네카 리소스를 독립 상장사로 분할하는 계획을 순조롭게 진행하고 있다. 1차 비공개 Form 10 제출은 2026년 말 이전을 목표로 하고 있다.
• 유정 생산 부진과 수압파쇄 간섭(frac interactions)이 2026 회계연도 생산량과 2027 회계연도 전망에 영향을 미침에 따라, 세네카는 로어 유티카(Lower Utica) 및 티오가 카운티 마셀러스(Tioga County Marcellus) 개발을 우선순위에 둘 계획이다.

주요 재무 데이터

사업 및 운영 실적

파이프라인 및 저장

티오가 패스웨이(Tioga Pathway)와 시핑포트 래터럴(Shippingport Lateral) 확장 프로젝트는 회계연도 종료 직후 가동을 시작했다. 경영진은 이들 프로젝트가 합산하여 연간 약 3,000만 달러의 매출을 추가할 것으로 예상하고 있다.

라인 N(Line N) 시스템 업그레이드는 2028년 말 가동 개시 일정이 유지되고 있으며 연간 약 2,000만 달러의 매출을 창출할 것으로 예상된다. 내셔널 퓨얼은 2026년 말까지 FERC에 섹션 7(c) 신청서를 제출할 계획이다.

회사는 또한 약 500만 달러에 허니오이 스토리지 코퍼레이션(Honeoye Storage Corporation)을 인수했다. 이 자산을 통해 FERC 규제를 받는 5.9 Bcf의 저장 용량과 테네시 가스 파이프라인(Tennessee Gas Pipeline)과의 상호 연결망이 추가된다. 경영진은 이를 인근 엠파이어(Empire) 시스템과 연결할 잠재력이 있다고 보고 있다.

서플라이 코퍼레이션의 신규 요금은 요금 심리에 관한 합의 논의가 계속되는 가운데 11월 1일 환급 조건부로 발효되었다.

유틸리티

내셔널 퓨얼은 펜실베이니아주에서 1,000만 달러 규모의 요금 인상을 승인받았다. 이번 명령으로 배관망 개선 비용(DSIC)도 재설정되어 현대화 투자 비용을 보다 즉각적으로 회수할 수 있게 되었다.

뉴욕주에서는 시스템 현대화 트래커(System Modernization Tracker) 승인을 통해 적격 현대화 지출에 대한 실시간 비용 회수가 가능해졌다. 그 대가로 유틸리티 사업 부문은 최소 1년 동안 요금 인상 신청을 제기하지 않기로 합의했다.

오하이오주 유틸리티 인수는 10월 1일에 마무리되었으며, 해당 사업은 현재 내셔널 퓨얼 가스 디스트리뷰션 오브 오하이오(National Fuel Gas Distribution of Ohio)로 운영되고 있다. 경영진은 요금 기저 증가에 발맞춰, 인수한 사업 부문이 2027 회계연도에 유틸리티 부문 영업이익을 약 2배로 늘릴 것으로 예상하고 있다.

센터포인트(CenterPoint)는 과도기 서비스 계약에 따라 최대 24개월간 특정 백오피스 서비스를 제공할 예정이다. 내셔널 퓨얼은 2027년 말까지 통합을 완료하고 해당 계약을 종료하는 것을 목표로 하고 있다.

세네카 리소스

세네카의 2026 회계연도 생산량은 라이커밍 카운티 마셀러스 6개 유정 패드의 생산 부진, 예상보다 부진했던 어퍼 유티카 평가 시추 결과, 그리고 로어 유티카 유정 간 예상보다 컸던 수압파쇄 간섭 현상의 영향을 받았다.

회사는 단기 개발 우선순위를 수익성이 더 높은 로어 유티카로 전환하고 있다. 보다 집약적인 4세대 설계는 추가 비용을 정당화할 만큼의 추가 추정 회수량을 지속적으로 제공하지 못했고 수압파쇄 간섭 위험을 높일 수 있었기 때문에, 2027 회계연도 프로그램의 상당 부분은 3세대 유정 설계를 기반으로 추진될 예정이다.

세네카는 약 8개의 평가 또는 시험 유정을 포함하여 2027 회계연도에 20~26개의 유정을 생산에 투입(turn in line)할 것으로 예상한다. 생산량은 1분기부터 3분기까지 증가한 후 회계연도 말로 갈수록 감소할 전망이다.

