Fitch Rates Washington Gas Light's $250MM Unsecured MTNs 'AA-'; Outlook Stable
WG's Stable Outlook reflects strong credit quality measures that are expected to remain commensurate with the current rating level over the next several years and the predictable cash flows of WG's regulated utility operations. Fitch notes that purchased gas cost recovery mechanisms in all of the company's service territories serve to limit cash flow volatility.
KEY RATING DRIVERS
Strong Credit Profile: Fitch expects WG's credit profile to remain consistent with its rating level over the next few years, despite a large capex program that is expected to modestly pressure leverage. Fitch estimates debt/EBITDAR to be approximately 3.0x through 2019, while funds from operations (FFO) fixed-charge coverage is projected to remain above 5.0x through the forecast period.
IRMs Adopted in All Jurisdictions: The adoption of infrastructure recovery mechanisms (IRM) in Maryland, Virginia and Washington, D. C. is a constructive development and will allow for timely returns on capex and earnings growth between general rate case (GRC) proceedings.
Revenue Decoupling: In Maryland, a full revenue decoupling mechanism eliminates sales volume volatility due to weather and customer conservation. Similarly, in Virginia, a decoupling and weather normalization mechanism allows WG to recover costs related to customer conservation, energy efficiency and extreme weather. In the District of Columbia, WG's request for a full revenue decoupling mechanism is currently pending.
Modest Customer Growth: WG operates in an attractive service territory in the metropolitan Washington, D. C. 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.
D. C. 2016 GRC Filed: WG filed its 2016 general rate case (GRC) with the District of Columbia Public Service Commission in February 2016 and is currently requesting a rate increase of $17.3 million predicated on a 10.25% return on earnings (ROE). The requested revenue increase includes $4.5 million associated with its natural gas pipeline replacement program that was previously approved by the commission. Notably, WG has applied for a full revenue decoupling mechanism, which would be a credit positive if approved. If the full rate increase is authorized, a typical customer's monthly bill is expected to increase approximately 9.6%. Fitch expects a final decision by March 2017.
VA 2016 GRC Filed: WG filed its 2016 GRC with the Virginia State Corporation Commission in June 2016 and is requesting a rate increase of $45.6 million predicated on a 10.25% ROE. The requested revenue increase includes $22.3 million associated with its natural gas pipeline replacement program that was previously approved by the commission. If the full rate increase is authorized a typical customer's monthly bill is expected to increase modestly by approximately 4.6%. WG plans to implement interim rates in December 2016, subject to refund by the commission, and Fitch expects a final decision in July 2017.
Large Capex Program: WG expects to spend $1.5 billion on capex in 2016-2019, levels roughly 48% higher than the previous four-year period, which is expected to modestly pressure leverage metrics. Capex will be focused on accelerated pipe replacements, system rehabilitation, and maintenance. Accelerated pipe replacement investments average one-third of annual capex through 2019 with timely recovery expected through WG's IRMs. Fitch projects WG will be moderately free cash flow negative net of dividends in 2016-2019.
Fitch's key assumptions within the rating case for WG includes:
--Utility rate base CAGR of 10% through 2019;
--Capex totalling $1.5 billion through 2019;
--Maturities of $25 million in 2016, none in 2017 and 2018, and $50 million in 2019.
Positive Rating Action: Given the company's very strong rating, no positive rating actions are anticipated in the near term.
Negative Rating Action: A greater-than-expected increase in leverage, adverse regulatory outcomes or other factors leading to an increase in debt/EBITDAR above 3.25x on a sustained basis could trigger a credit rating downgrade. In addition, a downgrade at corporate parent WGL Holdings, Inc. ('A'/Stable Outlook) could trigger a negative rating action.
WG maintains sufficient liquidity with $201 million of available liquidity at June 30, including $200 million of availability under its revolving credit agreement and $1 million of cash and cash equivalents. WG can increase its $350 million senior unsecured credit facility, which matures in December 2019, to $450 million with consent of the lenders. The credit facility backstops the company's commercial paper program and contains a maximum debt/capital covenant of 65%. As of June 30, 2016, there were no direct borrowings under the credit facility, and WG was in compliance with all financial covenants under the credit agreement.
Manageable Debt Maturities: Long-term debt maturities over the next four years are modest and as follows: $25 million in 2016, none in 2017 and 2018, and $50 million in 2019.