Fitch Ratings has assigned a rating of 'BBB+' to Black Hills
Corporation's (BKH) issuance of $550 million of senior unsecured notes,
which substantially completes BKH's permanent acquisition financing
needs. The debt issuance is comprised of two tranches including $250
million of 2.5% three-year senior notes due Jan. 11, 2019 and $300
million of 3.95% 10-year notes due Jan. 15, 2026. Fitch has also placed
BKH's senior notes on Rating Watch Negative.
Proceeds will be used toward financing BKH's acquisition 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 'BBB+' 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 quarter.
KEY RATING DRIVERS
Rating Watch Negative: The Negative Watch for BKH reflects a material
increase in consolidated leverage partially offset by an 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 consists of $255
million of common equity, $299 million of equity linked securities, and
$550 million of unsecured debt. The $554 million 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 complete
acquisition financing needs.
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 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 the 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 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 this year. Fitch forecasts BKH to remain FCF negative through the
forecast period and has assumed a balanced mix of debt and equity
financing.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for BKH include:
--Constructive regulatory environment across all jurisdictions;
--Capital expenditures of $1.3 billion through 2017;
--Minimal maturities through forecast period including $300 million term
loan in 2017.
RATING SENSITIVITIES
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;
--Constructive outcome in the proposed 'cost of service gas' proceedings;
--Regulatory 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;
--Pro forma total adjusted debt/EBITDAR and FFO adjusted leverage
sustained above 4.0x;
--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 unfavorable outcome in the proposed 'cost
of service gas' proceedings.
LIQUIDITY
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.
Date of Relevant Committee: July 13, 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
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997907
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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