LG is moving forward on its previously announced acquisition of
In April LG announced the acquisition of AGC for
KEY RATING DRIVERS
--Improved business risk profile as a result of the AGC acquisition;
--Expectation for future deleveraging at the parent;
--Stable earnings and cash flows from regulated utilities;
--Balanced mix of acquisition financing;
--Acquisitive growth strategy.
Improved Business Risk Profile: The acquisition of AGC improves the overall risk profile of LG. AGC has a strong standalone credit profile. AGC is the largest natural gas distribution company in
Leverage Pressures Credit Metrics; Deleveraging Expected: Fitch expects the increased leverage at the parent to pressure credit metrics after transaction close. Acquisition Debt-to-EBITDAR is roughly 7x, which includes existing debt at AGC. Fitch estimates consolidated pro forma leverage will approximate 5.0x. Going forward, Fitch expects deleveraging at the parent over the forecast period will result in consolidated leverage under 4.0x by 2019. Post-merger, Fitch expects LG's consolidated EBITDAR-to-interest coverage to be approximately 6.0x through 2019. For the LTM period ending
Modestly FCF Positive: Fitch projects LG to be modestly free cash flow (FCF) positive over the forecast period primarily due to the benefits of the tax basis step-up accounting treatment, which allows LG to treat the AGC acquisition as an asset purchase for income tax purposes, resulting in a tax benefit with a projected net present value of
Acquisitive Growth Strategy: LG closed on its acquisition of
Constructive Regulation in
GRC Moratorium at LGC: Per the terms of the MGE merger approval, LGC had agreed to a general rate case (GRC) moratorium through
What could lead to a ratings upgrade or a Positive Outlook:
--As a result of increased leverage from the AGC acquisition and given management's acquisitive strategy to pursue growth, no positive rating actions are expected at this time.
What could lead to a ratings downgrade or a Negative Outlook:
--An unexpected leveraged acquisition funded at the parent or a substantive change in anticipated deleveraging over the forecast period could cause negative rating actions.
--Sustained Debt-to -EBITDAR metrics over 4.5x throughout the forecast period could cause negative rating actions.
Additional information is available at 'www.fitchratings.com'.
--'Rating U.S. Utilities, Power and Gas Companies' (
--'Corporate Rating Methodology' (
--'Parent and Subsidiary Rating Linkage' (
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities within a Corporate Group Structure
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
Group Head and Senior Director
Source: Fitch Ratings
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