Credit analyst says KeySpan's equity layer improving but needs asset sales

By Ronda Fears

Nashville, Feb. 11 - Standard & Poor's Corp. credit analyst Scott A. Beicke said that while KeySpan Corp.'s equity level has improved to a level more appropriate for its single-A rating the company still needs to make asset sales.

In the wake of KeySpan's purchase of Eastern Enterprises two years ago, which saddled it with $1.65 billion of acquisition debt and pressured its capital structure by significantly increasing consolidated leverage, progress has been slow, Beicke said in a report Tuesday.

"In addition, the slow progress of non-core asset sales has pressured KeySpan's business profile," Beicke said.

"Although the company has produced some cash flow metrics commensurate with its A rating throughout the past two years, KeySpan's equity layer is only now reaching a level somewhat acceptable for its rating."

Over the past year, the analyst acknowledged that KeySpan has taken several steps toward shoring up its leverage ratios and improving its financial profile - its $460 million mandatory offering in 2002 and in January a $500 million stock offering.

For the 12 months ended Sept. 30, KeySpan's financial metrics included funds from operations interest coverage of 3.7x, funds from operations to total debt of 15.6% and debt to total capital of 66%.

When adjusted to reflect the January stock offer, assuming most goes to reduce debt, and giving equity credit for the convertible, Beicke said FFO interest coverage improves to nearly 4x, FFO to total debt strengthens to roughly 17% and debt to total capital decreases into the upper 50% area.

"Despite these efforts on the financial front, KeySpan still faces challenges to maintain its rating," Beicke said.

FFO interest coverage of about 3.5x, FFO to total debt between 20% and 25% and debt to total capital of about 50% would reflect adequate credit measures for the existing rating, he said.

KeySpan's business profile is pegged at 3 by S&P, in relation to a 10-point scale in which 10 is the highest risk and 1 is the lowest, Beicke said. But that was based on anticipated asset sales, he added.

"When assigned to KeySpan at the time of the Eastern Enterprises acquisition, this business profile incorporated the belief that relatively low-risk, regulated businesses would account for roughly 90% of consolidated operations and the sale of higher-risk, non-core operations" would occur, Beicke said.

"Standard & Poor's placed significant credence in KeySpan's stated intent to sell these non-core businesses and use the proceeds for debt reduction."

Those assets were interests in Houston Exploration Co., Midland Enterprises Inc. and the gas-processing plants and gathering facilities at KeySpan Canada.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.