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20 Dec 2002
MOODY'S DOWNGRADES ISSUER RATING OF BLACK HILLS CORPORATION TO Baa3 AND ASSIGNS (P)Baa3/(P)Ba1/(P)Ba2 RATINGS TO SHELF REGISTRATION; ALSO DOWNGRADES RATINGS OF BLACK HILLS POWER, INC. (SR. SEC. TO Baa1)
Moody’s Investor’s Service downgraded the issuer rating of Black Hills Corporation (BHC, Parent) to Baa3 from A3. Moody’s also downgraded the ratings of BHC’s wholly-owned electric utility subsidiary, Black Hills Power, Inc. (senior secured to Baa1 from A1). The outlook for the ratings of both companies is negative. The rating downgrades conclude a review for possible downgrade of the ratings commenced July 26, 2002.
Concurrent with the rating downgrades, Moody’s assigned ratings of (P)Baa3/(P)Ba1/(P)Ba2, respectively, to BHC’s recently filed shelf registration for prospective issuance of senior unsecured debt/subordinated debt/preferred stock.
A complete list of ratings downgraded follows:
Black Hills Corporation: issuer rating to Baa3 from A3.
Black Hills Power, Inc.: senior secured debt to Baa1 from A1; senior unsecured debt and issuer ratings to Baa2 from A2; senior unsecured pollution control revenue bonds to Baa2/VMIG-2 from A2/VMIG-1; and shelf registration rating for senior secured debt to (P)Baa1 from (P)A1.
The downgrade of BHC’s rating primarily reflects its growth strategy and the significant consolidated debt load taken on (including an adjustment for a synthetic lease to take effect in 2003) relative to expected cash flow levels. Consolidated cash flows are currently split approximately two-thirds/one-third between more volatile nonutility operations and more stable predictable utility operations. The relative mix is expected to be even more heavily weighted toward nonutility operations in coming years. Moody’s also notes that BHC’s consolidated debt level currently includes a higher than anticipated amount of recourse debt related to financing of its nonutility growth initiatives to date (especially as relates to independent power projects and oil and gas reserve acquisitions). This is reflective of the delays and other ongoing challenges that companies are facing in the prevailing difficult power project financing market due to heightened scrutiny of credit quality. With respect to BHC’s existing nonrecourse debt, Moody’s has taken a more conservative approach by largely considering such obligations to be on credit given our view that the assets linked to the nonrecourse debt are integral to BHC’s achieving its long-term corporate growth objectives. We note that management has asserted that it would exercise its legal rights under the nonrecourse financing in the event that any unexpected difficulties arise. Nevertheless, we believe the significant role that these assets are expected to play in BHC’s overall corporate strategy increases the likelihood that management might alter its position by deciding to provide additional funding in times of need.
Moody’s downgrade of BHP’s ratings brings them to a level that better reflects the utility’s more leveraged balance sheet following the issuance of $75 million of first mortgage bonds in August and the correspondingly lower, albeit still healthy, cash flow coverage of fixed obligations. The lower ratings for BHP also are intended to reflect an increased dependence on the utility’s cash flow to meet the Parent’s fixed obligations. Evidence of the Parent’s dependence on the utility lies in the fact that a portion of the proceeds from the first mortgage bond offering were used to repay parent company short-term debt. Still, investors can continue to take comfort from the fact that the dividend that BHP is expected to upstream to BHC is deemed more stable and predictable than any payments to be made by more risky nonutility operations.
The negative rating outlook for BHC’s ratings reflects the execution risks associated with management’s plans for improving liquidity, including funding out the currently high short-term debt component in the consolidated capital structure to free up capacity under existing bank credit facilities. We note that the recently filed $400 million shelf registration, which also provides for common stock issuance at management’s discretion, is intended to facilitate this strategy. The Parent’s negative rating outlook also takes into account the growth strategy, which assumes increasing investments in nonregulated businesses, especially including independent power projects, as market opportunities present themselves.
The negative rating outlook for BHP reflects ongoing concerns about the extent to which the Parent’s growth strategy might further rely upon funds from the utility to fund nonregulated investments, as was the case in August of this year.
Black Hills Corporation is a holding company, serving as parent company to subsidiaries divided into three business units: 1) Integrated Energy Group, which produces and sells power at wholesale, produces coal, and produces and markets natural gas, oil and coal; 2) Black Hills Power, an electric utility serving western South Dakota, northeastern Wyoming and southeastern Montana; and Black Hills FiberCom, a broadband communications company offering bundled telephone, high speed internet and cable entertainment services. Black Hills Corporation maintains its headquarters in Rapid City, South Dakota.
No Related Data.
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