Fitch Ratings has downgraded National Fuel Gas Company's (National Fuel)
Long-term Issuer Default Rating (IDR) and senior unsecured debt to 'BBB'
from 'BBB+'. The Short-term IDR and commercial paper rating have been
affirmed at 'F2'.
The downgrade reflects Fitch's concern around National Fuel's rising
leverage, the upstream segment's financial performance and associated
exposure to commodity price volatility and significant upstream capital
expenditures although that has been reduced following a joint
development agreement. In FY15, upstream operations accounted for 50% of
segment EBITDA, down from 57% in FY14 largely due to do weak natural gas
prices. National Fuel's total EBITDA fell to $851 million in FY15, down
11% from the prior fiscal year.
The Rating Outlook is Stable.
KEY RATING DRIVERS
Factors that support the rating include National Fuel's diversified
business mix. National Fuel also has a somewhat integrated business
model and has implemented a disciplined strategy to significantly cut
capex during the prolonged weak commodity price environment. Its
upstream operations are low cost and while the decline in hydrocarbon
prices has led to lower levels of profitability for the upstream
segment, it nonetheless remains profitable. The midstream business
(pipeline and storage) is well positioned to move Marcellus gas out of
the region and continues to execute on growth projects, although its
significant Northern Access 2016 project has been pushed back. The
regulated natural gas distribution utilities have provided relatively
predictable cash flows without requiring significant spending. The
company's liquidity position is adequate and should support growth in
the near term.
Fitch notes that National Fuel's ability to issue long term debt which
may be restricted for a period of time due to covenant in National
Fuel's 1974 indenture. A non-cash impairment charge of $435 million was
recorded to write-down the value of oil and gas reserves in the quarter
ending December 31, 2015. The company's 1974 indenture prohibits
additional long-term debt from being offered for 12 months or longer
given the magnitude of the impairment. Long term debt can be issued to
refinance maturing debt and no significant debt is due until 2018. The
indenture does not prohibit the company from drawing on its revolving
credit facilities or issuing commercial paper. Given National Fuel's
current liquidity position, Fitch does not anticipate that this
restriction will cause any issues for the company.
The company's assets are fairly diversified. In FY15, 50% of EBITDA was
generated from its volatile upstream segment. Gathering accounted for 8%
of EBITDA. The more stable segments, pipeline and storage as well as the
utility segment, generated 22% and 19%, respectively.
Leverage as of Dec. 31, 2015 was 2.7x, which was higher than 2.45x at
the end of FY15 and much higher than leverage of 1.8x at the end of
FY14. Leverage has increased as a result of higher debt balances along
with lower EBITDA. Fitch expects leverage to increase in FY16 and by
yearend, leverage is expected to be in the range of 2.6-2.9x. Leverage
may further increase in FY17 given the shift of capex spending from FY16
into FY17. National Fuel has elected to delay the in-service date of
Northern Access 2016 into 2017 which reduces near-term spending. Given
FY17 spending, FY17 leverage is expected to be north of 3.0x. Leverage
should decline beyond then but Fitch believes it will remain above
levels seen in recent years.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:
--Revenues fall in 5% - 8% range in FY16 driven by lower natural gas
prices;
--Growth in revenues resumes in FY17 as a result of higher natural gas;
--EBITDA continues to decline in FY16 after a decrease in FY15 and
margins remain in the mid-40's in the forecast years;
--Capex falls in FY16 following National Fuel's spending cuts including
cuts associated with its joint development agreement;
--Capex spending rises modestly following FY16.
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
reduction in leverage to 2.5x or better on a sustained basis could
prompt changes.
Negative: Future developments that may, individually or collectively,
lead to a negative rating action include:
--A further drop in natural gas prices without additional adjustments to
spending;
--Lack of access to capital markets when needed or reduced liquidity;
--Increases in leverage beyond 3.5x for a sustained period while
upstream operations remain the company's focus.
LIQUIDITY
Liquidity is currently adequate for National Fuel. As of December 31,
2015, National Fuel had nearly $1.3 billion of liquidity which includes
cash of $36 million on the balance sheet. In addition, it had nothing
drawn on its $750 million revolver due 2019 nor its 364-day $500 million
revolver. There was $31 million of commercial paper outstanding which
reduces the availability to drawn on the revolvers. The bank agreements
restrict the debt to capital ratio from exceeding 65%. As of December
31, 2015, it was 54%. Fitch expects National Fuel will have a debt to
capital ratio well below the maximum allowed. There are no debt
maturities until $300 million of notes mature in 2018.
FULL LIST OF RATINGS
National Fuel Gas Company ratings actions are as follows:
--Long-term IDR and senior unsecured rating downgraded to 'BBB' from
'BBB+';
--Short-term IDR and commercial paper affirmed at 'F2'.
The Outlook is Stable.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
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Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000720
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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