KEY RATING DRIVERS
--Strong credit metrics;
--Higher customer growth Trends;
--Constructive regulatory environment;
--Large capex spend with associated trackers.
Positive Rating Outlooks: The Positive Outlooks reflect the expectation for continued customer growth, improving economic conditions
Strong Credit Metrics: APS' EBITDAR-to-interest coverage trended relatively flat at 6.0x for the LTM ending
Higher Customer Growth: Going forward, Fitch expects customer growth to average about 2% per year through 2016, reflecting improving economic conditions in the state including lower unemployment and increased housing starts and new household formations. As economic conditions improve in
Positive Sales Trend: Going forward, Fitch expects that total weather normalized retail electricity sales will resume a positive growth trend and will increase on average about 0.5% to 0.75% per year through 2016 as a result of improved customer growth and improving economic conditions in the state, after including the effects of APS' energy efficiency and distributed generation programs. Retail electricity sales, adjusted to exclude the effects of weather variations, grew 0.6% for the three-month period ended
Net Metering Charge Adopted: A big concern for investors regarding net metering has been adequate rate design and proper cost allocation for using and maintaining the electrical grid between solar customers and non-solar customers. While the controversy persists, in a recent development, the
The new policy will be in effect until APS' next general rate case (GRC). The fixed charge does not increase APS's revenue because it is credited to the lost fixed-cost recovery (LFCR). Beginning this month, the ACC will conduct a series of workshops to evaluate the role of rate design regarding distributed generation, to continue discussions on cost allocations, and other issues regarding net metering. Additionally, the ACC directed APS to provide quarterly reports (April, July, and October) on the pace of rooftop solar adoption to assist the ACC in considering further rate increases.
Limited DG impact: Currently, the impact of distributed generation (DG) is not material given its small penetration but could become a concern if the trend materially increases in the future. (DG) currently comprises 0.5% or less of the negative impact to retail sales growth and equates to roughly 2% (700 GWh) of APS total 2013 retail sales.
LFCR Mechanism: APS' LFCR mechanism is estimated offset 30%-40% of revenues lost due to ACC-mandated energy efficiency (EE) and DG initiatives, subject to an annual cap at 1% of revenues. The LFCR is filed by
Constructive 2010 GRC Settlement: Per the terms of the settlement, APS agreed to a four-year stay-out and is prohibited from filing its next rate case before
Transmission Cost Adjustor (TCA): APS operates under a FERC-regulated TCA mechanism which allows for the recovery of transmission investments outside of GRC proceedings based on a 10.75% ROE predicated on an equity layer of 57% and a rate base of
Large Capital Spending Program a Key Growth Driver: Fitch expects rate base growth of 6% to 7% through 2016 driven by average annual capital expenditures of
Moderate increase in leverage expected: Going forward, due to the large capex program, Fitch expects APS to remain moderately free cash flow (FCF) negative and to fund the majority of forecasted capex internally and the balance with external financing. While Fitch anticipates external funding requirements to be financed via a balanced mix of equity and debt, Fitch expects modest regulatory lag to pressure credit metrics. Leverage, as measured by debt-to-EBITDAR, is expected to moderately increase to 3.0x by 2016.
Good Liquidity: As of
Energy Efficiency (EE) Standard: In 2013,
Demand-Side Management Adjustor Charge (DSMAC): On
Future developments, individually or collectively, that could lead to a positive rating action include:
--Continued sales growth reflecting improving economic conditions
--Sustained Debt-to-EBITDAR leverage metrics under 3.3x;
-Continued constructive regulatory outcomes that address rate design over evolving issues of energy efficiency, demand-side management and net metering.
Future developments, individually or collectively, that could lead to a negative rating action include:
--Given the stay-out provision of APS' last GRC, greater than anticipated increases in operating and other expenses could erode credit quality.
--An unexpected, prolonged base load generating facility outage could also lead to adverse credit rating actions;
--Sustained Debt-to-EBITDAR leverage metrics over 3.75x.
Fitch has affirmed the following ratings and revised the Rating Outlooks to Positive from Stable:
Pinnacle West Capital Corp.:
--Long-term Issuer Default Rating (IDR) affirmed at 'BBB+';
--Short-term IDR affirmed at 'F2';
--Commercial paper affirmed at 'F2''.
--Long-term IDR affirmed at 'BBB+'';
--Short-term IDR affirmed at 'F2' ';
--Senior unsecured affirmed at 'A-';
--Commercial paper affirmed at 'F2'.
--Secured lease obligation bonds affirmed at 'A-'.
Additional information is available at 'www.fitchratings.com'.
--'Rating U.S. Utilities, Power and Gas Companies,
--'Corporate Rating Methodology',
---'Parent and Subsidiary Rating Linkage',
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities within a Corporate Group Structure
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
Source: Fitch Ratings
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