경영진은 개발이 로어 유티카와 티오가 카운티 마셀러스에 더욱 집중됨에 따라 2028 회계연도에 생산량 증가세가 재개될 것으로 예상하고 있다. 회사는 현재 시추 속도 기준으로 가채 연수가 25년을 초과하며, PV-10 손익분기점은 NYMEX 기준 MMBtu당 2.25달러 미만이라고 밝혔다.

2027 회계연도 예상 생산량의 90% 이상이 실물 확정 판매 및/또는 확약 운송 용량에 의해 뒷받침된다. 확약 운송 용량의 다음번 대규모 증가는 2029 회계연도 초로 예상된다.

경영진 가이던스

생산량 전망에는 10월 중 가격에 따른 약 3 Bcf의 자발적 감산이 포함되어 있으나, 향후 추가 감산은 없다고 가정한 것이다.

경영진은 통상적인 비용 인플레이션으로 인해 현금성 단위당 비용이 소폭 상승할 것으로 예상하고 있다. 감가상각비(DD&A)는 Mcf당 약 0.05달러 증가할 것으로 예상되며, 장기 요율은 0.80달러대 중후반으로 복귀할 전망이다.

오하이오 인수는 2027 회계연도에 주당순이익을 소폭 희석할 것으로 예상된다. 매도자 대출 채권(seller note)의 금리는 내셔널 퓨얼이 유사한 조건으로 자금을 조달할 수 있다고 판단하는 금리보다 약 100bp 높다.

규제 사업 부문은 여전히 5~7%의 요금 기저 성장을 목표로 하고 있다. 경영진은 이 계획에 외부 주식 자금 조달이 필요하지 않다고 밝혔다.

위험 요인 및 주목할 부분

• 천연가스 가격 하락은 세네카의 헤지 포트폴리오에도 불구하고 2027 회계연도 수익과 현금흐름에 압박을 가할 것으로 예상된다.
• 경영진은 천연가스 시장이 2027년까지 다소 공급 과잉 상태를 유지할 것으로 예상하나, 2028년 이후 LNG 수요 증가에 따라 전망이 더욱 개선될 것으로 보고 있다.
• 세네카의 생산량 전망은 유정 생산 부진, 어퍼 유티카 생산성, 로어 유티카 수압파쇄 간섭 등으로 인한 운영상 불확실성에 직면해 있다.
• 오하이오 사업 통합과 세네카 분할 준비 과정에서 2027 회계연도 중 일회성 비용과 비반복적 재무제표 항목이 발생할 예정이다.
• 분할 일정은 증권거래위원회(SEC)의 Form 10 검토와 국세청(IRS)의 사전 유권해석(private letter ruling) 절차 완료 여부에 부분적으로 달려 있다.
• 서플라이 코퍼레이션의 요금 심리 절차가 아직 해결되지 않은 상태여서, 신규 파이프라인 요금은 현재 환급 조건부로 적용되고 있다.

애널리스트 Q&A 주요 내용

경영진은 2027 회계연도에 세네카의 잔여 어퍼 유티카 평가 시추 작업을 대부분 마무리하는 한편, 전반적인 프로그램을 로어 유티카와 티오가 카운티 마셀러스로 전환할 것이라고 밝혔다. 회사는 이러한 재현성이 높은 개발 구성을 통해 자본 효율성을 개선하고 2028 회계연도부터 생산 성장을 다시 견인할 수 있을 것으로 기대하고 있다.

확약 운송과 관련해, 세네카는 현재 용량이 단기 생산량과 잘 부합한다고 밝혔다. 다음 대규모 용량 증가는 2029 회계연도 초로 예상되며, 이는 회사의 장기 성장 계획을 뒷받침할 예정이다.

제3자 개더링(집하)은 전용 제3자 개더링 모델로의 전환이라기보다는 기회주의적 성격을 유지하고 있다. 세네카는 인근 생산 물량이 이용 가능한 인프라 용량을 경제적으로 활용할 수 있을 때 프로젝트를 추진할 계획이다.

계획된 분할과 관련하여, 경영진은 2026년 말 이전에 첫 비공개 Form 10을 제출하고 2027년 3월이나 4월경 공개 제출이 가능할 것으로 예상하고 있다. 분할 완료는 2027년 하반기, 가능하면 해당 기간의 전반부를 목표로 하고 있다.

실적 발표 콘퍼런스콜 전문

전체 실적 발표 컨퍼런스 콜 녹취록

경영진 발표

Operator

Hello, everyone. Welcome to the National Fuel Gas Company Fourth Quarter and Full Year Fiscal 2026 Earnings Call. My name is Rebecca, and I'll be coordinating the call today. [Operator Instructions] I will now hand the conference over to Ryan Vossler, Director of Investor Relations. Please go ahead.

Ryan Vossler

Thank you, 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 Loweth, President of Seneca Resources and National Fuel Midstream. At the end of today's prepared remarks, we will open the discussion to questions.

The fourth quarter and full year fiscal 2026 earnings release and 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.

David Bauer

Thank you, Ryan, and good morning, everyone. Last night, National Fuel reported strong fourth quarter results of $1.22 per share of adjusted earnings. Quarter capped off an excellent fiscal year for the company, one in which we generated adjusted earnings per share of $7.55, an increase of 9% over last year. More importantly, the past year will be remembered as a strategic inflection point for National Fuel. A little over a year ago, we announced a significant acquisition that would expand our utility footprint into Ohio and double our utility rate base. We've successfully closed that acquisition and are well on our way to integrating that business into our operations.

We also undertook an extensive strategic review that led to the decision to separate National Fuel into two stand-alone high-quality, publicly traded companies. Both companies will be well capitalized and well positioned to benefit from the broader long-term opportunities across the natural gas industry. Once completed, this separation will be an important step to maximizing the value of our assets.

Before discussing each of our business segments, I want to provide a few updates on the planned separation. As you read in last night's release, the new public company will operate under the Seneca Resources name. We felt that was important since Seneca is well known and respected in the communities in which it operates. Further, we remain on track with the key early separation work streams, including the Form 10 and IRS private letter ruling processes. In the coming quarters, we'll provide further updates, including information on the stand-alone business profiles, management teams and Boards of Directors.

Beyond the separation, fiscal 2026 was a year of significant progress across our businesses, further positioning each company for long-term success.

Starting with our Pipeline and Storage segment. This past weekend, we placed into service our Tioga Pathway and Shippingport Lateral expansion projects. These projects highlight the strategic position of our assets in the heart of the most prolific natural gas basin in the country. Together, they will add approximately $30 million in incremental annual revenues. In addition, the Line N system upgrade project that we announced last quarter remains on track for a late 2028 in-service date. This project is expected to add approximately $20 million in annual revenue while allowing us to modernize a key portion of our system. We expect to file our 7(c) application with FERC on this project by the end of the calendar year.

Looking beyond the Line N project, we continue to see interest in capacity from power developers and are optimistic we'll see -- we'll have further expansion opportunities. Also last week, we completed the acquisition of the Honeoye Storage Corporation. With a purchase price of approximately $5 million, this is a great little bolt-on for our pipeline business, bringing 5.9 Bcf of FERC-regulated storage capacity and an interconnection with Tennessee Gas Pipeline that provides access to premium Northeast markets. Looking ahead, we see the potential to further optimize this business by connecting it with our nearby Empire system.

Lastly, in the Pipeline segment, Supply Corporation continues to advance the rate case it filed at the end of April. Settlement discussions are ongoing, and I'm optimistic we'll reach an agreement. In the meantime, new rates went in place subject to refund on November 1.

Turning to our Utility segment. Last month, we received a final order in our Pennsylvania rate proceeding. As a reminder, given the political backdrop, we have been unable to reach a settlement with the parties involved and as a result, chose to litigate. In late July, we received a disappointing recommended decision from the administrative law judge, which we strongly opposed and rebutted. In its order, the commission ultimately took a more favorable view than the ALJ, awarding us a $10 million rate increase. Importantly, the order also reset our Distribution System Improvement Charge, which will allow us to recover on our modernization investments in near real time.

I'm happy to say that even after this rate increase, our delivery rates will still be the lowest in Pennsylvania. Our track record on affordability is something we're very proud of and will continue to be a focus area across all our jurisdictions. We also received a positive regulatory outcome in New York with the approval of our System Modernization Tracker in August. This will provide real-time recovery on our ongoing modernization investments, which are the bulk of our capital spending. In exchange, we agreed to stay out of a rate case for at least a year.

Turning to Ohio. On October 1, we closed on our acquisition and the business is now operating as National Fuel Gas Distribution of Ohio. As a reminder, our rate settlement contains two key capital spending riders that allow us to recover a return on nearly all of our Ohio capital spending between rate cases. As a result, we don't expect to file a rate case in Ohio until 2029 when those riders expire. To support a smooth transition, CenterPoint is providing certain back-office services under a transition services agreement for up to 24 months after closing. Our goal is to complete our integration and exit the TSA well ahead of that, ideally by the end of calendar 2027. Obviously, we're early in the process, but thus far, the transition is going as expected.

Overall, the outlook for the regulated businesses is outstanding. We continue to see success expanding our FERC pipeline systems. And at the utility, we see a path to continued rate base growth in all three jurisdictions without the need to file new rate cases through at least late 2028.

Switching to Seneca Resources. We remain confident in the long-term value of our deep high-quality inventory, particularly in Tioga County, where we've delivered strong results since shifting development focus there in 2023. However, we face a few challenges in the near term. First, natural gas prices have moved meaningfully lower over the past few quarters. We're nearly 2/3 hedged this year at prices well above the strip. But as Tim will talk about in more detail later, we do expect lower commodity prices will be a headwind for Seneca's earnings and cash flows in fiscal '27.

That said, as we look further out, the long-term outlook for natural gas demand is still strong, and we remain confident prices will recover. As Justin will discuss later on the call, we also faced some near-term challenges with respect to production that affected both fiscal '26 and our outlook for fiscal '27. But over the long term, we expect that Seneca's continued refinement of well design, development prioritization and operating practices should lead to a repeatable and capital-efficient development program. Most importantly, Seneca's inventory quality and ability to deliver long-term production and free cash flow growth remain intact.

In closing, in addition to delivering outstanding financial results, fiscal '26 served as a pivotal period in the nearly 125-year history of National Fuel. We took significant steps to position our businesses to maximize the long-term value of our assets and capitalize on the growth in natural gas industry occurring in our own backyard. I'm excited about the future and remain focused on executing on our strategy, which we believe will generate significant value for shareholders. With that, I'll turn the call over to Tim.

Timothy Silverstein

Thanks, Dave, and good morning, everyone. Last night, we reported fourth quarter GAAP earnings of $1.02 per share and adjusted EPS of $1.22 per share. Our adjusted results were flat compared to the prior year. Increased utility margin and higher natural gas price realizations driven by our strong hedge book were offset largely by lower Seneca production. As noted in the earnings release, there were also several items impacting comparability related to the Ohio acquisition and the planned separation of Seneca Resources. We expect costs for both to continue through the next year as we work to complete the integration and prepare for the spin.

The rest of the EPS drivers are straightforward and laid out in detail in the earnings release. As it relates to fiscal 2026 capital, we ended up in the middle of our guidance range. The only thing I'd note is that in the regulated companies, we saw modestly higher pipeline storage spending, which was offset by lower utility capital. While we hit our utility modernization mileage targets, we did so at a lower cost per mile than anticipated.

On the pipeline expansion side, our projects came in on budget. Where we saw the difference was with the modernization work in Supply Corporation, where we were able to complete more than originally planned by the close of the fiscal year. We expect to be able to recover this spending as part of our ongoing rate case.

Switching to fiscal 2027, we've initiated our earnings guidance with a range of $6 to $6.40 per share. The major driver of the decrease year-over-year is our $2.85 per MMBtu assumption for natural gas prices. This represents an $0.80 drop in NYMEX prices from the prior year. Despite our strong hedge book, which protects nearly 2/3 of our expected production at a weighted average floor of $3.80, the steep drop in pricing will have a negative impact on earnings for the year. Consistent with past practice, we've included sensitivities at different NYMEX prices.

At Seneca, production is expected to be in the range of 400 to 435 Bcf, which at the midpoint is relatively flat year-over-year. Our guidance range incorporates approximately 3 Bcf of voluntary price-related curtailments in October, but does not assume these occur in the future. Justin will have more on the drivers of production later.

