July 15, 2008
Fitch Assigns Ratings to Black Hills Corp. & Black Hills Power, Inc.
Fitch Ratings has assigned the following ratings to Black Hills Corp. (BKH) and Black Hills Power, Inc. (Black Hills Power)
Black Hills Corp.--Long-term Issuer Default Rating (IDR) 'BBB';
--Short-term IDR 'F2';
--Senior Unsecured 'BBB'.
Black Hills Power, Inc.
--Long-term IDR 'BBB';
--Short-term IDR 'F2';
--First Mortgage Bonds 'A-';
--Unsecured PCRBs 'BBB+'.
The Rating Outlook for both issuers is Stable.
The ratings and Rating Outlook of BKH are supported by its strong financial profile and average risk profile. Fitch expects credit metrics will weaken with the acquisition of the Aquila, Inc. assets but will remain strong relative to peers. For 2008 and 2009, Fitch expects funds from operations (FFO) interest coverage will be at least 4.0 to 5.0 times (x), debt to FFO will be 4.0x to 5.0x, and total debt to total capitalization will range from 47% to 52%. The utilities provide a stable source of cash flow, with riders for recovery of variable fuel costs. By 2009, utilities are expected to provide approximately 60% of consolidated cash flow. Cash flows from unregulated operations are substantially hedged.
The average risk profile reflects the lower risk nature of the utility operations, which provide a majority of cash flows, management's focus on managing the risks of its unregulated operations by lowering cash flow volatility, notably a rolling two-year hedging program at its oil and gas exploration and production unit, and limited exposure to its trading subsidiary, Enserco.
Black Hills Power's ratings are supported by its predictable cash flows, the low risk nature of its utility operations, its low cost generation fleet with low fuel price risk, and a constructive regulatory environment. For the year ended Dec. 31, 2007, funds from operations (FFO) interest coverage was 4.0 times (x) and total debt to FFO was 3.0x. There is modest ratings linkage between BHP and the credit profile of its parent through participation in an intra-company money pool.
The Stable Rating Outlook is based on Fitch's expectation that BHP's credit metrics will weaken during 2008 and 2009 as the company spends to build a new 100mq coal-fired plant, but remain with parameters for the current rating category. For 2008 and 2009, Fitch expects FFO interest coverage will be at least 3.25x to 3.75x, debt to FFO will be 5.0x to 6.0x, and total debt to total capitalization will range from 50% to 55%.
BKH is the parent holding company for a collection of gas and electric utilities in Wyoming, South Dakota, Colorado, Kansas, Nebraska, and Iowa. Collectively, these utilities serve 753,000 customers. Unregulated businesses include oil and gas exploration and production, merchant power generation, coal mining, and energy trading.
Black Hills Power is a vertically-integrated utility serving 65,100 customers across Montana, South Dakota, and Wyoming.