TEXT-Fitch rates National Fuel Gas propose notes 'BBB+'
Feb 12 - Fitch Ratings has assigned a 'BBB+' to National Fuel Gas Company's (National Fuel) proposed issuance of senior unsecured notes due 2023. The new notes are to rank pari passu with the company's senior unsecured debt. Proceeds are to be used for general corporate purposes including the repayment of $250 million of 5.25% notes due March 2013. Fitch rates National Fuel as follows: --Long-term Issuer Default Rating (IDR) 'BBB+'; --Senior unsecured debt 'BBB+'; --Short-term IDR at 'F2'; --Commercial paper at 'F2'. The Rating Outlook is Stable. KEY RATING DRIVERS Factors that support the rating 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 historically modest use of leverage and a prudent growth strategy. Ratings concerns center on an increased emphasis on oil and gas exploration and production, exposure to commodity price volatility, and a sizeable capital expenditure budget. In fiscal year 2012, upstream operations accounted for 54% of segment EBITDA, up from 47% at the end of fiscal year 2009. For the quarter ending Dec. 31, 2012, National Fuel's leverage was 2.3x, up slightly from 2.2x at the end of fiscal year 2012 and from 1.7x at the end of fiscal year 2011. The increase in leverage is attributed higher levels of debt to fund the company's capex program. Fitch expects leverage to be in the range of 2.2 to 2.5x at the end of fiscal year 2013. Liquidity is currently adequate for National Fuel. At Dec. 31, 2012, cash and temporary cash investments totaled $61 million. There were no borrowings on the company's $750 million committed credit facility which matures in 2017, but $220 million of commercial paper outstanding, resulting in availability of $530 million. National Fuel also had $318 million available on its $335 million of uncommitted credit lines. After the $250 million of notes are repaid in March 2013, no significant maturities occur until 2018. The company expects capex in fiscal year 2013 to be in the range of $665 million to $795 million. Spending for upstream operations is projected to be approximately 71% of the total capex budget. In the current fiscal year, spending should be well below the $1 billion spent in fiscal year 2012. National Fuel expects capex to be funded with cash flow from operations in fiscal year 2013. Over the last couple of years, spending has outpaced internally generated cash flow. Free cash flow remains negative and was negative $389 million for the LTM ending 1Q'13. High capex has impacted cash flows. With plans for reduced spending in fiscal year 2013, Fitch expects free cash flow to remain negative but improve by $150 million to $200 million. RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to positive rating action include: --Positive rating action is not viewed as likely; however, a significant decrease in leverage or a reduction in upstream operations could prompt changes. Negative: Future developments that may, individually or collectively, lead to a negative rating action include: --A significant and prolonged drop in natural gas prices without an appropriate adjustment to spending; --Expansion beyond Fitch's expectations of the upstream business; --Increases in leverage beyond 2.5-2.75x for a sustained period while upstream operations remain the company's focus. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. --'Corporate Rating Methodology' Aug. 8, 2012; --'2013 Outlook: North American Oil & Gas' Dec. 13, 2012 --'2013 Outlook: Natural Gas Pipelines and MLPs' Nov. 29, 2012; --'2013 Outlook: Midstream Services and MLPs' Nov. 29, 2012; --'Pipelines, Midstream, and MLP Stats Quarterly - Third Quarter 2012' Jan. 15, 2013; --'Marcellus Shale Report: Midstream and Pipeline Sector Challenges and Opportunities' June 10, 2012; --'Top Ten Questions Asked by Pipeline, Midstream, and MLP Investors' May 1, 2012; --'Natural Gas Pipelines: Hot Topics' Oct. 13, 2011.