OREANDA-NEWS. Fitch Ratings has assigned National Fuel Gas Company's (National Fuel) proposed issuance of senior unsecured notes due 2025 'BBB+'. 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 short-term debt.

Fitch currently rates National Fuel's Long-term Issuer Default Rating (IDR) and senior unsecured debt 'BBB+'. The short-term IDR and commercial paper are rated 'F2'. The Outlook is Stable.

KEY RATING DRIVERS

Factors that support the rating include National Fuel's diversified business mix. National Fuel also has an integrated business model and stable financial performance supported by moderate use of leverage and a prudent growth strategy. While its upstream operations have been negatively impacted by the notable decline in hydrocarbon prices since late-2014, the company continues to benefit from the low finding, development, and operating costs associated with its properties in the Marcellus, which allow it to remain profitable even under the current unfavorable pricing environment. The company has prudently curtailed the capital budget for upstream operations by about 25% in fiscal 2015 (September yearend), but remains committed to developing its acreage over the long-term as hydrocarbon prices recover from recent lows.

The pipeline and storage segment is well positioned to move Marcellus gas to Canada and U.S. markets and will be a focus of growth over the next two years. The regulated natural gas distribution utilities have provided predictable cash flows without requiring significant spending. The company's liquidity position remains strong and should support growth in the near term.

The company's assets are fairly diversified. For the LTM ending March 31, 2015, 54% 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 20% and 18%, respectively.

Ratings concerns center on the upstream segment's long-term increased influence on total financial performance, its associated exposure to commodity price volatility, and its significant and durable calls on capital expenditures. For the LTM ending March 31, 2015, upstream operations accounted for 54% of segment EBITDA, up from 48% at the end of fiscal year 2009.

Another concern is National Fuel's expected ability to issue long term debt may be restricted for a period of time. National Fuel expects to record non-cash impairment charges for the quarters ending June 30, 2015, Sept 30, 2015 and Dec. 30, 2015 unless there is a significant increase in oil and gas prices. The company's upstream segment uses the full cost method of accounting which requires a quarterly ceiling test. A non-cash impairment charge of \$120 million (\$70 million after taxes) was recorded to write-down the value of oil and gas reserves in the quarter ending March 31, 2015.

If there are additional impairments as National Fuel projects, the company's 1974 indenture prohibits additional long-term debt from being offered for 12 months or longer beginning in October 2015. 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 \$750 million revolving credit facility due 2019 and from drawing on its uncommitted bank lines. Fitch does not anticipate that this restriction will cause any issues for the company's liquidity.

For the period ending March 31, 2015, National Fuel's leverage, as defined as debt/EBITDA, was 1.9x, which is in line with the average leverage at the end of the last five fiscal years. Fitch expects leverage to be in the range of 2.5x and 3.2x at the end of the next two fiscal years given lower natural gas prices while overall spending remains significant.

In FY14, National Fuel had capex spending of \$914 million, up from \$703 million in the prior year. Spending for upstream operations accounted for 62% of the budget (down from 73% at the end of FY13). The company forecasts FY15 spending to be in the range of \$990 million to \$1.155 billion, with upstream operations accounting for about 50% of the total. The budget for FY16 is in the range of \$1.075 billion to \$1.25 billion and upstream is projected to be approximately 38% of the budget. In FY16, National Fuel plans to spend more significantly for its pipeline and storage segment (approximately 45% of the capex budget versus 23% of the total in FY15).

Fitch expects free cash flow to remain negative and projects it to be about \$480 million in FY15, and peak at a negative \$550 million in FY16 in concert with the planned pipeline project expenditures.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:
--WTI trends up from \$50/barrel in 2015 to \$60/barrel in 2016 and a long-term price of \$75/barrel; Henry Hub gas trends up from \$3/mcf in 2015 to \$3.25/mcf in 2016 and a long-term price of \$4.50/mcf consistent with Fitch's published Base Case commodity price deck.
--Moderate revenue growth for the non-upstream segments of the business.
--Capex funding comes from cash from operations and short term borrowings as National Fuel has not historically used equity for funding growth.

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 or a shift away from expanding 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;
--Upstream operations which exceed 65% of EBITDA;
--Increases in leverage beyond 2.75x for a sustained period while upstream operations remain the company's focus.

LIQUIDITY

Liquidity is currently adequate for National Fuel. As of March 31, 2015, cash and temporary cash investments totalled \$69 million. There were no borrowings on the company's \$750 million committed credit facility which matures in 2019, and \$158 million in commercial paper outstanding. National Fuel has a commercial paper program for up to \$300 million which is backed by the \$750 million revolver. The revolver has a financial covenant which does not allow debt to capital to exceed 65%. As of March 31, 2015 it was 41%. There are no significant debt maturities until 2018.

FULL LIST OF RATINGS

National Fuel Gas Company
--Long-term IDR 'BBB+';
--Senior unsecured debt 'BBB+';
--Short-term IDR and commercial paper 'F2'.