Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) of Nicor Inc. (Nicor) and its core gas utility subsidiary, Northern Illinois Gas Co. (dba Nicor Gas) at 'A'. Approximately $500 million of long-term debt is affected by the rating action.
Fitch has affirmed the following ratings:
Nicor
--Long-Term IDR at 'A';
--Short-Term IDR at 'F1';
--Senior Unsecured at 'A';
--Preferred Stock at 'A-';
--Commercial Paper at 'F1'.
Nicor Gas
--Long-Term IDR at 'A';
--Short-term IDR at 'F1';
--First-Mortgage Bonds at 'AA-';
--Senior Unsecured at 'A+';
--Commercial Paper at 'F1'.
The Rating Outlook is Stable.
Nicor's ratings and Stable Outlook reflect the low business risk of its core regulated gas distribution business, which comprised approximately 67% of consolidated operating income in 2008, and the company's conservative track record of operating a complementary portfolio of profitable, self-funding unregulated businesses. Nicor Gas' utility operations are supported by a large, mostly residential, customer base, access to a diverse source of gas supply and 150 Bcf of storage, and a monthly purchased gas adjustment (PGA) mechanism. The utility's financial position is solid, with strong credit protection measures, ample liquidity, and manageable capital spending and external funding requirements. The gas utility also benefits from balanced regulatory treatment as evidenced by the Illinois Commerce Commission's (ICC) March 2009 rate order, which authorized the recovery of approximately 80% of fixed costs in the fixed customer charge, up from approximately 60% in previous rates. Nicor's credit protection measures are expected to continue to be strong for the ratings category with the ratio of EBITDA to interest at approximately 9.5 times (x) and funds from operations (FFO) coverage at 9.5x through the ratings horizon. The utility's cash flow coverage ratios are also expected to be strong. However, unadjusted debt to EBITDA of approximately 3.0x and seasonally adjusted debt to capitalization of approximately 55% maintain the ratings at the current 'A' category.
Rating concerns relate primarily to Nicor Gas' exposure to potential contingent liability payments associated with the Performance Based Rate (PBR) case, which is currently under ICC review. Various intervenors, including the Citizens Utility Board (CUB) and Illinois Attorney General's Office (IAGO), have proposed refunds ranging from $108 million to $190 million. Although credit metrics at the current rating category are able to withstand a refund payment within the proposed range, the financial ramifications of a larger punitive payment could have negative rating implications. Fitch notes that as part of the on-going PBR review, CUB and IAGO, together with the ICC staff, recently filed testimony with the ICC in August 2009. Other rating concerns relate to potential disallowances of gas costs under prudency review. Fitch will continue to monitor the development of the Central Valley gas storage project in California. The project is expected to be completed in 2011. Financing for the project is anticipated to be provided by a balanced mix of debt and equity. Upon commercial operation, the facility will be subject to a regulated tariff structure and provide additional regulated cash flows beyond the current forecast period.
Nicor's ratings also consider the unregulated operations, which include wholesale energy services, retail energy services, and container shipping in the Caribbean. Nicor's largest unregulated business, Tropical Shipping (Tropical), continues to be profitable despite the impacts of the economic downturn on volumes shipped due to effective cost-containment measures and lower fuel costs. Fitch recognizes the earnings volatility at the wholesale energy business that normally occurs from changes in the fair value of the derivative instruments it uses to hedge its physical positions. However, mark to market earnings volatility is mitigated by the relatively small percentage of consolidated operating income that the marketing business generates. Throughout the forecast period, growth in the unregulated segment is projected to be modest. As such, Nicor's business risk profile is expected to remain within the moderate risk category.
Nicor has more than sufficient liquidity with approximately $116.3 million of cash and cash equivalents and short-term investments on the consolidated balance sheet as of June 30, 2009, and approximately $923 million available from bank facilities, with total liquidity around $1.039 billion. Nicor and Nicor Gas have a $600 million joint unsecured credit facility that expires September 2010 and is subject to a debt capitalization ratio of 70% or less. Nicor Gas also has access to a $550 million 364-day revolver, established in May 2009. Debt maturities over the next several years are manageable and are expected to be refinanced. Nicor has no external long-term debt.
The Stable Outlook reflects Fitch's expectation that Nicor Gas will continue to benefit from stable cash flow generation to finance the majority of its planned capital expenditures and provide upstream dividends to Nicor Inc. The Outlook also assumes that any punitive payments associated with the on-going PBR case will not be significantly larger than modeled.
Earlier this year, Nicor Gas received a $69 million base rate increase (compared to $138 million requested), a rate of return on rate base of 7.58%, and a return on equity of 10.17%. In addition, the ICC approved an energy efficiency rider to fund various energy efficiency programs. Although the rate order did not grant the requested decoupling mechanism or trackers for bad debt expense and infrastructure upgrades, new rates provide greater cash flow stability and improve business risk as a result of the higher recovery of fixed costs and the recognition of higher operating expenses, including bad debt. Nicor Gas now has $62 million built into its rate structure for un-collectibles, up from $38 million previously. In Fitch's view, Nicor Gas will be adequately insulated from the effects of bad debt expense throughout the current economic cycle. Fitch notes that the gas utility filed a request for rehearing with the ICC in April 2009 concerning the imputed short-term debt in the capital structure and return on equity, contending that the company's return on rate base should be higher. A final ruling from the ICC is expected by October 2009. A recently issued Administrative Law Judge (ALJ) order proposes no change to the authorized capital structure.
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Fitch Ratings
Karima Omar, 212-908-0592, New York
Karen
Anderson, 312-368-3165, Chicago
or
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Duignan, 212-908-0630, New York
Email: kevin.duignan@fitchratings.com
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Scenga, 212-908-0278, New York
Email: sandro.scenga@fitchratings.com
