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BKHU - Black Hills News Story

$63.72 -1.7  -2.6%

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Fitch Rates Black Hill Corp.'s Unsecured Notes 'BBB+'

Wed 10th August, 2016 5:20pm
(The following statement was released by the rating agency)

NEW YORK, August 10 (Fitch) Fitch Ratings has assigned a rating of 'BBB+' to 
Black Hills Corporation's (BKH) issuance of $700 million of senior unsecured 
notes. The debt issuance is to be comprised of two tranches: $400-$450 million 
of 10-year notes due 2027 and $250-$300 million of 30-year notes due 2046.

Proceeds from the issuance will be used to refinance long-term debt including 
the legacy debt of Black Hills Gas Holdings, LLC (BHGH; formerly SourceGas 
Holdings LLC). BKH acquired BHGH, the parent company of Black Hills Gas LLC 
(BHG; formerly SourceGas, LLC; 'BBB'/ Outlook Positive) for $1.89 billion in 
February. The Rating Outlook on BKH's Long-Term Issuer Default Rating (IDR) is 
Negative.

BKH's Negative Outlook primarily reflects the increased leverage associated with 
the BHGH acquisition. If BKH were successful in its plan to implement a cost of 
service gas program, Fitch could revise the company's Rating Outlook to Stable 
from Negative. Implementation of a cost of service gas program would improve 
BKH's business risk profile, mitigating downward rating pressure caused by the 
company's weaker pro forma credit metrics due to the BHGH acquisition.

Concurrent with today's announced debt issuance, BKH plans to retire the 
remaining $420 million of legacy BHGH notes composed of $95 million of secured 
notes due 2019 and $325 million of unsecured notes due 2017 and plans to give 
bondholders the required 10-day and 30-day advance notice, respectively. 

KEY RATING DRIVERS

Increased Leverage: BKH's leverage increased materially in the near term, as a 
result of the BHGH acquisition. Pro forma FFO adjusted leverage is approximately 
6.6x, pressuring credit metrics at the current rating level. Although BKH's 
financial metrics will remain weak as a result of increased leverage associated 
with the acquisition, Fitch expects consolidated FFO adjusted leverage to 
strengthen to 4.5x by 2018. Leverage is expected to benefit from a combination 
of EBITDA growth due to the timely recovery of utility investments under rate 
rider mechanisms, anticipated synergies, and debt reduction. BKH recently 
announced that it has sold a 49.9% member equity interest in a 200-MW natural 
gas-fired power plant from its independent power producer (IPP) portfolio for 
$216 million, with the proceeds used to reduce leverage.

Improved Business Risk Profile: The BHGH acquisition was positive for BKH's 
business risk profile, as it increased the regulated utility business mix to 
approximately 87% of consolidated EBITDA, from 80% previously. The acquisition 
also increased BKH's utility customer base by 55%, to more than 1.2 million, 
strengthening the company's existing footprint in Colorado, Nebraska, and 
Wyoming, while expanding its service territory into Arkansas. BKH's regulated 
electric and natural gas utility operations now span eight states, all of which 
allow for pass-through of commodity and/or purchased power costs, with several 
of the states allowing other riders or recovery mechanisms that enhance timely 
recovery of expenses and invested capital.

GRC Moratoriums: As a condition of receiving regulatory approvals for the BHGH 
acquisition, management agreed to general rate case (GRC) stay-out provisions in 
AR, CO, NE, and WY ranging from zero to three years, depending on the regulatory 
jurisdiction. The GRC moratorium allows for the realization of potential 
synergies over the next two years and does not preclude increases in the various 
rate recovery riders.

Cost of Service Gas Program: BKH recently withdrew its remaining cost of service 
gas program applications in WY, IA, KS, and SD following the recent denial of 
its application in NE and dismissal of its application in CO, with regulators 
citing concerns over a lack of detailed information about specific properties, 
reserves and costs. BKH plans to refile its cost of service gas program 
applications at a later date with additional details on specific gas reserve 
properties.

BKH's proposed cost of service gas program would materially lower the risk of 
BKH's natural gas exploration and production business while adding a degree of 
stability to the electric and gas utility subsidiaries' fuel costs. BKH's 
utility subsidiaries, including BHP, would procure up to 50% of their annual gas 
consumption through long-term contracts tied to the company's natural gas 
production costs. The BHGH acquisition in February 2016 roughly doubles the 
amount of natural gas that could be contracted by BKH owned utilities under this 
program.

Shift in Oil and Gas Strategy: BKH's oil and gas business strategy is focused on 
its proposed utility cost of service gas program. BKH has ceased drilling new 
wells and meaningfully reduced its planned capex over the next three years due 
to the low commodity price environment and resulting shift in strategy. The 
company plans to spend approximately $34 million on oil and gas capex through 
2018, a reduction of approximately 90% when compared with the prior three-year 
period. BKH plans to retain its key properties in the Piceance and Powder River 
Basins to support the company's proposed utility cost of service gas program, 
but is expected to divest its non-core oil and gas assets during the third 
quarter.

Increased Utility Capex: BKH plans to spend roughly $2 billion on capex through 
2019 with approximately 80% of that amount at the regulated utilities. The 
projected capex spend currently excludes the proposed cost of service gas 
program and will be primarily focused on new generation, transmission, and 
distribution investments at the electric and gas utilities. Due to looming 
regulations under the EPA's Clean Power Plan, future electric generation needs 
are likely to be in the form of new natural gas-fired power plants and 
small-scale wind and solar renewable projects. Capex at the gas utilities is 
primarily focused on pipeline replacement, typically subject to automatic 
recovery mechanisms. Fitch expects BKH to remain FCF negative through the 
forecast period and has assumed that the cash shortfall will be funded with a 
balanced mix of debt and equity financing.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for BKH include:

--Constructive regulatory environment across all jurisdictions;

--Successful integration of BHGH;

--Excludes the cost of service gas program;

--Capex of $2.1 billion through 2019.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a 
stabilization of ratings at the current level include:

--Constructive outcome in the pending cost of service gas program regulatory 
proceedings;

--FFO adjusted leverage at 4.0x or below.

Negative: Future developments that may, individually or collectively, lead to a 
negative rating action include:

--An unfavorable outcome in the pending cost of service gas program regulatory 
proceedings;

--Expectations for FFO adjusted leverage to remain above 4.5x through the 
forecast period;

--A weaker business risk profile from larger investments in the oil and gas 
business, outside of a cost of service gas program.

LIQUIDITY

BKH's liquidity is supported by sufficient availability under its $750 million 
unsecured revolving credit facility. The credit facility can be upsized up to $1 
billion with the consent of the lenders and matures in August 2021. The credit 
facility is currently subject to a maximum debt-to-capitalization ratio covenant 
of 70% which sunsets to 65% in March of 2017; as of June 30, 2016, BKH was in 
compliance with a debt-to-capitalization ratio of 69%. BKH's $750 million bank 
credit facility contains covenants that trigger cross-default if BKH or its 
subsidiaries fail to make timely payments of debt obligations. Fitch expects 
BKH's long-term debt maturities to be manageable through the forecast period.

Contact: 

Primary Analyst

Daniel Neama

Associate Director

+1-212-908-0561

Fitch Ratings, Inc.

33 Whitehall St.

New York, NY 10004

Secondary Analyst

Kevin L. Beicke, CFA

Director

+1-212-908-0618

Committee Chairperson

Philip W. Smyth, CFA

Senior Director

+1-212-908-0531

Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: 
alyssa.castelli@fitchratings.com.

Date of Relevant Rating Committee: Feb. 12, 2016.

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/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures 

Solicitation Status 

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010195

Endorsement Policy 

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&det 
ail=31

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