Fitch Rates Black Hills' Jr. Subordinated Notes 'BBB-'; IDR Remains on Negative Watch
Fitch Ratings has assigned a rating of 'BBB-' to Black Hills
Corporation's (BKH, IDR 'BBB+') issuance of $260 million of junior
subordinated notes that are a component of BKH's equity units. Fitch has
also placed BKH's junior subordinated notes on Rating Watch Negative.
Each equity unit consists of a remarketable junior subordinated note due
2028 and a forward equity purchase contract obligating the holder to
purchase common stock on Nov. 1, 2018. Under Fitch's criteria, the
junior subordinated notes will receive no equity credit; however, the
$260 million of additional equity is captured in Fitch's forecast period.
Proceeds will be used to support BKH's acquisition financing of
SourceGas Holdings LLC (SGH, not rated by Fitch) from investment funds
managed by Alinda Capital Partners and GE Energy Financial Services for
approximately $1.89 billion. BKH's Issuer Default Rating (IDR) remains
on Rating Watch Negative. Fitch will resolve the Negative Watch
concurrent with or close to the completion of the acquisition. Fitch
expects the acquisition to close in the first half of 2016.
KEY RATING DRIVERS
Rating Watch Negative: The Negative Watch for BKH reflects a material
increase in consolidated leverage at BKH partially offset by increased
scale of utility operations and higher regulated mix in overall earnings
and cash flows. The purchase price of $1.89 billion includes assumption
of approximately $700 million of debt at closing. While BKH has obtained
a $1.17 billion bridge facility, permanent financing will consist of
$500-575 million of equity and equity linked securities and $450-550
million of debt. The equity component of acquisition financing is
modestly less than the $575-675 million that was originally expected.
However, BKH is currently evaluating the sale of up to a 49.9% interest
in a 200-MW natural gas-fired power plant from its IPP portfolio, the
proceeds from which would be used to reduce debt financing.
However, BKH's leverage will increase materially with this acquisition.
Fitch will update its financial forecasts once there is greater clarity
on the post-acquisition debt structure, but considers it unlikely that
BKH's pro forma funds from operations (FFO) adjusted leverage could stay
below 4.0x over the medium term, which was Fitch's prior expectation.
Improved Business Risk Profile: Qualitatively, the SGH acquisition is
positive for BKH's business profile because it increases the utility
business mix to approximately 82% of EBITDA in 2016, from approximately
78% previously. BKH already operates in three of the four SGH states,
all of which have generally supportive regulatory constructs.
Key Factors to Resolve Watch: The post-acquisition capital structure
along with management intent to pay down the acquisition debt, the terms
of the regulatory approvals in each of the four states, and the trend in
pro forma credit metrics will be the key decision factors for Fitch.
Cost of Service Gas Program: BKH's proposed cost of service gas program
would be beneficial to credit quality and could offset some of the
increased risk associated with the leverage from the SGH acquisition. If
approved by state regulators, the cost of service gas program would
materially lower the risk of BKH's natural gas exploration and
production business by supplying its utilities with 50% of their annual
gas consumption through long-term contracts. BKH recently submitted cost
of service gas regulatory filings in IA, KS, NE, SD, WY and CO. The
acquisition of SGH approximately doubles the amount of natural gas that
can be contracted under the cost of service gas provision. A successful
outcome in the cost of service gas proceedings could mitigate the
potential one-notch downward pressure arising from the SGH acquisition.
Shift in Oil and Gas Strategy: The company's oil and gas strategy is now
centered around its utility cost of service gas program, a notable shift
from a prior focus on unregulated exploration and production activities.
BKH has meaningfully reduced its planned capex in the Mancos and
Piceance shale basins over the next two years, as the current commodity
price environment does not support drilling fundamentals. BKH has
decreased planned capital spending in the oil and gas business segment
by 89% to $27 million through 2017, from $242 million previously.
Capex Needs: BKH plans to spend $1.3 billion on capex through 2017 with
$357 million spent as of Sept. 30, roughly 15% higher than the preceding
three-year period. Approximately $308 million or 24% of that amount is
eligible for timely recovery under recovery mechanisms. Capex will be
primarily focused on new generation, transmission and distribution
investments at the electric and gas utilities. Due to looming
regulations under the EPA's Clean Power Plan, future electric generation
needs are likely to be focused on new natural gas-fired power plants and
on small-scale wind and solar renewable projects. Capex at the gas
utilities is primarily centered on pipeline replacement programs,
typically subject to automatic recovery mechanisms. Now that the 132-MW
gas-fired Cheyenne Prairie Generating Station power plant entered
service last year major generation projects include the $109 million
60-MW Peak View wind project and the smaller $65 million 40-MW
simple-cycle natural gas-fired plant at Colorado Electric, both with
scheduled in service dates in 2016. Fitch forecasts BKH to remain FCF
negative through the forecast period and has assumed a balanced mix of
debt and equity financing.
Fitch's key assumptions within the rating case for BKH include:
--Constructive regulatory environment across all jurisdictions;
expenditures of $1.3 billion through 2017;
through forecast period including $300 million term loan in 2017.
Positive: Future developments that may, individually or collectively,
lead to a stabilization of ratings at the current level include:
--Total adjusted debt/EBITDAR and FFO adjusted leverage at 4.0x or below;
outcome in the proposed 'cost of service gas' proceedings;
approval for SGH acquisition at reasonable terms.
Negative: Future developments that may, individually or collectively,
lead to a negative rating action include:
--Pro forma FFO fixed-charge coverage sustained below 4.75x;
forma total adjusted debt/EBITDAR and FFO adjusted leverage sustained
--Material claw back of potential synergies arising
from the SGH acquisition;
--A weaker business and financial risk
profile from larger investments in oil and gas drilling and/or
unfavourable outcome in the proposed 'cost of service gas' proceedings.
BKH had $391 million of liquidity available under its $500 million
unsecured revolving credit facility, including $39 million of
unrestricted cash and cash equivalents as of Sept. 30, 2015. The credit
facility can be upsized to $750 million with the consent of the lenders
and matures in June 2020. The credit facility is subject to a maximum
debt-to-capitalization ratio covenant of 65% as of Sept. 30, 2015, and
BKH was in compliance with a debt-to-capitalization ratio of 57%. BKH's
$500 million bank credit facility contains covenants that trigger
cross-default if BKH or its subsidiaries fail to make timely payments of
debt obligations. Maturities through the forecast period are minimal and
consist of a $300 million dollar term loan due April 12, 2017 which
Fitch expects to be refinanced upon expiry.
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including
Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Dodd-Frank Rating Information Disclosure Form
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
View source version on businesswire.com: http://www.businesswire.com/news/home/20151117007124/en/
Copyright Business Wire 2015