March 25, 2013 / 4:02 PM / 4 years ago

Fitch Affirms National Fuel's IDR at 'BBB+'; Outlook Remains Stable

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(The following statement was released by the rating agency) NEW YORK, March 25 (Fitch) Fitch Ratings has affirmed National Fuel Gas Company's (National Fuel) Issuer Default Rating (IDR) at 'BBB+'. See the full list of rating actions at the end of this press release. The Outlook is Stable. Approximately $1.6 billion of total debt is outstanding. KEY RATINGS 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. Rating 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 (FY) 2012, upstream operations accounted for 54% of segment EBITDA, up from 47% at the end of FY 2009. INTEGRATED BUSINESS MODEL BENEFITS THE CREDIT PROFILE National Fuel benefits from the diversity of its integrated assets with stable cash flows from the utility and pipeline and storage segments. Upstream operations have volatile cash flows but low-cost production particularly in its sizeable Marcellus position and a mix of natural gas and oil production benefit this segment. --UTILITY (23% of segment EBITDA in FY 2012): In FY 2012, the utility operations saw a decrease in EBITDA due to warmer weather. This segment should benefit if weather is more normal in FY 2013. The utility provides National Fuel with fairly steady cash flows while requiring only modest capex investments. --PIPELINE & STORAGE (22%): In the recent fiscal year, this segment saw a 43% increase in EBITDA as throughputs increased 16% due to the completion of two expansion projects in late 2011. In late 2012, the company put in service another two pipeline expansions. These projects should continue to benefit results going forward. Fitch expects this segment to have steady cash flows. --EXPLORATION & PRODUCTION (55%): With growing production in the Marcellus, the upstream operations saw a 4% increase in EBITDA. A sharp decline in weighted average prices for gas after hedging was more than offset by an increase in production. While upstream operations have cash flow volatility and require significant capex, there is a mix of low-cost natural gas production (79% of fiscal year 2012 production) and low-cost crude oil production in California (21% of production). A hedging program is in place to reduce earnings volatility. Fitch expects to see EBITDA growth in FY 2013 as gas production continues to grow in the Marcellus. Overall FY 2013 production is expected to rise approximately 20% against FY 2012. LEVERAGE For the quarter ending Dec. 31, 2012, National Fuel's leverage was 2.3x, up slightly from 2.2x at the end of FY 2012 and from 1.7x at the end of FY 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 FY 2013. LIQUIDITY 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 with $220 million of commercial paper outstanding, revolver availability was $530 million. The revolver has a financial covenant which does not allow debt to capital to exceed 65%. National Fuel also had $317 million available on its $335 million of uncommitted credit lines. There are no significant debt maturities until 2018. CAPEX The company expects capex in FY 2013 to be in the range of $665 million to $795 million and the preliminary forecast for fiscal year 2014 is $770 million to $945 million. Spending for upstream operations is projected to be approximately 70% of the total capex budget in each of those fiscal years. In the current fiscal year, spending should be well below the $1 billion spent in FY 2012. FREE CASH FLOW Free cash flow remains negative and cash flow was negative $389 million for the LTM ending 1Q'13. High capex has had an impact on cash flows. With plans for reduced spending in FY 2013, Fitch expects free cash flow to remain negative but improve by $150 million to $200 million. Fitch affirmed National Fuel's ratings as follows: --Long-term IDR at 'BBB+'; --Senior unsecured debt at 'BBB+'; --Short-term IDR at 'F2'; --Commercial paper at 'F2'. 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. Contact: Primary Analyst Kathleen Connelly Director +1-212-908-0920 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Ralph Pellecchia Senior Director +1-212-908-0586 Committee Chairperson Glen Grabelsky Managing Director +1-212-908-0577 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. 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. Applicable Criteria and Related Research: --'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. Applicable Criteria and Related Research Natural Gas Pipelines: Hot Topics -- Long-Term Trends Affecting Pipeline Risk here Top Ten Questions Asked by Pipeline, Midstream and MLP Investors here Marcellus Shale Report: Midstream and Pipeline Sector -- Challenges/Opportunities here Pipelines, Midstream, and MLP Stats Quarterly —Third-Quarter 2012 here 2013 Outlook: Midstream Services and MLPs here 2013 Outlook: Natural Gas Pipelines & MLPs here 2013 Outlook: North American Oil & Gas here Corporate Rating Methodology here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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