Fitch Affirms AGL & Subsidiaries' Ratings
KEY RATING DRIVERS
AGL:
--Merger concessions are not material;
--Utility and pipeline earnings will drive performance;
--Credit metrics are expected to weaken temporarily.
AGLC:
--Strong corporate parent linkage;
--Supportive regulatory regime.
Nicor Gas:
--Stable utility operations;
--Strong financial profile.
AGL
Outlook Stable; Rating Watch Resolved
AGL's ratings and Stable Rating Outlook reflect its relatively stable gas distribution earnings and cash flows, large capex program and generally constructive regulations across its seven state service territory.
The ratings also consider recent merger-related events, the one-notch downgrade of Southern Company (SO; LT IDR 'A-'/Outlook Stable) and AGL's anticipated positioning within the Southern Company's corporate family.
The proposed merger has received all regulatory approvals except from New Jersey and Illinois, and is expected to close in the second half of 2016. The merger approvals and settlements do not impose material restrictions on AGL's operating subsidiaries that would meaningfully affect AGL's long-term credit profile, in Fitch's view.
Stable Utility and Pipeline Earnings Will Drive Performance
Management is focused on its core utility and utility-like businesses and has set a target that nearly 80% of EBIT will come from its regulated utilities and contracted pipeline businesses by 2019. The remainder of consolidated EBIT would be contributed by the company's retail and wholesale segments. Stable earnings from gas distribution utilities are supported by supportive regulatory tariffs, including weather normalization or revenue decoupling, commodity cost pass-through mechanisms, and infrastructure program pre-approval and rider recovery. These mechanisms mitigate regulatory lag and provide a reasonable opportunity for AGL'S utilities to earn their authorized returns, in Fitch's opinion. In addition, AGL's three pipeline projects are over 90% contracted mostly with investment-grade regulated utility off-takers and expected balanced financing. These pipelines are expected to come online in 2017 and 2018.
Credit Metrics Expected to Weaken Temporarily
Elevated capex programs could pressure AGL's credit metrics temporarily. AGL expects to spend nearly $1.2 billion capital expenditures on average annually in the next several years, compared to an average of $770 million annually from 2012 - 2014. Approximately 60% of AGL capex is subject to recovery through riders or new business programs which are subject to minimal regulatory lag. In the next five years, Fitch estimates an average funds from operations (FFO) fixed-charge coverage ratio of approximately 5.3x. Debt/operating EBITDAR is expected to rise to the low 4x during 2016 - 2018 and then decline to high 3x in 2019 - 2020.
Atlanta Gas Light Company
Strong Parent Rating Linkage
AGLC's IDR mirrors AGL's primarily due to their close linkage. AGLC relies on AGL for access to capital and liquidity. AGLC and other subsidiaries, except for Nicor, participate in a corporate money pool for short-term borrowing needs. Intercompany loans represent approximately 83% of AGLC's total long-term debt in 2015. AGLC has approximately $182 million of medium-term notes outstanding, which are expected to be refinanced at the parent over time. Georgia regulation does not limit AGLC's ability to upstream dividends to AGL.
Supportive Regulations
AGLC operates under volume-insensitive straight fixed-variable rates. Changes in customer usage due to weather and improvements in equipment efficiencies have relatively small financial impact. The utility also benefits from other constructive regulations, including pre-approval and rider recovery for infrastructure investments.
Nicor Gas
Stable Utility Operations
Nicor Gas' utility operations are supported by a large and mostly residential customer base, a monthly purchased gas adjustment (PGA) mechanism, bad debt rider, infrastructure improvement rider, a diverse source of gas supply and 150 billions of cubic feet (Bcf) of gas storage. While Nicor's rates are not fully decoupled, its last rate order authorized the recovery of ~70% of fixed costs in the fixed-customer charge, up from 60% in previous rates. As Nicor's earnings are not insulated from weather impact, the company has used weather derivatives to partially offset lower operating margin from warmer than normal weather while retaining the upside should the weather become colder than normal.
Credit Metrics Declining but Remain Strong
Fitch expects Nicor's financial profile to weaken modestly due to its elevated capex program, but to remain strong for its rating category. FFO fixed-charge coverage is projected to average approximately 10x from 2016 to 2020. Debt/operating EBITDAR is projected to average approximately 2.9x for the same period.
Independent Capital Access
The notching difference between Nicor Gas and AGL reflects the limited parent subsidiary linkages between them. Nicor Gas maintains capital market access independent of AGL and has its own commercial paper program and credit facility. Nicor is prohibited by the Illinois Commission from lending money to affiliates. However, it is permitted to receive cash advances from AGL. The balance of the advances may not exceed the balance of funds available under the existing credit agreements or commercial paper facilities with unaffiliated third parties. Nicor's upstream dividend is limited to the extent of the retained earnings balance.
KEY ASSUMPTIONS
--Capex spending at the distribution utilities will average $990 million from 2016 - 2020 and peak in 2016 - 2017;
--Non-utility capex averages approximately $190 million per year from 2016 - 2020 and peak in 2017 - 2018;
--Dalton becomes operational in mid-2017; PennEast and Atlantic Coast become operational in late 2018;
--Dividend $270 million on average per year.
RATING SENSITIVITIES
AGL
Future developments, individually or collectively, that could lead to a future upgrade include:
--A material reduction in leverage and/or improvement in operating risk profile;
--Adjusted debt-to-operating EBITDAR below 3.5x and/or FFO fixed charge cover below above 5x on a sustained basis.
Future developments, individually or collectively, that could lead to a future downgrade include:
--Material debt funded expansion or shift towards risky uncontracted non-utility businesses;
--Negative developments in the regulatory supportiveness in which AGL's utilities operate;
--Adjusted debt-to-operating EBITDAR above 4.75x and/or FFO fixed charge cover below 4x on a sustained basis.
AGLC
Future developments, individually or collectively, that could lead to a future upgrade include:
--With close linkage to its parent, primary triggers would be any positive changes in the ratings of AGL.
Future developments, individually or collectively, that could lead to a rating downgrade include:
--Negative developments in Georgia's regulatory supportiveness;
--With close linkage to its parent, primary triggers would be any negative changes in the ratings of AGL.
Nicor Gas
Future developments, individually or collectively, that could lead to a future upgrade include:
--Positive ratings action is unlikely absent a rating upgrade at AGL.
Future developments, individually or collectively, that could lead to a rating downgrade include:
--Adverse change in the Illinois regulatory environment;
--Adjusted debt-to-operating EBITDAR above 3.75x and/or FFO fixed charge coverage below 4.5x on a sustained basis.
Fitch affirms the following ratings:
AGL Resources Inc.
--IDR at 'BBB+'.
AGL Capital Corp. (guaranteed by AGL)
--Senior unsecured notes at 'BBB+';
--Commercial paper at 'F2'.
Atlanta Gas Light Company
--IDR at 'BBB+';
--Senior unsecured medium-term notes at 'A-'.
Nicor Gas
--IDR at 'A';
--Senior unsecured notes at 'A+';
--First mortgage bonds at 'AA-';
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.
The Rating Outlook is Stable.
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