We are also projecting modest increases in our cash unit costs as a result of normal course expense inflation. DD&A is also expected to be up approximately $0.05 per Mcf. As I've talked about in the past, prior ceiling test impairments artificially lowered our DD&A rate in 2025, and it takes a couple of years for us to trend back to our expected long-term rate, which should be in the mid- to high $0.80 area.

Going in the other direction is the strength we are seeing in our regulated segments, most notably in our Pipeline and Storage business, where revenues from our newly in-service expansion projects and our pending rate case are expected to drive meaningful growth in 2027. In the Utility segment, we are also incorporating the expected full year impact of our new Ohio business. Our guidance highlights a doubling of operating income in this segment, which is consistent with the increase in rate base resulting from the acquisition.

We've also incorporated the impact of our acquisition-related financing, which we have been excluding as an item impacting comparability last year as we had yet to close on the transaction. As you may recall, we indicated that this acquisition would be modestly dilutive in fiscal 2027, particularly with the seller note carrying an above-market interest rate, which is about 100 basis points above where we could issue similar financing.

Overall, as we think about the long-term outlook, 2027 is a bit of a transitional year. The integration of our Ohio utility and the ongoing work preparing for the separation will certainly create a bit of noise in the financial statements, particularly as we will have a number of onetime expenses and nonrecurring items as we position each business to operate as a stand-alone public company.

Moving to capital. We project total spending to be approximately 10% higher than last year. Utility capital is expected to be in a range of $350 million to $400 million, which reflects the addition of Ohio-related spending. In the Pipeline and Storage segment, our range of $140 million to $180 million reflects mostly a modernization-only year of activity as our two major expansions were completed early in the fiscal year. We anticipate returning to a higher level of spending in 2028 as we begin work on our next Line N expansion. Overall, the spending level keeps us on track to deliver the 5% to 7% rate base growth we've previously discussed.

In our Integrated Upstream and Gathering segment, we are projecting to spend $600 million to $640 million, which at the midpoint is an increase of approximately $30 million year-over-year. While we are seeing modest inflation due to diesel costs, the increase is largely driven by third-party gathering activity, which will have an associated new revenue stream, along with nonoperated activity in Tioga County, which is incremental to our own development program. Outside of this guidance, we are projecting between $50 million and $100 million of discretionary land spending this year. We've seen great success with this program to date, deploying $38 million last year. Those who go through time, we retain the option to toggle this back if commodity prices remain depressed.

Our balance sheet exited last year right in line with expectations at 1.9x debt to EBITDA. This leaves us well positioned to navigate lower near-term natural gas prices. The long-term outlook for natural gas remains strong, and we continue to lock in hedges north of $3.50, a level at which we can generate meaningful free cash flow. Given our positive long-term outlook, we remain optimistic that our planned separation will provide both companies with strong financial foundations, which can position them for long-term success.

Bringing it all together, our underlying business fundamentals are strong. The regulated companies are executing at a very high level. Momentum continues to build around future pipeline expansion projects, and we are optimistic that we will reach a successful resolution to our Supply Corp rate proceedings. We also have a long runway of modernization opportunities in our utility business, all of which are underpinned by supportive rate-making mechanisms. Taken together, we can continue to deliver on our growth plans while staying out of rate cases in each of our jurisdictions for multiple years. And we can do this without the need for external equity financing. We see this outlook as a benefit to both customers and shareholders as we can deliver strong growth without dilution while also continuing our long track record on customer affordability.

At Seneca Resources, we expect this year to be a bit of an inflection point as all the work the team is doing to maximize long-term development value is expected to start to materialize later this year. We are laser-focused on optimizing our development, minimizing capital spending and generating sustainable and growing free cash flow. We're excited about the future and the broader evolution of National Fuel's business model, which we believe will benefit shareholders over the long term. With that, I'll turn the call over to Justin.

Justin Loweth

Thanks, Tim, and good morning, everyone. Fiscal '26 was an important year for our integrated Upstream and Gathering business. We generated more than $1 billion in EBITDA, increased our SEC reserve base to 5.2 Tcfe and replaced approximately 150% of production. However, our development program did not deliver the production we expected with full year production of 419.5 Bcf coming in just below the low end of our revised guidance range. Looking ahead, we expect fiscal '27 production to be approximately flat with fiscal '26.

Among the key drivers are underperformance on the Lycoming-Marcellus development pad, weaker-than-anticipated Upper Utica appraisal results and greater-than-anticipated frac interactions in the Lower Utica. Collectively, these had a modest impact in the fourth quarter and will have a greater impact in fiscal '27. We've taken a hard look at these results, adjusted our forecasting assumptions and incorporated what we've learned into our future development plans.

Digging in a bit further, I'll start with our Marcellus development pad in the Gamble area of Lycoming County, which was the most surprising of these results. This area is almost fully developed. And despite its significant production history and very strong historical results, this 6-well Marcellus pad meaningfully underperformed our expectations. We are still evaluating the cause but have not seen similar performance elsewhere in the region. With limited remaining inventory in Lycoming, we view this pad as an anomaly with no material impact on long-term value.

Turning to the Upper Utica, at the Taft 2 and Webster co-development pads, the wells are delivering solid results, although not at the exceptional productivity levels we saw from our earlier stand-alone Upper Utica appraisal wells. These results do not change our view that the Upper Utica provides attractive inventory, but they do change how and when we expect to develop it. With EURs of approximately 2 Bcf per 1,000 feet and attractive returns, we expect the Upper Utica to remain part of Seneca's long-term development plan, but the higher return Lower Utica will be our near-term development priority.

Lastly, we saw greater-than-anticipated frac interactions between offset Lower Utica wells. We are adjusting development sequencing, well design and operations to mitigate these interactions going forward. For instance, delaying the TIL of a well until offset completion activity is finished may allow us to maintain near wellbore pressure and reduce this risk. For fiscal '27, we plan to use our Gen 3 well design across much of the program. Based on our testing to date, the more intensive Gen 4 completion design has not consistently delivered enough incremental EUR to justify the additional cost and can increase the potential for frac interactions. We, therefore, expect Gen 3 or variations of that design to form the basis of our development program while continuing to optimize where appropriate.

While our development strategy is becoming more focused, fiscal '27 still includes targeted appraisal and optimization work already underway. Of the 20 to 26 wells we expect to turn in line, approximately 8 will involve appraisal or testing, including 3 Upper Utica delineation and infill wells, a 4-well Lower Utica pad testing GPU size to 40 million per day and a lower Utica appraisal well in a new fault block that could further expand our inventory.

Our remaining Upper Utica activity has specific objectives. Two wells will help determine optimal infill spacing around existing Upper and Lower Utica development, while a third well will test a new fault block where our data indicates the potential for higher gas in place. To execute this development plan, we expect to run a 1- to 2-rig program and a dedicated frac crew. Turn-in-line activity is concentrated in the second quarter, beginning in January with a 4-well Lower Utica pad with average TLL of approximately 18,000 feet, our longest Utica wells to date. With that TIL cadence, we expect production to increase from the first quarter through the third quarter before declining toward year-end.

The development changes we are implementing in fiscal '27 should position us to resume production growth beginning in fiscal '28 with development increasingly focused on our core Lower Utica and Marcellus in Tioga County. Over the longer term, we believe this more repeatable development approach will improve capital efficiency, supporting stronger free cash flow as production grows.

Turning to gathering. Our focus remains on supporting Seneca's production while maximizing the value of our integrated business. We are sequencing upcoming pipeline projects with Seneca's development schedule and employing new design standards that are already generating savings of 5% to 10% per facility. We are also advancing a new centralized station and associated pipeline corridor in Northwest Tioga, with construction expected to begin in early calendar 2027. We continue to pursue third-party gathering growth with volumes expected to remain relatively steady in fiscal '27 and additional opportunities being advanced in Tioga County. Together, these initiatives should lower costs and position gathering to efficiently support both Seneca and future third-party growth.

Pivoting to natural gas markets, we expect the market to remain somewhat oversupplied through 2027, with a more constructive outlook as LNG demand ramps in '28 and beyond. Our marketing portfolio positions us well in this environment, with more than 90% of expected fiscal '27 production supported by physical firm sales and/or firm transportation, leaving limited exposure to in-basin spot pricing. This provides meaningful protection during periods of regional price weakness while preserving upside as market conditions improve. That position was further strengthened by the recent in-service of the Tioga Pathway project, providing another valuable transportation outlet for Seneca's gas.

