TEXT-Fitch affirms WGL Holdings and Washington Gas Light Co ratings

Fri Oct 5, 2012 12:19pm EDT

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'.
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