News Column

Fitch Affirms The Laclede Group, Inc. & Laclede Gas Co. at 'BBB+'; Assigns Stable Outlook

August 8, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the Issuer Default Ratings (IDR) of the Laclede Group, Inc. (LG) at 'BBB+'. With this rating action Fitch has removed LG from Rating Watch Negative where it was placed on April 7, 2014 and assigned a Stable Outlook. Fitch has also affirmed the 'BBB+' IDR of Laclede Gas Company (LGC) with a Stable Outlook.

LG is moving forward on its previously announced acquisition of Alabama Gas Corp. (AGC) from Energen Corp with a targeted closing on Aug 31, 2014. The affirmations reflect LG's improved business risk profile as a result of the AGC acquisition, modestly lower debt used in acquisition financing than Fitch's prior assumptions and expectation for future deleveraging at the parent that will improve consolidated credit metrics toward the end of the forecast period.

In April LG announced the acquisition of AGC for $1.6 billion from Energen Corp., including the assumption of approximately $250 million of unsecured debt. LG has completed the equity component of the acquisition financing by issuing 10 million shares of its common stock in June, generating net proceeds of $479 million. Concurrently, LG also issued $144 million of equity units. Each equity unit consists of a 2.00% junior subordinated note due 2022 and a forward equity purchase contract obligating the holder to purchase common stock on April 1, 2017. Under Fitch's criteria, the junior subordinated notes will receive no equity credit; however, the $144 million of additional equity is captured in Fitch's forecast period. LG is currently finalizing the terms of its permanent debt acquisition financing and plans to issue $625 million of new unsecured debt, and the acquisition financing including the equity issuance will have been completed at more favorable terms than Fitch originally modeled. Fitch expects that the debt component of the permanent financing will be funded at the parent. Post-merger, AGC will become a subsidiary of LG.

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 Alabama; its service territory includes the cities of Birmingham and Montgomery, and it services approximately 422,400 customers. The AGC acquisition increases LG's customer base by roughly 37% to approximately 1.6 million. AGC will comprise 33% of consolidated EBITDA and regulated operations will comprise more than 95% of consolidated earnings. Fitch has a constructive view of the regulatory environment in Alabama because of the higher than average authorized returns on equity (ROEs) and notes that AGC has the ability to self-implement rates once a year, if needed.

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 March 31, 2014, both LG and LGC exhibited balanced capitalization structures with debt-to-capitalization ratios of 44% and 47%, respectively. Post-merger, Fitch expects the consolidated debt-to-capitalization ratio to approximate 57%. Due to anticipated deleveraging activities at the parent, LG's long-term debt-to-capitalization ratio is expected to return to the pre-AGC acquisition levels by 2019.

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 $260 million.

Acquisitive Growth Strategy: The acquisition of AGC comes on the heels of a recently completed transaction. LG recently closed on its acquisition of Missouri Gas Energy (MGE) from Southern Union Company for $975 million. Two back-to-back acquisitions reflect the aggressive growth strategy being pursued by management. It also exposes the company to the pitfalls of integrating two distinct entities in quick succession. Fitch also notes that the acquisition price for AGC reflects a roughly 11.4x 2013 EBITDAR multiple, which is higher than other recent comparable transactions.

Constructive Regulation in Alabama: Since 1983, AGC has been operating under the Rate Stabilization and Equalization (RSE) regulatory framework and is regulated by the Alabama Public Service Commission (APSC). The current RSE framework will continue through Dec. 31, 2018, unless, after notification and a hearing the APSC votes to modify or continue the RSE methodology. Under the RSE, AGC is authorized to earn an ROE between 10.5%-10.95%, with a midpoint of 10.8% based on an equity-to-total capitalization ratio of 56.5%. The authorized ROE and equity component compare favorably to industry averages. Notably, AGC can self-implement rates once a year, effective Dec. 1, subject to a 4% cap on prior revenues. Reductions in rates can be made quarterly, however, to keep AGC within the targeted ROE.

GRC Moratorium at LGC: Per the terms of the MGE merger approval, LGC had agreed to a general rate case (GRC) moratorium through Oct. 1, 2015. The approved stipulation further requires that the first GRC filed after Oct. 1, 2015 will include both LGC and MGE.

RATING SENSITIVITIES

LG

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.

LGC

What could lead to a ratings upgrade or a Positive Outlook:

--Sustained Debt-to-EBITDAR metrics under 3.25x could cause positive rating actions

What could lead to a ratings downgrade or a Negative Outlook:

--An unexpected change in Missouri regulation that prevents LGC from earning an adequate and timely return on invested capital could cause negative rating actions.

Fitch affirms the following ratings:

LG

--IDR at 'BBB+';

LGC

--IDR at 'BBB+';

--First mortgage bonds at 'A';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Both Rating Outlooks are Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating U.S. Utilities, Power and Gas Companies', March 7, 2014;

--'Corporate Rating Methodology', May 28, 2014;

--'Parent and Subsidiary Rating Linkage', Aug. 5, 2013.

Applicable Criteria and Related Research:

Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=847836

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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.



Fitch Ratings

Primary Analyst

Daniel Neama, +1 212-908-0561

Associate Director

Fitch Ratings, Inc.

33 Whitehall St.

New York, NY 10004

or

Secondary Analyst

Roshan D. Bains, +1 212-908-0211

Director

or

Committee Chairperson

Shalini Mahajan, +1 212-908-0351

Group Head and Senior Director

or

Media Relations:

Brian Bertsch, +1 212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Business Wire


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters