NEW YORK--(BUSINESS WIRE)--Fitch Ratings has placed Berkshire Hathaway Energy Company's (BHE) 'BBB+' Long-term Issuer Default Ratings (IDR) and individual securities ratings on Rating Watch Negative. The rating action reflects BHE's announced acquisition of Canadian-based AltaLink, L.P. (AltaLink) for $7 billion. BHE's subsidiary ratings are unaffected by the rating action.
BHE, formerly known as MidAmerican Energy Holdings Company, changed its name to Berkshire Hathaway Energy Company effective April 30, 2014.
Fitch expects BHE's leverage to increase and credit metrics to weaken as the result of the proposed AltaLink acquisition. These concerns are counter-balanced to a degree by the predictable nature of transmission company revenues and cash flows that typically tend to be more highly leveraged. BHE and its subsidiary ratings and notching are supported by affiliation with a strong ultimate corporate parent, Berkshire Hathaway (BRK; IDR 'AA-'; Stable Outlook), a diverse asset base of utility or utility-like operating companies, and relatively strong subsidiary ring-fencing.
A complete list of rating actions follows at the end of this release.
KEY RATING DRIVERS
--The acquisition of AltaLink by BHE;
--High and potentially rising debt leverage;
--Ownership of BHE by Berkshire Hathaway, Inc. strengthens BHE's funding capabilities and capital retention.
--Diversified low-risk regulated businesses support stable cash flows.
--Execution risk associated with BHE expansion strategy.
AltaLink Acquisition: BHE announced on May 1, 2014 that it reached a definitive agreement to acquire AltaLink, a wholly-owned subsidiary of SNC-Lavalin Group, Inc. (SNC) for approximately $2.9 billion, which includes estimated investment in the joint transmission development agreement. In addition, BHE will assume approximately $4 billion in AltaLink debt, bringing the enterprise value (EV) associated with the transaction to $7 billion. Approval by Canadian regulatory authorities will be required and BHE expects to receive needed approvals and close the transaction by year-end 2014.
BHE is acquiring SNC's regulated transmission-only business headquartered in Calgary, Alberta, Canada. AltaLink's assets include 280 substations and 12,000 kilometers of transmission lines. The transmission company serves approximately three million people representing 85% of the province's population. As of Dec. 31, 2013, AltaLink had total assets of US$5.3 billion and revenue of US$481 million.
Leverage Rising: The AltaLink acquisition announcement comes a little more than four months after the close of its $5.6 billion acquisition of NV Energy's equity ($10 billion EV) and is expected by Fitch to further pressure BHE's leverage ratios. Funding for the acquisition has not yet been determined and will be a factor in resolving the Negative Watch.
Stable, Regulated Business Model: Completion of the proposed AltaLink acquisition will further expand BHE's investment in stable, regulated businesses with relatively predictable earnings and cash flows. AltaLink benefits from a balanced regulatory model and a constructive market structure in Alberta. In Fitch's view, BHE is paying a full price for AltaLink, which is expected to increase BHE's leverage, further pressuring its credit metrics. Assuming a balanced mix of debt and equity to fund the proposed acquisition, Fitch estimates that funds from operations (FFO)-lease adjusted leverage could weaken to approximately 4.9x in 2015 - 2016 from our previous expectation of 4.6x.
Strong Ultimate Parent: BHE's ratings reflect the significant benefits of ownership by ultimate parent BRK. Given BRK's large cash position and appetite for investment, BHE is able to retain earnings typically paid to shareholders by investor-owned utilities, enhancing its financial flexibility.
Given BHE's debt leverage and pending acquisition of AltaLink, a rating upgrade is unlikely in the near- to intermediate-term.
If, after completion of the AltaLink merger, FFO-lease adjusted leverage reaches 4.7x or weaker on a sustained basis, this could lead to a credit rating downgrade for BHE. A change of ownership at BHE, or a material change in financial policy governing dividends paid by BHE to its corporate parent, could result in future credit rating downgrades. Adverse regulatory developments or catastrophic plant outages at its utility operations could pressure BHE metrics sufficiently to result in future credit rating downgrades.
Fitch has placed the following ratings on Watch Negative:
Berkshire Hathaway Energy (BHE)
--Long-term IDR 'BBB+';
--Senior unsecured debt 'BBB+';
--Preferred stock 'BBB-';
--Short-term IDR 'F2'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 19, 2013);
--'Rating U.S. Utilities, Power, and Gas Companies' (March 11, 2014);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Parent and Subsidiary Rating Linkage
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
Recovery Ratings and Notching Criteria for Utilities
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage