Fitch Affirms WGL Holdings, Inc. IDR at 'A'; WG at 'A+'; Outlook Stable
Fitch Ratings has affirmed the Issuer Default Rating (IDR) of WGL
Holdings, Inc. (WGL) at 'A' and those of its primary utility holding
subsidiary, Washington Gas Light Co. (WG), at 'A+'. Both Rating Outlooks
are Stable. Approximately $1.2 billion of consolidated debt is affected
by today's rating action.
KEY RATING DRIVERS
WGL ratings reflect the predictable cash flows and strong credit metrics
of WG, a regulated gas distribution utility subsidiary, and the
increased business risk of its retail marketing and midstream
businesses. For the latest 12 months (LTM) ending June 30, 2015, WG
comprised 82% of consolidated EBITDAR.
The Stable Outlooks reflect the expectation that the company will
continue to effectively manage the risks associated with its growing
non-regulated businesses and large utility capex plan.
Leverage Under Pressure: Due to the large capex program, leverage at
both WGL and WG is expected by Fitch to increase over the next few
years. Fitch expects WGL's EBITDAR leverage will increase to
approximately 3.7x in 2017 and then trend down to approximately 3.3x by
2019 as projects under construction are completed and begin contributing
to earnings and cash flow. By comparison, for the LTM period, WGL's
EBITDAR leverage was 3.3x. At WG Fitch expects EBITDAR leverage to
increase to 3.0x in 2019 as compared to 2.1x currently. Ultimately,
Fitch expects credit ratios for both entities to be consistent with our
target ratios for their current rating levels.
Solid Operating Performance: Fitch expects funds from operations (FFO)
coverage ratios at WGL and WG to remain above 5.0x through the forecast
period, consistent with current rating levels. For the LTM period, FFO
coverage ratios at WGL and WG approximated 7.4x and 9.0x, respectively.
Growth in Diversified Businesses: Fitch expects strong growth in WGL's
non-utility businesses through the forecast period, driven by
significant investments in the midstream and commercial energy systems
business segments. For WGL these operating segments made up 5% and 2% of
adjusted EBIT for 2014, respectively, and Fitch expects the segments may
contribute up to 15% and 20% of adjusted EBIT by 2019. WGL's midstream
investments are focused on gas storage and pipeline investments that
primarily move gas from the expanding Marcellus basin to consuming
markets. WGL's commercial energy systems business segment invests in
distributed generation assets including PV solar, combined heat and
power plants, and natural gas fuel cells typically structured through
purchase power agreement (PPAs) with a term of 20 years. Fitch views
both businesses as relatively low risk.
Large Capex Program: WGL expects to spend $3 billion on capital
expenditures through 2019, averaging $606 million per annum, levels
significantly higher than previous years. The capex program is primarily
focused on accelerated pipe replacements at WG and growing unregulated
midstream pipeline and alternative energy investments, which will
pressure credit metrics. Fitch expects WGL's capex levels to peak in
2016 and 2017 at $607 million and $825 million, respectively, due to
increased midstream investments and then taper off and average $545
million through the balance of the forecast period. Fitch expects that
both the midstream and utility business segments will be moderately free
cash flow (FCF) negative though the forecast period and will need equity
support from the parent in 2016 and 2017 to help maintain balanced
capital structures. Fitch expects WGL to fund the deficit by a roughly
50% mix of debt and equity. Notably, accelerated pipe replacement
investments at the utility average under 30% of total capex through
2019, subject to recovery under Infrastructure Recovery Mechanisms
(IRMs) in MD, VA, and Washington DC, which will provide for a timely
return on invested capital.
Volatile Retail Energy Business: WGL has grown its unregulated
investments primarily through Washington Gas Energy Services (WGES), its
retail energy marketing subsidiary which primarily services commercial
customers. For the nine months ending June 30, WGES contributed $54.6
million of adjusted EBIT (approximately 17% of consolidated), as
compared to a loss of $1.5 million for the same period last year. The
earnings volatility highlights the increased risk of this business.
Fitch notes that during the same period last year WGES earnings were
negatively impacted by extreme weather due to the polar vortex. Revenues
at WGES have been growing modestly for the last six years at a 2% CAGR
and Fitch expects prospective large commercial and government customers
to drive modest growth at WGES.
Continued Customer Growth: WG operates in an attractive service
territory in the metropolitan Washington DC, area, one of the stronger
residential markets in the country, and forecasts modest annual customer
growth of 1% through 2016 increasing to 2% in 2017 through 2019.
Customer growth for the nine months ending in June was approximately
1.1%. WG continues to capture over 90% of new single-family homes in its
service territory and is targeting the multifamily home segment for new
growth opportunities.
Revenue Decoupling: In MD, a full revenue decoupling mechanism mitigates
the sales volume volatility which is due to weather variability and
customer conservation. In VA, a decoupling mechanism allows WG to
recover costs related to conservation and energy-efficiency programs. In
addition, WG also operates under a weather normalization mechanism in
VA. Therms delivered by jurisdiction were approximately 47%, 36%, and
17% in MD, VA, and Washington DC, respectively, for the year ended Sept.
30, 2014.
MD 2013 GRC Settled: In November 2013, the Public Service Commission of
Maryland (PSC) approved an $8.9 million rate increase for WG based on a
9.5% return on equity, which represented 31.4% of the revised requested
amount for rates effective going forward.
MD STRIDE: In July, the PSC of MD approved WG's request to expand its
existing $200 million, five-year accelerated pipe replacement program by
an additional $31 million over the remaining four years through 2018.
The approval specified that only transmission-related accelerated pipe
replacements in MD would be eligible for recovery under the IRM. WG
subsequently filed an appeal addressing accelerated pipe replacements
outside of MD which is currently pending. In December 2014 the PSC of MD
approved WG's 2015 Strategic Infrastructure Development and Enhancement
(STRIDE) program, totaling approximately $37 million in capex and an
associated IRM to collect an estimated $3.8 million of revenue in 2015.
DC GRC Filing Expected: As part of WG's settlement agreement with the
PSC of DC, the utility agreed to file its next rate case in 2016.
Previously, in May 2013, the Public Service Commission of DC (PSC of DC)
approved an $8.4 million rate increase for WG, predicated on a 9.25%
ROE, which represented 29% of the requested amount, for rates effective
June 4, 2013. WG plans to spend roughly $22 million per annum over the
next five years through 2019 related to its accelerated pipe replacement
program and the PSC of DC) granted final approval of WG's new IRM in
January. The IRM will allow for the timely recovery of costs and is a
credit positive.
VA GRC Settled: On July 2, 2012, the Virginia State Corporate Commission
(SCC of VA) approved a $20 million rate increase for WG, which
represented 70.2% of the requested amount, based on a 9.75% ROE. In June
the SCC of VA authorized WG to expand its existing $191 million
five-year pipe replacement program by an additional $66 million over the
remaining three years. Costs associated with this accelerated
infrastructure replacement program are recovered through an IRM that is
subject to commission approvals and annual true-ups.
VA Gas Reserves in Rate Base: WG entered into a 20-year agreement with
Energy Corporation of America (ECA) in May to acquire non-operating
working interests in 25 producing wells located in PA's Appalachian
Basin for $126 million and subsequently filed with the SSC of VA to
include the gas reserves in the rate base. The purchase agreement is
conditional upon commission approval and a final decision is expected by
November 8. The approval of gas reserves in the rate base would be a
constructive development and provide for a timely return on invested
capital.
New Midstream Investments
Constitution Pipeline: In May 2013, WGL Midstream entered into $79
million equity investment in the Constitution Pipeline Company, LLC for
a 10% share in a proposed 121-mile long pipeline. The pipeline project
is designed to transport at least 650,000 dekatherms of natural gas per
day from the Marcellus region in northern Pennsylvania to major
northeastern markets and is expected to enter service in the second half
of 2016. WGL Midstream joins Williams Partners L.P.'s ('BBB'/Negative
Rating Watch; 41% share), Cabot Oil and Gas Corporation (25% share) and
Piedmont Natural Gas (24% share) in the project. As of June 30, WGL
invested approximately $26 million in the constitution pipeline.
Central Penn Line Pipeline: In February 2014, WGL Midstream formed Meade
LLC with COG Holdings LLC, Vega Midstream MPC LLC, and River Road
Interests LLC to partner with Transcontinental Gas Pipeline Company, LLC
(Transco; 'BBB+'/Negative Rating Watch) to invest in the Central Penn
Pipeline. The 177-mile Central Penn Pipeline, as part of Transco's
Atlantic Sunrise project, is designed to transport up to approximately
1.7 million dekatherms per day of natural gas from Susquehanna County,
PA to a delivery point into Transco's mainline in southeast PA. The
Central Penn Line currently has a projected in-service date in 4Q17. WGL
Midstream plans to invest an estimated $412 million for a 55% interest
in Meade and Meade will invest an estimated $746 million for an
approximate 39% interest in the Central Penn Line. As of June 30, WGL
invested $22 million in the Central Penn Line pipeline.
WGL Midstream becomes supplier to Cove Point: WGL Midstream entered into
a 20 year gas sale and purchase and capacity agreement with GAIL Global
LNG LLC, a subsidiary of GAIL Limited (GAIL), to be their sole provider
of natural gas to the Cove Point LNG facility for export to the growing
Indian market. Under the agreement, WGL has agreed to sell up to 430,000
Dth/day of natural gas at Henry Hub linked prices commencing on the
in-service date of the Cove Point LNG export facility in June of 2017.
The majority of natural gas would be purchased at Henry Hub linked
prices through an existing arrangement with Antero Resources Corporation
(Antero), helping to mitigate pricing risk. Additionally, WGL Midstream
has the option invest $100 million to $150 million to acquire a 30%
ownership interest in a 70-mile extension of an existing gathering
pipeline system to support deliveries serving the Mid-Atlantic market.
The gathering system is expected to enter service in late 2015 or early
2016.
Mountain Valley Pipeline: In March 2015, WGL Midstream acquired a 7%
equity interest in the proposed Mountain Valley Pipeline Project for a
projected investment between $230 million and $245 million dollars. The
pipeline is expected to cost up to $3.5 billion and as of June 30, WGL
invested $6 million dollars. The proposed pipeline will transport
approximately 2.0 million dekatherms of natural gas per day from the
Marcellus basin to the Mid-Atlantic market. Mountain Valley has a
projected in service date in December 2018.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
--GRC Filing at PSC of DC in 2016.
--Utility rate base CAGR of 11% through 2019.
--Capex totalling $3 billion through 2019.
--Maturities of $20 million in 2015, $25 million in 2016, none in 2017
and 2018, and $50 million in 2019.
RATING SENSITIVITIES
What Could Lead to a Credit Rating Upgrade?
--No positive rating actions are anticipated in the near term.
What Could Lead to a Credit Rating Downgrade?
--WGL: A marked increase in the risk profile of its retail marketing
operations could lead to negative rating actions. Sustained debt to
EBITDAR leverage metrics above 3.65x and/or FFO fixed charge coverage
below 5.0x over the forecast period could cause negative rating actions.
--WG: A greater than expected increase in leverage to fund the large
capex program coupled with adverse regulatory outcomes which limits WG's
ability to earn an adequate return on invested capital. Sustained
EBITDAR leverage above 3.25x and/or FFO fixed charge coverage below 5.0x
could trigger a downgrade.
--A downgrade at WGL could trigger other negative rating actions.
LIQUIDITY
Sufficient Liquidity: As of June 30, 2015, WGL had total consolidated
available liquidity of $710 million under their credit agreements
including $66 million of cash and cash equivalents. WGL and WG can
upsize their $450 million and $350 million senior unsecured credit
facilities, which mature in December 2019, to $550 million and $450
million, respectively, with consent of the lenders. The credit
facilities backstop the companies' commercial paper programs and contain
a maximum debt-to-capital covenant of 65%. As of June 30, there were no
direct borrowings under the facilities and WGL had $156 million of
commercial paper outstanding.
Manageable Debt Maturities: Long-term debt maturities over the next five
years are modest and as follows: $20 million in 2015, $25 million in
2016, none in 2017 and 2018, and $50 million in 2019.
FULL LIST OF RATING ACTIONS
WGL Holdings, Inc.
--Long-term IDR affirmed at 'A';
--Senior unsecured debt affirmed at 'A';
--Short-term IDR affirmed at 'F1';
--Commercial paper affirmed at 'F1'.
Washington Gas Light
--Long-term IDR affirmed at 'A+';
--Senior unsecured notes affirmed at 'AA-';
--Preferred stock affirmed at 'A';
--Short-term IDR affirmed at 'F1';
--Commercial paper affirmed at 'F1'.
Additional information is available on 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
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992379
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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