S&P Upgrades AGL Resources (GAS) to 'A-'; Outlook is Negative

S&P Global Ratings raised its issuer credit rating on AGL Resources Inc. (NYSE: GAS)(ALGR) and its subsidiaries Atlanta Gas Light Co. (AGLC), Nicor Gas Co., and Pivotal Utility Holdings Inc. (Pivotal) to 'A-' from 'BBB+'. The outlook is negative.

Southern Co. (A-/Negative/A-2) on June 29, 2016, received the last necessary regulatory approval to acquire AGLR. "The rating upgrades reflect our view that AGLR and its subsidiaries will be core subsidiaries of Southern," said S&P Global ratings credit analyst Dimitri Nikas. The negative outlook on AGLR and its subsidiaries reflects the outlook of parent Southern Co.

Our group status assessment for AGLR takes into account the following:

• We expect that AGLR will form a material part of the merged entity, contributing anywhere from 15% to 20% of operating income and EBITDA.
• Given the combined entity's enhanced presence in Georgia, we expect that Southern and AGLR will continue to effectively manage regulatory risk in the state, and we also expect that AGLR will become closely linked to the group's reputation, name, and brand.
• AGLR operates in lines of business that are integral to Southern's overall group strategy, and the combined company will likely have opportunities to realize efficiencies and cost savings over time.
• We expect that AGLR will have a strong, long-term commitment from Southern senior management.
• AGLR's utility and non-utility operations are successful at what they do and have no ongoing performance problems that could undermine operational or financial performance.
• AGLR's capitalization and debt leverage are in line with and are expected to remain in line with those of Southern Co.

The ratings on AGLR incorporate the strength of the company's regulated utility operations that benefit from exposure to constructive regulatory frameworks, large and diverse customer bases with modest growth characteristics, regulatory and operating diversity with a presence in six states (Georgia, Illinois, New Jersey, Virginia, Florida, and Tennessee), and very low operating risk. At the same time, the ratings account for AGLR's non-utility operations in retail supply and wholesale services and to which we ascribe significantly higher business risk because they can introduce significant volatility to AGLR's returns and profitability. Finally, the ratings on AGLR reflect the company's core group designation, which leads to a final issuer credit rating of 'A-' for AGLR and each of its subsidiaries.

The outlook on AGL is negative and is based on the outlook of its ultimate parent, Southern Co. The negative outlook on Southern and its subsidiaries reflects the lack of cushion at the current ratings and the potential for lower ratings over the next six to 12 months, if in the context of the AGL acquisition, the company has further challenges at its nuclear or integrated gasification combined-cycle (IGCC) turbine construction projects that lead to higher business risk while hurting financial performance, leading to FFO to debt consistently below 16%.

We could lower the ratings on Southern and its subsidiaries, including AGLR, over the next six to 12 months if business risk increases while FFO to debt remains unchanged or if FFO to debt consistently declines to less than 16%. Business risk could increase if:

• Unfavorable developments occur at the prudence proceeding currently underway to address the increased costs and revised schedule of Georgia Power's new nuclear units;
• The Kemper IGCC unit continues to have material delays in reaching commercial operation or if efforts to recover the investment falter; orSouthern Power's growth accelerates, without offsetting growth at Southern Co.'s regulated operations, increasing its contribution to the whole.

We could affirm the ratings on Southern and its subsidiaries, including AGLR, if, after accounting for the impact of acquiring AGLR, Southern can reach a constructive outcome in the pending prudence proceeding in Georgia while also demonstrating meaningful progress in bringing the Kemper IGCC on line and achieving constructive ratemaking treatment, enabling the company to recover its investment in the project and achieving FFO to debt that is consistently at or above 16%.

You May Also Be Interested In

• IBM tumbles on soft Q1 revenue; announces HashiCorp $6.4bn acquisition
• Perrigo (PRGO) Receives Binding Offer to Divest its HRA Pharma Rare Diseases Business for up to EUR 275M
• BMO Capital Reiterates Market Perform Rating on Incyte (INCY)