Fitch Ratings has assigned an 'AA-' rating to Washington Gas Light Co.'s
(WG; Issuer Default Rating of 'A+') issuance of $250 million of 30-year
unsecured medium-term notes (MTNs), series K, due Sept. 15, 2046.
Proceeds will be used to pay down short-term borrowings and to prefund a
portion of planned capital expenditures. The Rating Outlook is Stable.
WG's Stable Outlook reflects strong credit quality measures that are
expected to remain commensurate with the current rating level over the
next several years and the predictable cash flows of WG's regulated
utility operations. Fitch notes that purchased gas cost recovery
mechanisms in all of the company's service territories serve to limit
cash flow volatility.
KEY RATING DRIVERS
Strong Credit Profile: Fitch expects WG's credit profile to remain
consistent with its rating level over the next few years, despite a
large capex program that is expected to modestly pressure leverage.
Fitch estimates debt/EBITDAR to be approximately 3.0x through 2019,
while funds from operations (FFO) fixed-charge coverage is projected to
remain above 5.0x through the forecast period.
IRMs Adopted in All Jurisdictions: The adoption of infrastructure
recovery mechanisms (IRM) in Maryland, Virginia and Washington, D.C. is
a constructive development and will allow for timely returns on capex
and earnings growth between general rate case (GRC) proceedings.
Revenue Decoupling: In Maryland, a full revenue decoupling mechanism
eliminates sales volume volatility due to weather and customer
conservation. Similarly, in Virginia, a decoupling and weather
normalization mechanism allows WG to recover costs related to customer
conservation, energy efficiency and extreme weather. In the District of
Columbia, WG's request for a full revenue decoupling mechanism is
currently pending.
Modest Customer Growth: WG operates in an attractive service territory
in the metropolitan Washington, D.C. area, one of the stronger
residential markets in the country, and forecasts modest annual customer
growth of 1% through 2016, increasing to 2% in 2017 through 2019.
D.C. 2016 GRC Filed: WG filed its 2016 general rate case (GRC) with the
District of Columbia Public Service Commission in February 2016 and is
currently requesting a rate increase of $17.3 million predicated on a
10.25% return on earnings (ROE). The requested revenue increase includes
$4.5 million associated with its natural gas pipeline replacement
program that was previously approved by the commission. Notably, WG has
applied for a full revenue decoupling mechanism, which would be a credit
positive if approved. If the full rate increase is authorized, a typical
customer's monthly bill is expected to increase approximately 9.6%.
Fitch expects a final decision by March 2017.
VA 2016 GRC Filed: WG filed its 2016 GRC with the Virginia State
Corporation Commission in June 2016 and is requesting a rate increase of
$45.6 million predicated on a 10.25% ROE. The requested revenue increase
includes $22.3 million associated with its natural gas pipeline
replacement program that was previously approved by the commission. If
the full rate increase is authorized a typical customer's monthly bill
is expected to increase modestly by approximately 4.6%. WG plans to
implement interim rates in December 2016, subject to refund by the
commission, and Fitch expects a final decision in July 2017.
Large Capex Program: WG expects to spend $1.5 billion on capex in
2016-2019, levels roughly 48% higher than the previous four-year period,
which is expected to modestly pressure leverage metrics. Capex will be
focused on accelerated pipe replacements, system rehabilitation, and
maintenance. Accelerated pipe replacement investments average one-third
of annual capex through 2019 with timely recovery expected through WG's
IRMs. Fitch projects WG will be moderately free cash flow negative net
of dividends in 2016-2019.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for WG includes:
--Utility rate base CAGR of 10% through 2019;
--Capex totalling $1.5 billion through 2019;
--Maturities of $25 million in 2016, none in 2017 and 2018, and $50
million in 2019.
RATING SENSITIVITIES
Positive Rating Action: Given the company's very strong rating, no
positive rating actions are anticipated in the near term.
Negative Rating Action: A greater-than-expected increase in leverage,
adverse regulatory outcomes or other factors leading to an increase in
debt/EBITDAR above 3.25x on a sustained basis could trigger a credit
rating downgrade. In addition, a downgrade at corporate parent WGL
Holdings, Inc. ('A'/Stable Outlook) could trigger a negative rating
action.
LIQUIDITY
WG maintains sufficient liquidity with $201 million of available
liquidity at June 30, including $200 million of availability under its
revolving credit agreement and $1 million of cash and cash equivalents.
WG can increase its $350 million senior unsecured credit facility, which
matures in December 2019, to $450 million with consent of the lenders.
The credit facility backstops the company's commercial paper program and
contains a maximum debt/capital covenant of 65%. As of June 30, 2016,
there were no direct borrowings under the credit facility, and WG was in
compliance with all financial covenants under the credit agreement.
Manageable Debt Maturities: Long-term debt maturities over the next four
years are modest and as follows: $25 million in 2016, none in 2017 and
2018, and $50 million in 2019.
Date of Relevant Rating Committee: Oct. 14, 2015.
Disclosure: There were no financial statement adjustments made that were
material to the rating rationale outlined above.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/site/re/869362
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011612
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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