In closing, we see a clear path to long-term value creation as we continue to optimize our development program and expand our inventory. With more than 25 years of development inventory with PV-10 breakevens below $2.25 per MMBtu NYMEX at our current drilling pace, supported by our integrated gathering infrastructure, we believe we have the resource depth, economics and increasingly optimized development plan to drive long-term shareholder value. With that, I'll turn the call back to the operator to open the line for questions.

Operator

[Operator Instructions]

Your first question comes from Neil Mehta with Goldman Sachs.

질의응답

Neil Mehta

Thanks so much for the rundown here. And I want to start with you, Justin, on Slide 18. This was very helpful in mapping out some of the challenges that you might be having in the '27 development plan. Maybe you can simplify it for us. What are the key things that you're looking to do in '27 during that transition year? And what is the confidence level that you're back on track by '28?

Justin Loweth

So the focus has been '26 had a lot of -- as I noted in my remarks, a lot of testing and appraisal work, a lot of focus on completion design in the Lower Utica, a lot of focus on the Upper Utica co-development. As we move into '27, we'll have more limited work in the Upper Utica and really completing that appraisal program and testing program. There's three wells that we have. One -- two of them will kind of come back in to help us understand long term how infill wells, whether it's adjacent to an existing Upper Utica or above longer producing Lower Utica, how those wells behave in productivity and so forth. And then another well that actually would potentially expand our inventory base more because it's into a new fault block where we have not included locations.

So those are key things there. Generally, though, we're overall pivoting to a Lower Utica and Marcellus-focused strategy. A lot of the things in 2027 were already in flight when you think about the long lead time nature of our integrated gathering and upstream business in that you're planning out 12, 18, 24 months in advance when you're building out those corridors and so forth. So a lot of it was in flight. But as we move to '28 and beyond, we will have much more Lower Utica as our core focus of the development. We'll have some Marcellus, very little, if any, Upper Utica. And that should lead to more consistent repeatable results, improving capital efficiency and a resumption of our production growth trends.

Neil Mehta

All right. That's great. And then Dave and team, obviously, it was a consequential week from a political perspective, including the states you operate in, Pennsylvania, Ohio. and New York at the gubernatorial level. So just your early perspectives on how we, as an investment community, should be thinking about some of these changes and any thoughts?

David Bauer

Yes. It was an interesting week indeed. At the state level, really, I don't see any change in New York. It's been a one-party rule state for a while. I guess on the optimistic side, I think the administration is starting to realize that gas isn't going to go anywhere anytime soon and has been less hostile towards us. In Pennsylvania, obviously, the Senate flipped Democrat, which isn't a positive for the industry. But at the end of the day, the Governor seems to be a pretty reasonable person. So I'm not expecting any real surprises there.

And then in Ohio, the governorship did go Democrat, but the House and the Senate are still very much Republican controlled. And so they have a long history of really supporting natural gas. They have a constructive regulatory environment and really don't see that changing. And overall, what I'd say is we build our business to go through the cycle, right? And so we'll have periods where we'll have politicians in favor of us and others where they're not in favor of us, but our business is designed to go through that cycle.

Operator

Your next question comes from Tim Rezvan with KeyBanc Capital Markets.

Timothy Rezvan

I guess my first one is for Justin. I know you all have put out the 2030 outlook where you'll have basically 1.5 Bs a day of FT to support growth. Can you kind of walk through the timing of when that comes on? If you could just update us on that? And where I'm going with this is if the oversupplied conditions persist into 2028, how do you think about organic growth? And could you look to find third-party volumes to kind of meet that FT? Just trying to understand sort of the outlook.

Justin Loweth

Sure. So the FT that we have today matches our kind of existing and projected, I'll call it, near-term next year or so production quite well, protects us from some of these headwinds we're facing, frankly, on some of the in-basin pricing and overall. And that's, of course, buttressed by a really strong hedge portfolio, protecting the realized price.

Looking out to 2030, the next material increase in expected FT happens in early fiscal '29. So it's out there a little bit, more or less a couple of years. So we've got a plan that works towards utilizing that as that becomes available. So I think it all still ties together really nicely with our long-term projections. As I mentioned, '26 into '27, relatively flat production expected at the midpoint. And then as we move to '28 and principally a Lower Utica and Tioga Marcellus-focused program, would expect to see production resume growth and that continuing in the years beyond.

