Fitch Ratings has affirmed the ‘BBB-‘ long-term Issuer Default Rating (IDR) on Black Hills Corporation (BKH) and the ‘BBB’ long-term IDR on BKH’s electric utility subsidiary Black Hills Power, Inc. (BHP).
The short-term IDR of BHP was lowered to ‘F3’ from ‘F2’, reflecting alignment with the short-term rating of its parent. A full list of rating actions is shown at the end of this release.
The Rating Outlook for both issuers is Stable. These rating actions affect approximately $1.5 billion of debt.
Key Rating Factors:
–Relatively weak, but improving, consolidated financial profile;
–A reduction of risk from the nonregulated operations;
–A moderately-sized capex plan that will increase company-owned generation;
–Stable cash flows provided by the regulated utilities;
–Strong and stable credit profile at BHP.
Relatively Weak Consolidated Financial Metrics:
BKH’s consolidated financial metrics are relatively weak, suffering from multiple problems at the nonregulated operations, including an unprofitable coal contract and losses at Enserco’s marketing operations. For fiscal 2011, funds from operations (FFO) to debt was less than 16%, and debt to EBITDA was greater than 5 times (x). Interest coverage metrics were also weak; BKH suffers from an expensive debt structure from its 2008 acquisition of various Aquila assets.
Nonregulated Risk Reduction:
The expiration of the coal contract at the end of 2011 and the sale of Enserco’s energy marketing business at the end of February removed two recent burdens from the financial profile. The Enserco sale also eliminates a primary concern on the nonregulated side and allows management to focus more on minimizing risk at the other operations.
Improving Financial Profile:
In addition, Fitch expects improved consolidated financial performance this year driven by BKH’s new generation facilities near Pueblo, Colorado. Representing an investment of approximately $500 million, these natural gas-fired plants commenced operations at the beginning of the year and should provide a significant boost to cash flow. BKH reported first quarter 2012 (1Q’12) net earnings improved approximately 11% over 1Q’11 despite the headwinds from a warm winter largely reflecting the earnings from these assets.
This project resulted in BKH’s Colorado Electric utility division adding 180 megawatts (MW) of generation to rate base effective Jan. 1, 2012. In addition, BKH’s Black Hills Colorado Independent Power Production subsidiary began selling output from its new 200 MW generation facility to Colorado Electric under a 20-year power purchase agreement.
Fitch expects EBITDA to interest to improve to approximately 3.8x in 2012 and 2013 from 2.8x in 2011. Similarly, over this same time period Fitch expects debt to EBITDA to improve a full-turn to approximately 4x.
Stable Regulated Operations:
BKH benefits from stable cash flows at the regulated utilities. BHP and BKH’s other utilities operate in generally constructive regulatory environments. Cost recovery mechanisms for fuel, purchased power, transmission, and energy efficiency, among others, help stabilize cash flows and smooth out customer rate increases over time.
Fitch considers BKH’s liquidity position to be adequate. The company recently entered into a five-year, $500 million revolving credit facility that matures on Feb. 1, 2017. There was $384 million of available capacity at March 31, 2012, which should be sufficient to fund BKH’s working capital and other short-term funding needs. An accordion feature allows BKH to increase the facility to $750 million, pending consent of the facility’s administrative agent.
Rating Notching Between BHP and BKH:
BHP’s IDR is one notch higher than that of BKH, reflecting less leverage and a pure utility model. BHP’s ratings are consistent with its standalone credit profile. BKH’s nonregulated operations are considered riskier than the utility businesses and therefore result in lower credit quality at the consolidated entity.
Fitch has affirmed the following ratings with a Stable Outlook:
–Long-term IDR at ‘BBB-‘;
–Short-term IDR at ‘F3’;
–Senior unsecured debt at ‘BBB-‘.
–Long-term IDR at ‘BBB’;
–Senior secured debt at ‘A-‘.
Fitch has downgraded the following rating:
–Short-term IDR to ‘F3’ from ‘F2’.