TEXT-Fitch affirms National Fuel Gas Co
March 27 Fitch Ratings has affirmed the Long-term Issuer Default Rating (IDR) and Senior unsecured rating of National Fuel Gas Company (National Fuel). Fitch rates National Fuel as follows: --Long-term IDR 'BBB+'; --Senior unsecured debt 'BBB+'; --Short-term IDR at 'F2'; --Commercial Paper at 'F2'. The Outlook remains Stable. Today's rating actions affect approximately $1.4 billion of debt outstanding. Key rating factors include stable earnings from regulated natural gas distribution utilities, relatively predictable cash flows from FERC regulated interstate pipeline and storage segments, an integrated business model, strong financial performance supported by modest use of leverage and a prudent growth strategy. The ratings also consider concerns including an increasing emphasis on oil and gas exploration and production, exposure to commodity price volatility and an expanding capital expenditure budget. In fiscal year 2011, upstream operations accounted for 57% of segment EBITDA which was a significant increase from 48% at the end of fiscal year 2009. Negative rating actions could occur if the company's focus on exploration and production resulted in higher leverage or if there was a significant and prolonged drop in natural gas prices without an appropriate adjustment to spending. Other drivers that could lead to negative action include a significant expansion of upstream operations which are beyond Fitch's expectations. Positive actions are not viewed as likely but could occur if National Fuel scaled back its exploration and production operations. At the end of the first quarter of fiscal year 2012, National Fuel's leverage was 2.1 times (x) which was an increase from 1.7 times (x) at the end of fiscal year 2011. The increase in leverage is attributed debt raised in December. A portion of the debt proceeds are to be used to fund capital spending in the current fiscal year. Fitch expects leverage to remain near 2.0 at the end of fiscal year 2012. Liquidity appears to be adequate for National Fuel. At the end of the first quarter of fiscal year 2012, cash was $224 million which partially reflects the December note offering. There was full availability on the company's $300 million committed credit facility which was since replaced with a $750 million committed credit facility maturing in 2017. National Fuel also had full availability on its $335 million of uncommitted credit lines. As of December 31, 2011, $20 million of commercial paper was outstanding leaving $280 million of availability on the commercial paper facilities. Fitch expects capital expenditures in fiscal year 2012 to be funded with cash from operations and the proceeds from debt already issued. The company now expects to see capital expenditures in the range of $900 million to $1,045 million. This represents a $50 million decrease on both sides of the range due to reduced investment in the upstream operations. Spending at National Fuel has been increasing as the company has been ramping up production in the Marcellus. While the forecast for the current fiscal year has been modestly reduced, it is still above prior levels of spending. In fiscal year 2011, capital expenditures were $837 million, up from $455 million in the prior fiscal year. Free cash flow (after dividends) has been impacted by higher spending. In fiscal year 2011, free cash flow was negative $275 million. In the current fiscal year, Fitch expects to see negative free cash flow increase in the range of $150 million to $200 million.
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