NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to WGL Holdings, Inc.'s (IDR: 'A') planned issuance of $250 million of senior unsecured notes. The issuance consists of $150 million of 30-year notes due 2044 and $100 million of five-year notes due 2019. Net proceeds will be used to pay down short-term borrowings and for general corporate purposes including working capital requirements, and to fund planned share repurchases and capital expenditures. The Rating Outlook is Stable.
KEY RATING DRIVERS
WGL's ratings primarily reflect the predictable cash flows and strong credit metrics of Washington Gas Light Co. (WG; IDR: 'A+'), a regulated gas distribution utility subsidiary, and also incorporate the risk and volatility of WGL's retail marketing business. For the latest 12 months (LTM) ending June 30, 2014, WG comprised 76.7% of consolidated funds from operations (FFO).
The Stable Outlook reflects the solid operating performance of the company's regulated and non-regulated operations, and the expectation that the company will continue to effectively manage the risks associated with its modestly growing non-regulated businesses.
Solid Financial Performance: Credit quality measures at both WGL and WG are expected to be commensurate with their current rating levels over the forecast period. For LTM ended June 30, 2014, WGL's EBITDAR-to-interest coverage and debt-to-EBITDAR ratios were 6x and 3.3x, respectively. For the same period, WG's EBITDAR coverage and debt-to-EBITDAR metrics were 7.7x and 2.3x. Over the LTM, WG has benefited from a combination of higher rates in the District of Columbia and Maryland, modest customer growth and lower interest expense. Going forward, Fitch estimates leverage, as measured by debt-to-operating EBITDAR, will be approximately 3.4x at WGL, and 3x at WG, which remains consistent with Fitch's target ratios for their current rating levels.
Share Repurchase Program: On August 7, WGL's board of directors authorized a $150 million share buyback program over a two-year period.
Increased Capex Needs: WGL plans to spend $2.2 billion on capital expenditures through 2018, an average of approximately $500 million per annum, significantly higher than previous years. The capex program is primarily focused on system rehabilitation and maintenance at WG, and to a lesser extent, unregulated alternative energy and midstream pipeline investments, which will pressure credit metrics. Going forward, Fitch expects the majority of capex will be covered by operating cashflows; however, both WGL and WG will be moderately free cash flow (FCF) negative net of dividends. Notably, the recent adoption of Infrastructure Recovery Mechanisms (IRMs) in Maryland and Virginia is a constructive development for WG and will allow for timely recovery on invested capital in between general rate case (GRC) proceedings.
Volatile Retail Business: WGL has grown its unregulated investments primarily through Washington Gas Energy Services (WGES), its retail energy marketing subsidiary which primarily services residential and commercial customers. Revenues at WGES have been growing steadily for the last six years at a 2% compound annual growth rate (CAGR) through fiscal 2013 before a drop-off in 2014. Gross margins from electric sales were adversely affected by higher capacity and ancillary service charges from PJM and lower realized margins from large commercial customers due to cooler than normal winter weather during the polar vortex. Consequently, contributions from WGES declined to 36.5% of consolidated net income for the LTM ending June 30, 2014 compared to 41.1% in fiscal 2013. Going forward, Fitch expects new commercial customers to drive modest growth. WGES entered the Pennsylvania electric market in 2010 and currently operates in Washington D.C., Maryland, Virginia, Delaware, and Pennsylvania.
Modest Customer Growth: WG operates in an attractive service territory in the metropolitan Washington D.C. area, one of the stronger residential markets in the country, and forecasts modest customer growth of 1% annually.
Decoupling: In Maryland, a full revenue-decoupling mechanism mitigates any sales volume volatility due to weather variability and customer conservation. In Virginia, a decoupling mechanism allows WG to recover costs related to conservation and energy-efficiency programs. Additionally, WG also operates under a weather-normalization mechanism in Virginia. WG's request for a weather-normalization adjustment mechanism filed in November 2013 in D.C. is currently pending. Natural gas sales delivered were approximately 48.6%, 34.5%, and 16.9% in Maryland, Virginia, and Washington, D.C., respectively, for the year ended Sept. 30, 2013.
MD 2013 GRC Settled: On Nov. 22, 2013, the Maryland Public Service Commission (MPSC) approved an $8.9 million rate increase for WG based on a 9.5% return on equity (ROE), which represented 31.4% of the revised requested amount for rates effective forthwith.
MD STRIDE: Maryland's Strategic Infrastructure Development and Enhancement Program (STRIDE) program allows WG to implement an infrastructure replacement mechanism (IRM) to accelerate repair and replacement of its natural gas distribution system. On May 6, 2014, the MPSC approved $200 million of infrastructure investments under the STRIDE program during the next five years as part of a 22-year long-term plan with a January 1 start date. In July, the MPSC allowed WG to collect associated revenues over the next five-month period through December 2014. The Maryland Office of People's Counsel filed an appeal of the MPSC's May 6, 2014 order with the Circuit Court for Baltimore City. The appeal is currently pending.
DC GRC Settled: On May 15, 2013, the PSC of DC approved an $8.4 million rate increase for WG, predicated on a 9.25% ROE, which represented 29% of the requested amount, for rates effective June 4, 2013. WG plans to spend roughly $22 million per annum over the next five years related to its accelerated infrastructure replacement program and filed for an IRM with the D.C. PSC. On March 31, 2014, the D.C. PSC approved WG's infrastructure replacement program, contingent on submitting an implementation plan by the end of April.
WG filed the implementation plan and sought reconsideration on several issues in the order. The D.C. PSC granted final approval of WG's infrastructure replacement program on August 21 and established a procedural schedule for expedited review of the proposed IRM.
VA GRC Settled: On July 2, 2012, the Virginia State Corporation Commission (VSCC) approved a $20 million rate increase for WG, which represented 70.2% of the requested amount, based on a 9.75% ROE. On Jan. 31, 2011, WG requested a $28.5 million revenue increase predicated on a 10.5% ROE for rates effective October 2011, subject to refund. On July 24, 2012, the VSCC finalized its July 2, 2012 order. On Nov. 15, 2012, the VSCC approved WG's application to increase its Steps to Advance Virginia's Energy Plan (SAVE) expenditures to $191.4 million over a five-year period beginning Jan. 1, 2013. Costs associated with this accelerated infrastructure replacement program are recovered through a SAVE rider that is subject to commission approvals and annual true-ups.
New Midstream Investments
Constitution Pipeline: In May, WGL Midstream entered into $72 million equity investment in the Constitution Pipeline Company, LLC for a 10% share in the proposed 121-mile long pipeline. The pipeline project is designed to transport at least 650,000 dekatherms of natural gas per day from the Marcellus region in northern Pennsylvania to major northeastern markets. Construction of the pipeline is expected to begin in the third quarter of 2014 (3Q'14) and is scheduled to be in service by 2Q'16. WGL Midstream joins Williams Partners L.P.'s ('BBB'/Outlook Stable; 41% share), Cabot Oil and Gas Corporation (25% share) and Piedmont Natural Gas (24% share) in the project.
Central Penn Line Pipeline: In February 2014, WGL Midstream formed Meade LLC with COG Holdings LLC, Vega Midstream MPC LLC and River Road Interests LLC to partner with Transcontinental Gas Pipeline Company, LLC (Transco; 'BBB+'/Outlook Stable) to invest in the Central Penn Pipeline. The Central Penn Pipeline, as part of Transco's Atlantic Sunrise project, will be an approximately 177-mile pipeline originating in Susquehanna County, Pennsylvania that is designed to transport up to approximately 1.7 million dekatherms per day of natural gas to a delivery point into Transco's mainline in southeast Pennsylvania. The Central Penn Line currently has a projected in-service date in 4Q'17. WGL Midstream plans to invest an estimated $410 million for a 55% interest in Meade and Meade will invest an estimated $746 million for an approximate 39% interest in the Central Penn Line.
Sufficient Liquidity: As of June 30, 2014, WGL had total consolidated available liquidity of $575 million under their credit agreements including $13 million of cash and cash equivalents. WGL and WG can upsize their $450 million and $350 million senior unsecured credit facilities, which mature in April 2017, to $550 million and $450 million, respectively, with consent of the lenders. The credit facilities backstop the companies' commercial paper (CP) programs and contain a maximum debt-to-capital covenant of 65%. As of June 30, there were no direct borrowings under the facilities and WGL had $237.5 million of CP outstanding.
Manageable Debt Maturities: Long-term debt maturities over the next five years are modest and are as follows: $20 million in 2015, $25 million in 2016, none in 2017 and 2018, and $50 million in 2019.
RATING SENSITIVITIES
What Could Lead to a Rating Upgrade:
--No positive rating actions are anticipated in the near term.
What Could Lead to a Rating Downgrade:
--WGL: A marked increase in the risk profile of its retail marketing operations or other non-regulated businesses could lead to negative rating actions. Sustained debt-to-EBITDAR leverage metrics above 3.65x and/or FFO fixed-charge coverage below 5.0x over the forecast period could lead to negative rating actions.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating U.S. Utilities, Power and Gas Companies (March 11, 2014);
--'Corporate Rating Methodology' (May 28, 2014);
--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities within a Corporate Group Structure
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714476
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=904934
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