Fitch Affirms Otter Tail Corp. and Otter Tail Power's IDRs; Outlook Stable
Due to the risks inherent in the diversified business portfolio, Fitch rates OTTR one notch below its regulated subsidiary OTP. OTTR's current IDR of 'BBB-' takes into consideration the company's business mix including a regulated electric utility and two relatively small manufacturing industrial business segments that operate in fragmented, competitive markets.
OTP is the main driver of consolidated earnings and cash flows and comprised 75% of consolidated EBITDAR for the LTM period ending March 31, 2016. Going forward the utility segment is expected to approximate roughly three-fourths of consolidated earnings with nonregulated businesses providing the remainder. The Stable Outlook reflects Fitch's expectations that utility earnings and cash flows will be supported by regulatory recovery mechanisms that afford timely recovery on investments during a period of high capital spending at OTP.
OTTR - KEY RATING DRIVERS
OTTR's ratings and Stable Outlook reflect the higher operating risk profile of its nonregulated business. Following divestiture of poorly performing businesses over the last couple of years, OTTR's nonregulated activities consist of two segments: manufacturing and plastics. OTTR's ratings consider the earnings volatility of its nonregulated businesses.
Parent-Subsidiary Linkage
Fitch's ratings of OTTR and OTP take into consideration some modest ring-fencing of the utility subsidiary from the parent and other affiliates, a factor that reduces but does not eliminate linkage between the ratings of OTTR and OTP. OTTR's 'BBB-' IDR is one-notch lower than OTP, it's core utility subsidiary, reflecting higher risk associated with OTTR's nonregulated operations and parent-only long-term debt of $103 million (approximately 25% of consolidated long term debt). Consequently, Fitch expects to maintain at least a one notch rating differential between OTTR and OTP.
Solid Credit Metrics
OTTR's EBITDAR-to-interest coverage approximated 5.0x for the LTM ended March 31, 2016 and Fitch projects EBITDAR-to-interest to approximate 5x through the 2016 to 2018 forecast period. Debt-to-EBITDAR leverage at OTTR approximated 3.6x for the LTM ending March 31, 2016. Going forward, Fitch expects leverage to remain under 3.8x through 2018. Fitch's projections assume OTTR will issue equity to support the utility's statutory capital structure and high capex program.
Challenges at Non-regulated Businesses
OTTR's non-regulated manufacturing and plastics businesses were subject to cyclical challenges through first quarter of 2016, particularly OTTR's metal fabrication company, BTD. LTM earnings at BTD improved modestly due to improved performance in Minnesota and Illinois operations. However, BTD was negatively impacted by soft demand from the agriculture, oil and gas, and recreational vehicle markets driven by continued weakness in commodity prices and lower scrap metal sale prices as compared to last year. Going forward, Fitch assumes a return to a normal commodity cycle environment and expects BTD to grow organically due to recent facilities expansion and the addition of paint services. However, Fitch expects the company may pursue small bolt-on acquisitions to improve growth.
BTD Completes Small Bolt-On Acquisition
BTD acquired Impulse Manufacturing for $30.5 million last year. Impulse is a small high-tech metal manufacturer located in Dawsonville, GA, and the purchase extends BTD's operations to the manufacturing-heavy Southeast to serve its growing customer base. The acquisition financing was obtained from OTTR's unsecured $150 million credit facility. The acquisition is key to BTD as Polaris Industries Inc., one of BTD's main customers, moved its operations to a new facility in Alabama. Polaris expects its main suppliers to be located within a 250-mile radius of the plant and the facility is expected to start shipping product in the third quarter 2016.
OTP - KEY RATING DRIVERS
Otter Tail Power's (OTP) Stable Outlook reflects the regulated nature of its electric utility operations across its three state jurisdictions in Minnesota, North Dakota, and South Dakota. OTP continues to perform strongly but faces pressures from a large capex program that will put modest pressure on credit metrics over the next four years.
Constructive Regulatory Environment
Fitch expects OTP's regulatory environment to remain constructive throughout the forecast period and notes that OTP's authorized return on equity (ROE) in its two largest jurisdictions, Minnesota and North Dakota, are above industry averages at 10.4% and 10.75%, respectively. The states accounted for 91% of 2015 electric retail sales.
New MN General Rate Case(GRC)
OTP filed its 2017 GRC with the Minnesota Public Utilities Commission (MPUC) in Feb. OTP is requesting an annual revenue increase of $19.3 million based on a 10.4% return on equity (ROE) and a 52.5% equity layer, predicated on a forward looking test year. The MPUC approved an interim rate increase of $16.8 million based on a 10.4% ROE in April and Fitch expects a final decision in the first quarter of 2017.
Solid Credit Metrics
Fitch expects OTP's large capex program to modestly pressure credit metrics through the forecast period. EBITDAR coverage is expected to average 5x and debt-to-EBITDAR leverage is expected to remain less than 4x through 2018, in line with the current rating category.
Timely Return on Investments
OTP benefits from tariff recovery mechanisms that provide for a timely return on investments and purchased power recovery across its three state jurisdictions. OTP has capex rider recovery mechanisms for new transmission, renewable and environmental compliance investments that provide for earnings and cash flow growth between general rate case (GRC) proceedings. Additionally, transmission projects are supported by construction work in progress (CWIP) accounting.
Large Capex Program
Fitch expects average rate base growth of 8% through 2020 driven by capital investments totaling $858 million, levels approximately 46% higher than the preceding five years. Notably, roughly two-thirds of capex is recoverable under rider mechanisms. Capex is focused on new transmission and renewable investments, and new gas generation associated with the planned retirement of the coal-fired Hoot Lake plant in 2020. Fitch expects OTP to remain free cash flow (FCF) negative through the forecast period, that future funding needs will be met by a balanced mix of debt and equity, and that OTTR will downstream additional equity as needed to support the balanced capital structure.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case includes:
--Assumes a 9.75% authorized ROE at OTP;
--Large capex program at OTP totalling $858 million through 2020;
--Anticipated equity infusions from OTTR to OTP to preserve balanced capital structure;
--Long-term debt maturities of $52 million at OTTR in 2016, $33 million at OTP in 2017 and $50 million at OTTR in 2018.
RATING SENSITIVITIES
Rating Sensitivities for OTTR
Positive: Future developments that may, individually or collectively, lead to a positive rating
Action include:
--An upgrade at OTP;
--Further downsizing of non-regulated businesses;
--Retirement of Parent Only Debt.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--A sustained downturn in the economically sensitive non-regulated businesses;
--An acquisition that is debt-financed or that materially heightens the business risk profile;
--Sustained debt-to-EBITDAR above 4.0x.
Rating Sensitivities for OTP:
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Better-than-expected regulatory outcomes in future GRC proceedings;
--Sustained debt-to-EBITDAR in the 3.5x-3.75x range;
--Successful execution and balanced funding of the large capital investment program.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
-Adverse future regulatory outcomes;
-Failure to maintain a balanced equity component in its capital structure;
-Sustained debt-to-EBITDAR leverage above 4.25x.
LIQUIDITY
OTTR has $277 million of consolidated liquidity available as of March 31, 2016. OTTR and OTP maintain liquidity though separate revolving credit facilities totalling $150 million and $170 million, respectively. The unsecured credit facilities mature on Oct. 28, 2020 and the companies may increase the size to $250 million with the consent of the lenders. The credit facilities contain a maximum debt-to-capitalization ratio covenant of 60%, and both OTTR and OTP were in compliance with debt-to-capitalization ratios of 49% and 48% as of March 31, 2016. Long-term debt maturities are manageable over the next three years and includes: $52 million at OTTR in 2016, $33 million at OTP in 2017 and $50 million at OTTR in 2018. Fitch expects the maturing debt to be refinanced on a timely basis.
FULL LIST OF RATING ACTIONS
Fitch affirms the following ratings:
Otter Tail Corporation (OTTR)
--Long-Term IDR at 'BBB-';
--Short-Term IDR at 'F3';
--Senior unsecured at 'BBB-'.
Otter Tail Power Company (OTP)
--Long-Term IDR at 'BBB';
--Short-Term IDR at 'F3';
--Senior unsecured at 'BBB+'.
Комментарии