TEXT - Fitch cuts AGL Resources Inc
Dec 3 - Fitch Ratings has downgraded the long-term Issuer Default Ratings (IDRs) of AGL Resources, Inc. (AGL), AGL Capital Corp. (AGL Capital) and Atlanta Gas Light Company (AGLC) to 'BBB+' from 'A-'. Simultaneously, Fitch affirmed the long-term IDR of Northern Illinois Gas Company (Nicor Gas) at 'A'. The Rating Outlook for all entities is Stable. Approximately $3.6 billion long-term debt is affected by these actions. A full list of rating actions follows this release. KEY RATING DRIVERS AGL and AGL Capital: The rating downgrades at AGL and AGL Capital reflect Fitch's expectations that absent any substantial deleveraging, the low growth prospects in AGL's regulated segment and the challenging market environment in its unregulated segments dampen AGL's ability to recover its credit measures in the foreseeable future, resulting in a weakened credit profile that is more consistent with a 'BBB+' rated entity. Diversified Utility Operations With Low Customer Growth: The 'BBB+' IDR and the Stable Outlook take into consideration the low-risk profile of AGL's diverse utility operations. AGL owns gas distribution utilities in seven states, all of which have full recovery of gas commodity costs through adjustment mechanisms. AGLC, AGL's second largest subsidiary by rate base, benefits from a volume-insensitive straight fixed-variable rate design under which the utility is not affected by weather fluctuations and/or customer usage. In addition, Virginia Natural Gas Co. (VNG) and Elizabethtown Gas Co. (EGC) both have weather normalization provisions and partial revenue decoupling. While Nicor Gas' rates are not fully decoupled, its most recent rate orders authorized the recovery of 80% of fixed costs in the fixed customer charge. Fitch expects AGL's core natural gas utility operations to represent over 75% of consolidated earnings. However, this segment is expected to continue to experience low growth in the next few years due to low customer growth in its service territories and lack of planned rate case filings, partially offset by a modest amount of infrastructure investments in Georgia, New Jersey and Virginia. Unregulated Segments Continue to Face Challenges: AGL's primary unregulated operations include Sequent Energy, an asset management and wholesale energy marketing business; SouthStar Energy Services, a competitive gas retailer; and Pivotal Energy, a high deliverability salt-dome storage business. Results from both Sequent and Pivotal have been challenged by low volatility and the collapse of basis differentials in the natural gas markets, though there are signs of corrections in commercial activities and seasonal storage spreads in the summer of 2012. SouthStar, the gas retailer, remains pressured by competition and minimal customer growth. Its margins are under pressure as a result of migrating to fixed-price plans for residential and commercial customers in response to its competitors, partially offset by lower bad debt expense primarily as a result of low commodity prices. Consolidated Financial Profile: Without substantial deleverage, the pre-merger leverage with the addition of acquisition debt will continue to pressure AGL's leverage ratios while its interest coverage ratios are expected to be relatively in line with its 'BBB+' rating. Fitch expects AGL to produce on average, over the next three years, debt to operating EBITDA approximately 4.3x and consolidated funds from operations (FFO) to debt of approximately 17%. Its FFO interest coverage ratio over the same period is expected to average approximately 5.2x. Long-term ratings adjustment will be dependent on reduction in leverage through successful integration and full realization of operating synergies from the merger. As AGL's capital spending plans moderate, external financing needs are expected to be limited while liquidity remains adequate with its $1.3 billion bank credit facility. Atlanta Gas Light Company Strong Parent Ratings Linkage: AGLC's ratings reflect its strong individual credit profile, while also considering the linkage to its parent, including AGLC's reliance on AGL for access to capital and liquidity, and AGL's dependence on upstream dividends from AGLC to service holding company level debt. Intercompany loan represents the majority of AGLC's debt. AGLC has approximately $182 million of medium-term notes outstanding which are being refinanced at the parent level over time. Affiliated companies except for Nicor, including AGLC, participate in a corporate money pool arrangement at AGL for short-term borrowing needs. Georgia regulatory framework does not limit AGLC's ability to upstream dividends to AGL. Strong Utility Operations: AGLC has historically benefited from favorable service territory demographics. However, overall customer growth in the last year remains flat due to a weak residential housing market and general economic conditions. As a pure energy delivery company, AGLC operates under volume-insensitive straight fixed-variable rates. Accordingly, changes in customer usage patterns due to weather and improvements in equipment efficiencies or other business conditions have minimal financial effect. The utility also benefits from a constructive regulatory environment which includes riders for recovery of infrastructure investments. Manageable Customer Concentration: While AGLC has customer concentration risk, billing only 11 marketers, financial exposure is limited, since the company is able to obtain security support in an amount equal to a minimum of 2x a marketer's highest monthly bill. In addition, AGLC bills its delivery service to marketers in advance rather than arrears. Nicor Gas Solid Utility Operations: Nicor Gas' utility operations are supported by a large, mostly residential customer base, diverse source of gas supply and 150 billions of cubic feet (Bcf) of gas storage, a monthly purchased gas adjustment (PGA) mechanism, and manageable capital spending and external funding requirements. While the gas utility's rates are not fully decoupled, its most recent rate orders authorized the recovery of 80% of fixed costs in the fixed customer charge, up from 60% in previous rates. Independent Liquidity Access Post Merger: Unlike AGLC, Nicor Gas maintains capital market access independent of AGL and has its own commercial paper program and liquidity facilities. Debt maturities are manageable with $50 million maturing in 2016. Nicor is prohibited to make money pool loans to affiliates. However, current regulation does not effectively prohibit Nicor from making upstream dividends to its parent. Strong Financial Profile: Fitch expects Nicor's financial profile to remain strong for its rating category in the next three years. EBITDA-to-interest and FFO-to-interest are projected to be approxmiately 10x. Leverage is also expected to remain low for the rating category with debt-to-EBITDA of 2.5x over the forecast period. Given the modest capital expenditure in the next few years, the utility is expected to be modestly free cash flow positive. PBR Exposure Remains: Nicor Gas continues to be exposed to potential liability payments associated with the Performance Based Rate (PBR) case. In April 2012, Nicor reached a settlement agreement with ICC staff committing to refunding $64 million to its customers. The case remains under ICC review. Barring an outcome substantially higher than the settlement amount, ratings could be maintained. What Could Trigger A Rating Action AGL and AGL Capital: Positive: --Unlikely absent a material reduction in leverage. Negative: --Debt funded growth at non-regulated operations and investments; --Material expansion or shift in the mix of regulated and unregulated businesses; --Negative developments in the regulatory supportiveness in which AGL's utilities operate. Atlanta Gas Light: Positive: --With close linkage to its parent, primary triggers would be any changes in the ratings of AGL. Negative: --With close linkage to its parent, primary triggers would be any changes in the ratings of AGL; --Negative developments in Georgia's regulatory supportiveness. Nicor Gas: Positive: --Positive ratings action is limited by rating linkage to AGL (absent a rating change at the parent). Negative: --PBR payments beyond amounts considered in the current ratings resulting in a significant and long-term deterioration in credit metrics; --Adverse change in regulatory environment; --Upstream dividend exceeds what is incorporated in the rating which results in substantial increase in leverage; --Downgrade at its parent AGL Resources. Fitch downgraded the following ratings, with a Stable Outlook: AGL Resources Inc. --Issuer Default Rating (IDR) to 'BBB+' from 'A-'. AGL Capital Corp. (guaranteed by AGL) --IDR to 'BBB+' from 'A-'; --Senior unsecured notes to 'BBB+' from 'A-'. Atlanta Gas Light Co. --IDR to 'BBB+' from 'A-'.; --Senior unsecured medium-term notes to 'A-' from 'A'. Fitch affirmed the following ratings, with a Stable Outlook: AGL Capital Corp. (guaranteed by AGL) --Short-term IDR at 'F2'; --Commercial paper at 'F2'. Nicor Gas --IDR at 'A'; --Senior unsecured notes at 'A+'; --First mortgage bonds at 'AA-'; --Short-term IDR at 'F1'; --Commercial paper at 'F1'.
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