TEXT-Fitch affirms WGL Holdings and Washington Gas Light Co ratings
Oct 5 - Fitch Ratings has affirmed the Issuer Default Ratings (IDR) of WGL Holdings, Inc. (WGL) and Washington Gas Light Company (WG) at 'A+'. The Rating Outlook for both entities is Stable. In addition, Fitch lowered the short-term rating of WG to 'F1' from 'F1+', consistent with Fitch's short-term rating criteria as specified in the report titled 'Short-Term Ratings Criteria for Non-Financial Corporates' dated Aug. 9, 2012. A full list of ratings is provided at the end of the release. The ratings of WGL are driven by the predictable cash flows and strong credit metrics of WG, a regulated gas distribution utility subsidiary. All of the consolidated long-term senior unsecured debt resides at WG. For the latest 12 months (LTM) period ending June 30, 2012, WG comprised 81.6% of consolidated EBITDA. The Stable Outlook considers 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 moderately growing non-regulated businesses. Key Rating Drivers: Solid Financial Performance: Credit quality measures at both WGL and WG are expected to remain strong, albeit moderately weaker than historical results. For the 12-month period ended June 30, 2012, WGL's EBITDA coverage and debt to EBITDA metrics were 7.9 times (x) and 2.2x, respectively. For the same period, WG's EBITDA coverage and debt to EBITDA metrics were 7.1x and 2.3x, respectively. Due to the large capex program, Fitch estimates that leverage, as measured by debt to operating EBITDA, will increase to 2.7x by 2014 at WG, and 2.5x at WGL, which remains consistent with Fitch's target ratios for the rating category. Rising Capex: WGL is planning a significant capex program over the next five years, primarily focusing on system rehab and maintenance at WG, and to a lesser extent, unregulated alternative energy investments, which will pressure credit metrics. The company currently expects to spend $1.4 billion through 2016 and Fitch expects the majority of capex will be covered by operating cash flows. Modestly Growing Retail Business: WGL has grown its unregulated investments primarily through Washington Gas Energy Services (WGES), its retail energy marketing subsidiary. At its present size and risk tolerance, the non-regulated businesses are not a rating concern, but could become an issue if either leverage or risk appetite increases. Revenues at WGES have been growing steadily for the last five fiscal years at a 7.6% compound annual growth rate (CAGR), and for the LTM period ending June 30, 2012 earnings grew to 19.2% of consolidated EBITDA, as compared to 12.6% for 2009. 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 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. In the District of Columbia, WG uses heating degree day derivatives to mitigate weather sensitivity. Manageable Debt Maturities: Long-term debt maturities are modest and include no parent company debt. Maturities are as follows: $77 million in fiscal 2012, $67 million in 2014, $20 million in 2015, and $25 million in 2016. Sufficient Liquidity: As of June 30, 2012, WGL had total consolidated liquidity available of $761 million including $52 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 with consent of the lenders. The credit facilities backstop the companies' commercial paper 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 $91 million of commercial paper outstanding. Regulatory Developments: The regulatory environment in Maryland continues to be challenging. On Nov. 14, 2011, the Public Service Commission of Maryland (PSC of MD) approved an $8.4 million rate increase for WG, representing 30% of requested, predicated on an 9.6% return on equity (ROE) for rates effective forthwith. In Virginia, which accounted for 35.4% of total therms delivered in 2011, regulation is more constructive. On July 2, 2012, the Virginia State Corporation Commission (SCC of VA) approved a $20 million rate increase for WG, which represented 70.2% of requested, 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 SCC of VA finalized its July 2, 2012 order. On Feb. 29, 2012, WG filed for a $29 million base rate increase with the Public Service commission of the District of Columbia (PSC of DC), predicated on a 10.9% ROE. Additionally, the filing included a request to authorize and include $119 million of capital expenditures into rate base over the next five years, relating to WG's accelerated infrastructure replacement program. Evidentiary hearings with the PSC of DC are scheduled to occur this month. Commonwealth Pipeline: In February 2012, Capital Energy Ventures Corp. (CEV), an unregulated subsidiary of WGL, entered into a joint development agreement with UGI Energy Services, Inc. (UGI) and Inergy Midstream, L.P. (Inergy), to jointly market and develop the planned 200-mile interstate Commonwealth pipeline. The Commonwealth pipeline is designed to provide mid-Atlantic markets with direct access to abundant supplies of Marcellus natural gas and is expected to enter service in 2015. The pipeline is expected to cost approximately $1 billion and be funded equally by the three parties. As of June 30, 2012, no capital expenditures have been incurred on the project. Fitch anticipates a filing for FERC approval in the first half of 2013. What Could Lead To A Credit Rating Upgrade? --None anticipated in the near term. What Could Lead To A Credit Rating Downgrade? --WGL: A change in funding strategy that would add long-term debt at the parent level or a marked increase in the risk profile of its retail marketing operations or other non-regulated businesses could lead to negative rating actions. --WG: A greater than expected increase in leverage to fund the large capex program coupled with adverse regulatory outcomes which limits WG's ability to earn an adequate return on invested capital. Sustained FFO/debt metrics below 21% could trigger a downgrade. Fitch has downgraded the following ratings of WG: --Short-term Issuer Default Rating (IDR) to 'F1' from 'F1+'; --Commercial paper to 'F1' from 'F1+'. Additionally, Fitch affirms the following ratings with a Stable Outlook: Washington Gas Light --Long-term IDR at 'A+'; --Senior unsecured notes at 'AA-'; --Preferred stock at 'A'. WGL Holdings, Inc. --Long-term IDR at 'A+'; --Senior unsecured debt (indicative) at 'A+'; --Short-term IDR at 'F1'; --Commercial paper at 'F1'.