Legal ownership structure and lack of explicit ring fencing between IPL and its parent,
KEY RATING DRIVERS
High Capex: Current capex cycle (through 2017) is expected to be high, in Fitch's opinion. IPL's current capex plans include retrofitting most of its economical coal-fired electricity generation units with the new emission control equipment and to build a new natural gas fired power plant as a replacement for its retiring generating capacity. Fitch expects concurrent recovery of environmental capex under the 'environmental compliance cost recovery adjustment' (ECCRA) clause of the
Near-term General Rate Case Likely: The last IURC approved general rate increase was implemented in 1996. Fitch's rating case model assumptions include regulatory approval of IPL's general rate case applications by the IURC. In the past, the company was able to offset rising costs with strong wholesale electricity margins and concurrent recovery of environmental costs, including capex. However, continuously depressed wholesale electricity margin environment and increase in certain costs will require IPL to request a general rate increase to support the consolidated credit profile.
Consolidated Leverage Based Credit-Profile:
Credit Metrics Volatility Expected: The assigned ratings takes into account the expected decline in the credit metrics through 2015 and recovery thereof to reasonable levels by 2018. IPL's adjusted debt to funds from operations (FFO) and FFO-to-interest ratios at the end of 2013 were 3.7x and 4.8x respectively. These ratios are within Fitch's guidelines for IPL's current IDR ('BBB-'), but are expected to decline over the current capex cycle ending in 2017. Fitch projects IPL's credit metrics to remain constrained until the regulators approve increase in IPL's retail tariffs, especially to recover its investment in the new generating capacity. Fitch expects IPL's FFO based leverage (adjusted-debt-to-FFO) to be around 4x at the end of 2018 and FFO based interest coverage (FFO-to-interest) is expected to be around 4.3x at the end of the same period, in line with Fitch's expectations for the assigned IDR.
Environmental Policy Challenges for Coal-fired Generation: IPL's long-term power generation capacity will be coal based. Even with the installation of new emission controls, the long-term policy challenges to coal-fired generation remains a threat to the long-term viability of these assets. Fitch relies on ECCRA and the
Stable Regulatory Environment: IPL benefits from the stable regulatory environment in
Liquidity is adequate, but IPL will depend on external debt to finance its capex program. IPL maintains a
A positive rating action is unlikely over the rating horizon (2014 - 2018) given the rising capex at IPL that will be partially debt financed. External financing of increasingly stringent environmental regulation based investment at IPL will constrain the credit protection measures over the rating horizon. Fitch's rating concerns also include increased regulatory risk to IPL's cash flow given that the management plans to file two general rate increase applications over the rating horizon.
Fitch will downgrade the IDR of both companies, if IPL's credit metrics on a sustainable basis, fail to be within the Fitch's guidelines for a 'BBB' rated entity. A restrictive regulatory outcome in the upcoming rate proceedings, if adverse for the credit protection measures on a sustainable basis, will also result in a negative rating action.
Fitch will also consider a negative rating action on
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology' (
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Source: Fitch Ratings
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