Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) of
UGI Utilities, Inc. (UGIU) at 'A-' and its senior unsecured debt rating
at 'A'. The Rating Outlook is Stable. The rating action affects
approximately $600 million of long-term debt.
KEY RATING DRIVERS
--Healthy customer growth despite macro headwinds;
--Credit metrics have reasonable headroom for rating level;
--Large capex;
--Ratings independent from UGI Corp.
UGIU continues to experience healthy customer growth despite low oil
prices and reduced drilling activities in the Marcellus shale region.
UGIU added approximately 17,400 new heating customers (or 2%) in fiscal
2015, albeit lower than 2014's 18,000. Although the price advantage
enjoyed by natural gas over heating oil has lessened with the decline in
oil prices which slowed conversion rates, natural gas, especially
Marcellus gas, still has economic and environmental advantages which
will likely continue to drive conversions. The company has also received
increasing natural gas conversion requests from power generators. Going
forward, Fitch estimates that CAGR for net customer growth will be in
the 1.5%-2% range from 2016 to 2019.
UGIU has historically exhibited a strong financial profile rooted in a
conservative capital structure and low leverage. Fitch expects credit
metrics to weaken as capital investments rise and profitability and cash
flows decline primarily due to macro headwinds. El Nino weather pattern
will also adversely affect sale volumes this winter as UGIU operates
under a traditional volume sensitive tariff structure. However, UGIU's
credit metrics are strong and should be able to withstand the
deterioration at the current ratings level. Key leverage measures,
adjusted debt to EBITDAR and funds from operations (FFO)-Adjusted
Leverage, were, 2.3x and 2.6x at fiscal year-end Sept. 30, 2015,
respectively. The credit metrics are expected to average around 3.2x and
3.6x from 2016-2019, respectively. These metrics remain consistent with
the guideline ratios for the 'A-' rating level.
Capital spending continues to rise, driven by new customer additions, an
infrastructure replacement program for aging pipe, and an approved
program Growth Extension Tariff or 'GET Gas' to expand the natural gas
distribution system to under-served and un-served markets. 'GET Gas'
commits UGIU to a five-year $75 million investment budget. Capex
expenditures, which grew to $214 million in 2015 from $119 million in
fiscal 2012, are expected to be in the $300 million range in fiscal 2016
and decline to a more normalized run rate of approximately $200 million
in fiscal 2018. UGIU receives recovery under the GET Gas program and
through Distribution System Improvement Charges (DSIC) for its
subsidiary, Penn Natural Gas (PNG). However, for a substantial part of
its remaining capital investment, it does not receive recovery under
existing tariff mechanisms. Management has publicly indicated that its
primary subsidiary UGI Gas will likely file a general rate case in 2016
for the first time in over 20 years to recoup the capital investments. A
conservative amount of rate increase is incorporated in Fitch's
projections.
UGIU is a wholly-owned subsidiary of UGI Corp., a holding company with
interests in a diversified portfolio of energy, power, and utility
assets including, AmeriGas Partners, L.P. (IDR 'BB'/Outlook Stable). UGI
Corp. operates each of its businesses separately and does not carry
parent-level debt. UGIU files its own separate financial statements.
There are shared management, treasury, and investor relation functions
shared among various entities. However, there are no significant
operational ties between UGIU and UGI Corp and its other affiliates.
Accordingly, Fitch rates UGIU independently of the UGI Corp's other
businesses.
KEY ASSUMPTIONS
--Net customer growth 1.5% for 2016 and CAGR of 2% from 2017-2019;
--UGI Gas rate order takes effect in 2017;
--PNG rate order takes effect in a future period;
--Dividend payout ratio averages 55% over projection period;
--Capital expenditures average $250 million per year from 2016-2019 and
peak in 2016 and 2017;
--Warmer than normal winter for 2016 and normal weather for 2017-2019;
--Cash shortfall funded by debt.
RATING SENSITIVITIES
Positive rating actions are not likely at this time given the sizable
multi-year capital investment program, weak oil price, reduced Marcellus
drilling activities and mild winter in the December quarter of 2015.
Negative:
--A review and decision by the PUC of the company's rate structure that
leads to sustained weaker cash flows;
--Increased leverage due to higher capex and/or higher dividend payments
to parent UGI Corp than Fitch models reflect;
--Debt-to-EBITDAR sustained above 3.8x.
Fitch has affirmed the following ratings with a Stable Outlook:
UGIU
--Long-term IDR at 'A-';
--Senior unsecured debt at 'A'.
Date of Relevant Rating Committee: Dec. 29, 2015
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=997423
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997423
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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