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BKHU - Black Hills News Story

$63.72 -1.7  -2.6%

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Utilities
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Fitch Rates Black Hills' Senior Notes 'BBB+'; IDR Remains on Negative Watch

Thu 14th January, 2016 10:55pm
(The following statement was released by the rating agency)

NEW YORK, January 14 (Fitch) Fitch Ratings has assigned a rating of 'BBB+' to 
Black Hills Corporation's (BKH) issuance of $550 million of senior unsecured 
notes, which substantially completes BKH's permanent acquisition financing 
needs. The debt issuance is comprised of two tranches including $250 million of 
2.5% three-year senior notes due Jan. 11, 2019 and $300 million of 3.95% 10-year 
notes due Jan. 15, 2026. Fitch has also placed BKH's senior notes on Rating 
Watch Negative.

Proceeds will be used toward financing BKH's acquisition of SourceGas Holdings 
LLC (SGH, not rated by Fitch) from investment funds managed by Alinda Capital 
Partners and GE Energy Financial Services for approximately $1.89 billion.

BKH's 'BBB+' Issuer Default Rating (IDR) remains on Rating Watch Negative. Fitch 
will resolve the Negative Watch concurrent with or close to the completion of 
the acquisition. Fitch expects the acquisition to close in the first quarter.

KEY RATING DRIVERS

Rating Watch Negative: The Negative Watch for BKH reflects a material increase 
in consolidated leverage partially offset by an increased scale of utility 
operations and higher regulated mix in overall earnings and cash flows. The 
purchase price of $1.89 billion includes assumption of approximately $700 
million of debt at closing. While BKH has obtained a $1.17 billion bridge 
facility, permanent financing consists of $255 million of common equity, $299 
million of equity linked securities, and $550 million of unsecured debt. The 
$554 million equity component of acquisition financing is modestly less than the 
$575-675 million that was originally expected. However, BKH is currently 
evaluating the sale of up to a 49.9% interest in a 200-MW natural gas-fired 
power plant from its IPP portfolio, the proceeds from which would be used to 
complete acquisition financing needs.

BKH's leverage will increase materially with this acquisition. Fitch will update 
its financial forecasts once there is greater clarity on the post-acquisition 
debt structure but considers it unlikely that BKH's pro forma funds from 
operations (FFO) adjusted leverage could stay below 4.0x over the medium term, 
which was Fitch's prior expectation. 

Improved Business Risk Profile: Qualitatively, the SGH acquisition is positive 
for BKH's business profile because it increases the utility business mix to 
approximately 82% of EBITDA from approximately 78% previously. BKH already 
operates in three of the four SGH states, all of which have generally supportive 
regulatory constructs.

Key Factors to Resolve Watch: The post-acquisition capital structure along with 
management intent to pay down the acquisition debt, the terms of the regulatory 
approvals in each of the four states, and the trend in pro forma credit metrics 
will be the key decision factors for Fitch.

Cost of Service Gas Program: BKH's proposed cost of service gas program would be 
beneficial to credit quality and could offset some of the increased risk 
associated with the leverage from the SGH acquisition. If approved by state 
regulators, the cost of the service gas program would materially lower the risk 
of BKH's natural gas exploration and production business by supplying its 
utilities with 50% of their annual gas consumption through long-term contracts. 
BKH recently submitted cost of service gas regulatory filings in IA, KS, NE, SD, 
WY and CO. The acquisition of SGH approximately doubles the amount of natural 
gas that can be contracted under the cost of service gas provision. A successful 
outcome in the cost of service gas proceedings could mitigate the potential 
one-notch downward pressure arising from the SGH acquisition.

Shift in Oil and Gas Strategy: The company's oil and gas strategy is now 
centered around its utility cost of service gas program, a notable shift from a 
prior focus on unregulated exploration and production activities. BKH has 
meaningfully reduced its planned capex in the Mancos and Piceance shale basins 
over the next two years, as the current commodity price environment does not 
support drilling fundamentals. BKH has decreased planned capital spending in the 
oil and gas business segment by 89% to $27 million through 2017, from $242 
million previously. 

Capex Needs: BKH plans to spend $1.3 billion on capex through 2017 with $357 
million spent as of Sept. 30, roughly 15% higher than the preceding three-year 
period. Approximately $308 million or 24% of that amount is eligible for timely 
recovery under recovery mechanisms. Capex 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 focused on new natural gas-fired 
power plants and on small-scale wind and solar renewable projects. Capex at the 
gas utilities is primarily centered on pipeline replacement programs, typically 
subject to automatic recovery mechanisms. Now that the 132-MW gas-fired Cheyenne 
Prairie Generating Station power plant entered service major generation projects 
include the $109 million 60-MW Peak View wind project and the smaller $65 
million 40-MW simple-cycle natural gas-fired plant at Colorado Electric, both 
with scheduled in service dates this year. Fitch forecasts BKH to remain FCF 
negative through the forecast period and has assumed 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; 

--Capital expenditures of $1.3 billion through 2017;

--Minimal maturities through forecast period including $300 million term loan in 
2017.

RATING SENSITIVITIES

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

--Total adjusted debt/EBITDAR and FFO adjusted leverage at 4.0x or below;

--Constructive outcome in the proposed 'cost of service gas' proceedings;

--Regulatory approval for SGH acquisition at reasonable terms.

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

--Pro forma FFO fixed-charge coverage sustained below 4.75x;

--Pro forma total adjusted debt/EBITDAR and FFO adjusted leverage sustained 
above 4.0x; 

--Material claw back of potential synergies arising from the SGH acquisition;

--A weaker business and financial risk profile from larger investments in oil 
and gas drilling and/or unfavorable outcome in the proposed 'cost of service 
gas' proceedings.

LIQUIDITY

BKH had $391 million of liquidity available under its $500 million unsecured 
revolving credit facility, including $39 million of unrestricted cash and cash 
equivalents as of Sept. 30, 2015. The credit facility can be upsized to $750 
million with the consent of the lenders and matures in June 2020. The credit 
facility is subject to a maximum debt-to-capitalization ratio covenant of 65% as 
of Sept. 30, 2015, and BKH was in compliance with a debt-to-capitalization ratio 
of 57%. BKH's $500 million bank credit facility contains covenants that trigger 
cross-default if BKH or its subsidiaries fail to make timely payments of debt 
obligations. Maturities through the forecast period are minimal and consist of a 
$300 million dollar term loan due April 12, 2017, which Fitch expects to be 
refinanced upon expiry. 

Contact: 

Primary Analyst

Daniel Neama

Associate Director

+1-212-908-0561

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004 

Secondary Analyst

Kevin 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 Committee: July 13, 2015

Additional information is available at '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=997907

Endorsement Policy 

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

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