Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of
Mountaineer Gas Company (MGC) at 'BB+'. Fitch has affirmed MGC's senior
unsecured debt at 'BBB-' and assigned a Recovery Rating of 'RR1'. A
complete list of rating actions follows at the end of this release.
The Rating Outlook is Stable.
KEY RATING DRIVERS
Small Scale of Operations
The ratings of MGC are restricted by the utility's small scale of
operations. MGC is one of the smallest investor-owned natural gas
distribution utilities rated by Fitch. Due to MGC's modest size, small
changes in revenue or expenses can have an outsized impact on financial
metrics, causing the utility to be more vulnerable to external shocks.
Private Equity Ownership
MGC's ratings are also restricted by the utility's private equity
ownership. MGC's holding company, Mountaineer Gas Holdings Limited
Partnership, is owned by private equity funds ultimately owned by iCON
Infrastructure LLP, Deutsche Bank AG, and IGS Utilities LLC. Fitch
considers private equity ownership to present an increased level of
credit risk due to the typically more aggressive dividend payout policy,
weaker financial flexibility, and less transparent corporate governance
compared with a publicly traded company.
Challenging Regulatory Environment
Fitch regards West Virginia's regulatory environment as challenging. The
Public Service Commission of West Virginia (PSCWV) does not allow MGC to
use revenue decoupling or weather normalization. In addition, the
PSCWV's use of a historical test year for rate case decisions makes it
difficult for MGC to earn its authorized return on equity (ROE).
However, the PSCWV's recent implementation of an infrastructure
replacement and expansion program (IREP) cost recovery rider partially
mitigates regulatory lag. MGC's latest rate case resulted in an increase
of $7.7 million, or 3%, effective Nov. 1, 2015 and an authorized ROE of
9.75%.
Supportive, But Volatile, Financial Metrics
Fitch expects MGC's financial profile to remain supportive of the
ratings, but the company's small size, large seasonal working capital
borrowings, and exposure to the effects of weather result in significant
swings in financial metrics, both on a seasonal basis and year to year.
Assuming normal weather, Fitch expects adjusted debt/EBITDAR to average
4.3x-4.7x, funds flow from operations (FFO) adjusted leverage to average
around 4.5x, and FFO fixed-charge coverage to average 3.7x-4.2x through
2019.
Large Capex Program
Capex is expected to be significantly larger over the next several
years. Excluding the Eastern Panhandle expansion project, capex is
expected to average approximately $25 million per year over 2016-2020.
An additional $28 million of capex in 2018 and $15 million in 2019 are
planned to be spent on MGC's Eastern Panhandle expansion project, which
is designed to provide natural gas distribution service to unserved and
underserved areas in northeastern West Virginia. The inclusion of the
Eastern Panhandle expansion project capex in MGC's IREP cost recovery
rider helps to alleviate concerns related to the large capex program.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for MGC include:
--Gas sales volume growth of 5.5% in 2017 and 0%-0.5% in 2018 and 2019;
--EBITDA margin averaging 15% through 2019;
--Capex averaging approximately $25 million per year over 2016-2020,
with the Eastern Panhandle expansion project adding another $28 million
in 2018 and $15 million in 2019;
--Normal weather.
RATING SENSITIVITIES
Positive Rating Action: A positive rating action is not likely, given
the small scale of operations, the aggressive financial policy of MGC's
private equity owners, and the challenging regulatory environment in
West Virginia. Implementation of revenue decoupling and/or other
regulatory measures sufficient to provide a greater level of stability
and predictability to MGC's credit metrics would be needed for a ratings
upgrade.
Negative Rating Action: A negative rating action is not likely, but
could occur if MGC's private equity owners instituted a more aggressive
financial policy that increased leverage, with adjusted debt/EBITDAR
around 5.0x and FFO fixed-charge coverage less than 3.5x on a sustained
basis.
LIQUIDITY
MGC's natural gas distribution business is very seasonal, with much
larger sales during the winter heating season. Short-term debt is used
to temporarily fund natural gas inventories and customer receivables,
which normally peak in late December and return to more normalized
amounts by the end of the first quarter.
Fitch considers MGC's liquidity to be adequate, primarily supported by a
$100 million unsecured revolving credit facility. The five-year facility
expires Dec. 1, 2019 and includes an accordion feature that could expand
the facility's size to $170 million to account for the possibility of
unusually high natural gas prices and sales volumes that could occur
during an abnormally cold winter heating season. Fitch expects this
facility to provide MGC with sufficient availability for its working
capital needs. As of Sept. 30, 2016, $9 million of borrowings were
outstanding under the facility, leaving $91 million available.
The credit facility includes financial covenants requiring MGC to
maintain a minimum EBITDA interest coverage ratio of 2.0x and a maximum
debt-to-capital ratio of 65%.
MGC's next long-term debt maturity is in December 2017, when $70 million
of 7.58% unsecured senior notes comes due. The company's only other
long-term debt outstanding is its $20 million floating rate senior note
due in 2022, which has its interest rate hedged at 4.48%.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Mountaineer Gas Company
--Long-Term IDR at 'BB+', Stable Outlook;
--Senior unsecured debt at 'BBB-'; assigned Recovery Rating of 'RR1'.
Disclosure: There were no financial statement adjustments made that were
material to the rating rationale outlined above.
Additional information is available on www.fitchratings.com
Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014690
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014690
Endorsement Policy
https://www.fitchratings.com/regulatory
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT 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
WEBSITE.
Copyright (c) 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its
subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone:
1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or
retransmission in whole or in part is prohibited except by permission.
All rights reserved. In issuing and maintaining its ratings and in
making other reports (including forecast information), Fitch relies on
factual information it receives from issuers and underwriters and from
other sources Fitch believes to be credible. Fitch conducts a reasonable
investigation of the factual information relied upon by it in accordance
with its ratings methodology, and obtains reasonable verification of
that information from independent sources, to the extent such sources
are available for a given security or in a given jurisdiction. The
manner of Fitch's factual investigation and the scope of the third-party
verification it obtains will vary depending on the nature of the rated
security and its issuer, the requirements and practices in the
jurisdiction in which the rated security is offered and sold and/or the
issuer is located, the availability and nature of relevant public
information, access to the management of the issuer and its advisers,
the availability of pre-existing third-party verifications such as audit
reports, agreed-upon procedures letters, appraisals, actuarial reports,
engineering reports, legal opinions and other reports provided by third
parties, the availability of independent and competent third- party
verification sources with respect to the particular security or in the
particular jurisdiction of the issuer, and a variety of other factors.
Users of Fitch's ratings and reports should understand that neither an
enhanced factual investigation nor any third-party verification can
ensure that all of the information Fitch relies on in connection with a
rating or a report will be accurate and complete. Ultimately, the issuer
and its advisers are responsible for the accuracy of the information
they provide to Fitch and to the market in offering documents and other
reports. In issuing its ratings and its reports, Fitch must rely on the
work of experts, including independent auditors with respect to
financial statements and attorneys with respect to legal and tax
matters. Further, ratings and forecasts of financial and other
information are inherently forward-looking and embody assumptions and
predictions about future events that by their nature cannot be verified
as facts. As a result, despite any verification of current facts,
ratings and forecasts can be affected by future events or conditions
that were not anticipated at the time a rating or forecast was issued or
affirmed.
The information in this report is provided "as is" without any
representation or warranty of any kind, and Fitch does not represent or
warrant that the report or any of its contents will meet any of the
requirements of a recipient of the report. A Fitch rating is an opinion
as to the creditworthiness of a security. This opinion and reports made
by Fitch are based on established criteria and methodologies that Fitch
is continuously evaluating and updating. Therefore, ratings and reports
are the collective work product of Fitch and no individual, or group of
individuals, is solely responsible for a rating or a report. The rating
does not address the risk of loss due to risks other than credit risk,
unless such risk is specifically mentioned. Fitch is not engaged in the
offer or sale of any security. All Fitch reports have shared authorship.
Individuals identified in a Fitch report were involved in, but are not
solely responsible for, the opinions stated therein. The individuals are
named for contact purposes only. A report providing a Fitch rating is
neither a prospectus nor a substitute for the information assembled,
verified and presented to investors by the issuer and its agents in
connection with the sale of the securities. Ratings may be changed or
withdrawn at any time for any reason in the sole discretion of Fitch.
Fitch does not provide investment advice of any sort. Ratings are not a
recommendation to buy, sell, or hold any security. Ratings do not
comment on the adequacy of market price, the suitability of any security
for a particular investor, or the tax-exempt nature or taxability of
payments made in respect to any security. Fitch receives fees from
issuers, insurers, guarantors, other obligors, and underwriters for
rating securities. Such fees generally vary from US$1,000 to US$750,000
(or the applicable currency equivalent) per issue. In certain cases,
Fitch will rate all or a number of issues issued by a particular issuer,
or insured or guaranteed by a particular insurer or guarantor, for a
single annual fee. Such fees are expected to vary from US$10,000 to
US$1,500,000 (or the applicable currency equivalent). The assignment,
publication, or dissemination of a rating by Fitch shall not constitute
a consent by Fitch to use its name as an expert in connection with any
registration statement filed under the United States securities laws,
the Financial Services and Markets Act of 2000 of the United Kingdom, or
the securities laws of any particular jurisdiction. Due to the relative
efficiency of electronic publishing and distribution, Fitch research may
be available to electronic subscribers up to three days earlier than to
print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia
Pty Ltd holds an Australian financial services license (AFS license no.
337123) which authorizes it to provide credit ratings to wholesale
clients only. Credit ratings information published by Fitch is not
intended to be used by persons who are retail clients within the meaning
of the Corporations Act 2001.
View source version on businesswire.com: http://www.businesswire.com/news/home/20161111005794/en/
Copyright Business Wire 2016