Timothy Rezvan

Okay. That's helpful context. I appreciate that. And then as a follow-up, you've mentioned a couple of times in prepared comments about initiatives on third-party gathering. It seems to be sort of an evolution of your strategy. Is this sort of related to the separation? Is this sort of an opportunity that you felt like you wanted to capitalize on? Can you talk more about that?

Justin Loweth

Sure, Tim. Yes. It's more happenstance than it happens to be now. We've been working with a third party for quite some time, and they had an opportunity to develop some resource that's proximate to our gathering system in an area where we could expand our gathering system to provide service to them. And so it's a great project for us to add some capital, but get a really attractive return to provide that third-party service. We're not looking to become a true gathering company for third parties. It's always kind of a 1 plus 1 equals 3 type approach. If we have the capacity within our system that's not being utilized by Seneca, it's economic for us, and we can reach out to those third parties that are proximate to our systems, we always look to do that. It's really -- again, just think of it as a 1 plus 1 equals 3 type approach.

Timothy Rezvan

Okay. I appreciate that. And then if I could just add one more, maybe this is for David. I know on the separation, it's a lengthy process. The big gating factor seems to be the Form 10 filing. I know that's confidential, but can you give any color on when that might get filed or where you stand in that process? I know you're trying to sort of tie this to a quarter end. So just trying to understand if maybe that's a July 1 or an October 1 kind of event in 2027. Any color there would be helpful.

David Bauer

I'll let -- Tim is sort of driving that process. So I'll let him answer that.

Timothy Silverstein

Yes, Tim. Just overall, we're still not specific to anything other than the second half of calendar 2027 for the actual effective date of the spin. But from a practical standpoint, in the near term, likely before the end of this year, our intent is to get the -- this calendar year, that is, get the Form 10 on file, that first confidential submission. From there, there's a number of back and forths with the SEC on that. So usually it will take a number of months to get that ultimately to a position where we can flip that public and share that with the broader investment community. That's likely in the March, April time frame. But that's sort of what we're working towards.

Some of that's within our control and then some of that's within the SEC's control. The other process that goes in parallel is the private letter ruling process. It's actually probably a little bit longer than the Form 10 ultimately. But I still think where we sit today, everything leaves us on track for something in the second half of next year, if not towards the earlier part of that.

Operator

Your next question comes from Sebastian Almodovar with Raymond James.

Sebastian Cuchi-Almodovar

I guess my first question has to do with your Gen 3 design going back to 2027. How confident are you right now on your spacing assumptions or anything that you might have to do or make any changes to it going next year?

Justin Loweth

Yes. So we have a lot of wells in the ground with our Gen 3 design. So it's a relatively developed approach. What we've been looking at was the increased design of the Gen 4, which was slightly wider interval spacing, but quite a bit more proppant loading. So we think that, frankly, this is something we evaluated. I've spoken about this in the past. We wanted to look at Gen 4, see if we saw the productivity uplift, meaning more near-term and long-term ultimate EUR per foot of well that would justify the incremental cost. And what we saw through our appraisal and testing work is that we get some of that uplift that would justify that cost at times, but we don't get it consistently enough to really justify it overall as the investment.

And we also were experiencing more frac risk, hit risk associated with that larger design. I mean the reality is that the Gen 3 looks good. We've got a really good rock quality in the Lower Utica. It concentrates that frac energy. There's clearly some natural fracturing in the reservoir. And so we think that's a really solid design that will give us solid economics and really good recoveries as we move forward.

Sebastian Cuchi-Almodovar

Great. And just as a quick follow-up, I'm not sure if you can speak to this at a high level already, but how should we think about the appropriate leverage you would be targeting post-separation of both companies?

Timothy Silverstein

Yes. I would just refer you back to what we said in the last call. That will ultimately come out in the Form 10. But given where commodity prices are and continue to move around, that's something that we'll continue to evaluate as we get towards the public flip on the Form 10. But everything that we said a few weeks ago still remains true.

Operator

There are no further questions at this time. I will now turn the call back to Ryan Vossler for closing remarks.

Ryan Vossler

Thank you. We'd like to thank everyone for taking the time to be with us this morning. A replay of the call will be available on our website later today. 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. Have a great day.

Operator

This concludes today's call. Thank you for attending. You may now disconnect.