NEW YORK--(BUSINESS WIRE)--
Fitch Ratings has upgraded the Issuer Default Rating (IDR) of Mountaineer Gas Company (MGC) to 'BB+' from 'BB' and senior unsecured debt to 'BBB-' from 'BB+' . The Rating Outlook is Stable. Approximately $90 million of long-term debt is affected by this rating action.
The upgrade reflects the realization of substantial improvement in MGC's financial results driven by a relatively average 2012/2013 winter heating season. Fitch expects further progress in 2013 as MGC will benefit from a full year of higher rates that became effective Nov. 1, 2012 following the outcome of the 2011 General Rate Case (GRC). Fitch had expected MGC to realize this improvement last year, but the 2011/2012 winter heating season was one of the warmest on record, which impeded earnings.
KEY RATING DRIVERS
--Substantially improved financial profile;
--Constructive outcome to the 2011 GRC;
--Low risk, regulated utility;
Strong First Quarter 2013 Earnings
MGC reported substantially higher earnings in the 2013 first quarter as average weather conditions drove higher volumes of natural gas sales. EBITDA, driven principally by higher natural gas sales, grew over 50% to approximately $24 million from the prior year period. MGC typically earns approximately 70% of EBITDA in the March Quarter, providing the foundation for a strong performance in 2013.
For the LTM period ended March 31, 2013, EBITDA to Interest improved to 4.3x from 2.6x in the like 2012 period, while Funds From Operations (FFO) to Interest improved to 4.9x from 3.6x over the same period. Fitch expects calendar year 2013 coverage metrics to widen slightly reflecting a full year of higher rates from the 2011 GRC which became effective Nov. 1, 2012.
Leverage measures are strong. FFO to Debt is expected to remain above 25% and Debt to EBITDA is expected to remain relatively stable at 3.0x over the three year forecast period. All credit metrics compare favorably to peers and Fitch rating category guideline ratios.
MGC may experience modest margin pressure in 2014 and 2015 as operating expenses increase. Routine expense items including pensions and property taxes, are not on riders. Still, Fitch expects EBITDA to Interest to remain above 4x over the three year forecast period.
Constructive GRC Outcome
The Public Service Commission of West Virginia (PSCWV) approved a $6.265 million rate increase effective Nov. 1, 2012 representing approximately 60% of MGC's revised revenue request. The new rates are based on an authorized return on equity of 9.9%. The revenue increase is collected through higher monthly customer charges providing modestly greater stability to earnings and cash flows which are modestly less dependent on sales volumes and seasonal consumption patterns. In April 2013, the PSCWV authorized an additional $522 thousand annual revenue increase.
MGC's margins are largely volume based subjecting it to weather as well as customer conservation and efficiency. Also regulatory lag is a concern based on historic test years and the absence of riders or trackers for routine expense items.
MGC's seasonal gas supply needs, in recent years, were procured under an Asset Management Agreement with Sequent (a subsidiary of AGL Resources). Related financing and working capital requirements were minimized as MGC would only draw gas as needed. Going forward, MGC will manage its own gas inventories and supplies and working capital and short term borrowing needs will likely peak early in the 2013/2014 heating seasonal. MGC has ample capacity under its $70 million bank credit facility to manage its working capital needs through the peak heating season period. The facility matures in 2014. In 2012, MGC refinanced a $20 million debt maturity and the next debt maturity is in 2017.
--A Positive rating action is not likely over the next two years. Fitch would consider an upgrade based on earnings and cash flow stability if MGC's tariff structure permitted weather normalization or revenue decoupling.
Future developments that may, individually or collectively, lead to negative rating action include:
--An increase in leverage or distributions to owners
--Deterioration in operating performance from unfavorable regulatory outcomes or inability to recover in a timely manner higher operating or capital expenditures.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria For Utilities' (Nov. 12, 2012);
--'2013 Outlook: Utilities, Power, and Gas' (Dec. 7, 2012).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Utilities
2013 Outlook: Utilities, Power, and Gas
Corporate Rating Methodology
Glen Grabelsky, +1 212-908-0577
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Lindsay Minneman, +1 212-908-0592
Ralph Pellecchia, +1 212-908-0586
Brian Bertsch, +1 212-908-0549