The affirmation reflects the lower risk nature of MGC's regulated utility business offset by normal seasonal as well as weather related gas delivery volume volatility that adds a sizable and somewhat unpredictable measure to MGC's financial results. Driven by a relatively cold 2013/2014 winter heating season, MGC reported strong earnings in its key first quarter ended
KEY RATING DRIVERS
--Substantially Improved Financial Profile;
--Elevated Capex Spending;
--2015 GRC Outcome;
Strong First Quarter 2014 Earnings
MGC reported substantially higher earnings in the first quarter of 2014 as colder than average weather conditions drove higher volumes of natural gas sales. EBITDA, driven principally by higher natural gas sales, grew 14% to approximately
For the latest 12 months (LTM) period ended
Assuming normal weather conditions, Fitch expects coverage measures such as EBITDAR-to-interest to be pressured in 2015 and 2016 falling to approximately 3.6x over that time period in part reflecting higher interest expense for working capital needs.
Funds from operations (FFO) fixed charge coverage at 4.3x in 2013 is expected to remain strong into 2014. Fitch models produce FFO fixed charge coverage at 4.1x in 2014 and then weakening in 2015 and 2016 to approximately 3.0x.
Elevated Capital Investments
MGC's capex spending increased substantially 2013 with further growth expected. From 2010 to 2012, capex averaged
2015 General Rate Case
Fitch expects MGC to file a new GRC in 2015 with 2014 as its historical test year. Fitch expects MGC to seek recovery riders for pipe replacement that is more typical of the gas industry. MGC had a constructive outcome of the last GRC. The Public Service Commission of
MGC's assumed responsibility for its seasonal gas supply needs following the expiration of the Asset Management Agreement with Sequent (a subsidiary of AGL Resources) in 2013. The arrangement with Sequent relieved MGC of most of its working capital requirements related to gas inventory and supply. Despite a cold winter with requiring higher gas volumes as well as higher gas prices, MGC managed its greater liquidity needs through its committed
The bank facility matures in 2014 and MGC is currently seeking a new and larger facility which Fitch expects to be obtained on similar or better terms. MGC's next long-term debt maturity is in 2017.
MGC is jointly owned by managing partner
--A Positive rating action is not likely over the next two years ahead of the outcome of the 2015 GRC. Fitch would view recovery riders for pipe replacement and weather normalization clauses or other riders that permit timely expense recovery and add stability to earnings and cash flows favorably.
Future developments that may, individually or collectively, lead to negative rating action include:
--An inability to earn an adequate and timely return on invested capital.
--Deterioration in operating performance from unfavorable regulatory outcomes or inability to recover in a timely manner higher operating or capital expenditures.
--Increase in leverage or distributions to owners.
--Failure to maintain on a sustained basis an FFO fixed charge coverage ratio of 3.5x.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology - Including Short-Term ratings and Parent and Subsidiary Linkage',
--'Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)',
--'Recovery Ratings and Notching Criteria For Utilities',
--'2014 Outlook: Utilities, Power, and Gas,'
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
Recovery Ratings and Notching Criteria for Utilities
2014 Outlook: Utilities, Power, and Gas (Electricity Sales Unplugged)
Source: Fitch Ratings
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