NEW YORK–(BUSINESS WIRE)–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.
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.
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 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.
Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Dodd-Frank Rating Information Disclosure Form