OREANDA-NEWS. Fitch Ratings has affirmed National Fuel Gas Company's (National Fuel) ratings as follows:

--Long-term Issuer Default Rating (IDR) at 'BBB+';
--Senior unsecured debt at 'BBB+';
--Short-term IDR and commercial paper at 'F2'.

The Rating Outlook is Stable. Approximately \$1.8 billion of total debt is outstanding.

KEY RATINGS DRIVERS

Factors that support the rating include National Fuel's diversified business mix. National Fuel also has an integrated business model and a 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 mid-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.

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. In fiscal year 2014, upstream operations accounted for 56% of segment EBITDA, up from 48% at the end of fiscal year 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. Related to the upstream segment is a growing gathering segment, which National Fuel is nurturing into a notable contributor to overall profitability.

--UTILITY (17% of segment EBITDA in FY14): In FY14, utility EBITDA was in line with the prior year's contribution, which is typical of this very mature, steady cash flow, positive free cash flow business. Approximately two-thirds of the utility assets are located in western New York, and the remaining one-third is in northwestern Pennsylvania. Fitch expects similar cash flow contributions from this segment for the foreseeable future.

--PIPELINE & STORAGE (20%): In the recent fiscal year, this segment saw a 15% increase in EBITDA over the prior fiscal year, as operations benefited from Line N capacity coming on-line, as well as producers in the Marcellus utilizing the segment's spot capacity to move their gas out of the region. National Fuel has expanded the capital budget of this segment to grow its unique platform for delivering Marcellus gas into both Canadian and southern U.S. markets.

--EXPLORATION & PRODUCTION (56%): With growing production in the Marcellus, the upstream operations saw a 10% increase in EBITDA in FY14. The significant decline in natural gas prices experienced in the past six months is expected to result in EBITDA declines for this segment in 2015. Consequently, National Fuel has reduced its capital budget by about 25% for the year. While production has grown at a compound annual growth rate of 33% over the past four years, Fitch expects production in FY15 to grow at less than 10%. The reserve life was 12 years when evaluating proved reserves to production as of FY14. A more conservative look at the reserve life is proved developed reserves to production which was nine years.

Given the backdrop of an adverse hydrocarbon pricing environment, Fitch believes that National Fuel has taken the prudent course of curtailing its capital expenditures in this segment and redeploying capital into the segments with greater cash flow visibility such as the pipeline and storage segment.

--GATHERING (7%): The Gathering segment's EBITDA more than doubled in FY14 and is notably contributing to Company EBITDA. While this segment currently only provides gathering services for Seneca, the system has been designed to service third party producers. The company expects to capitalize on growing demand for gathering services as the Marcellus region further develops.

LEVERAGE
For the period ending Dec. 31, 2014, National Fuel's leverage as defined as Debt/EBITDA was 1.9x, slightly below leverage of 2.0x as of yearend FY13 and 2.2x as of yearend FY12, based on Fitch calculations. 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. However, Fitch projects leverage to return to more normalized levels in the range of 2.25x to 2.5x beyond FY16.

LIQUIDITY
Liquidity is currently adequate for National Fuel. At Dec. 31, 2014, cash and temporary cash investments totaled \$43.9 million. There were no borrowings on the company's \$750 million committed credit facility which matures in 2019, and \$173 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%.

National Fuel also has available uncommitted credit lines from several financial institutions that are revocable at the lenders discretion. There are no significant debt maturities until 2018.

CAPEX
In FY14, National Fuel had capex spending of \$914 million, up from \$717 million in the prior year. Spending for upstream operations accounted for 62% of the budget (down from 74% at the end of FY13). The company forecasts FY15 spending to be approximately \$1.1 billion, with upstream operations accounting for about 50% of the total. 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 debt as National Fuel has not historically used equity for funding growth.

RATING SENSITIVIES

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;
--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.