KEY RATING DRIVERS
--Strong credit metrics;
--Improving customer growth;
--Relatively low leverage;
--Balanced regulatory environment;
Positive Rating Outlook: APS' Positive Outlook reflects customer growth, an improving service territory economy and strong projected credit metrics. The rating also considers APS' solid liquidity position, manageable debt maturities, low leverage, and financial support from its corporate parent, Pinnacle West Capital Corporation (PNW; Issuer Default Rating (IDR) 'BBB+'; Rating Outlook Positive by Fitch).
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
Positive Sales Trend: Going forward, Fitch expects that total weather normalized retail electricity sales will resume a positive growth trend, increasing on average about 0.5% to 0.75% per year through 2016 as a result of customer growth partially offset by energy efficiency and distributed generation. Retail electricity sales, adjusted to exclude the effects of weather variations, grew 0.6% for the three-month period ended
Net Metering Charge Adopted: Cost shifting issues associated with net metering remains a concern for investors, in Fitch's opinion. In
The fixed charge will remain in effect through completion of APS' next general rate case (GRC), is revenue neutral and will be credited to the lost fixed-cost recovery (LFCR) rider. The ACC began a series of workshops to evaluate the role of rate design regarding distributed generation, to continue discussions on cost allocation 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.
GRC Settlement: Per the terms of the commission-approved settlement in APS' last general rate case (GRC), APS agreed to a four-year stay-out and is prohibited from filing its next rate case before
Large Cap Ex: Fitch expects average annual capital expenditures of
AZ Regulatory Compact: GRC orders have been more balanced for APS in the past several years and more timely adjudication of rate filings is a constructive development from an investor point-of-view in that has enabled the utility to improve its earned returns. Regulators have adopted several regulatory mechanisms to facilitate cost recovery outside of GRCs. Such cost recovery mechanisms include the power supply adjustor, renewable energy surcharge, transmission cost adjustor, demand-side management adjustor charge, the environmental improvement surcharge, and the lost fixed cost recovery mechanism.
Moderate Leverage Increase: Due to its large capex program, Fitch expects APS to remain moderately free cash flow (FCF) negative going forward and expects the utility to fund the majority of forecasted capex internally. The balance is expected to be funded with a balanced mix of equity and debt, Fitch expects modest regulatory lag to pressure credit metrics, with leverage as measured by debt-to-EBITDAR estimated to weaken moderately to 3.0x by 2016.
Solid Liquidity: As of
Future developments, individually or collectively, that could lead to a positive rating action include:
--Continued sales growth reflecting improving economic conditions in APS' service territory;
--Sustained debt-to-EBITDAR leverage metrics under 3.3x;
--Continued credit supportive regulatory outcomes in future GRCs
--Constructive resolution of rate design issues associated with distributed generation and energy efficiency.
Future developments, individually or collectively, that could lead to a negative rating action include:
--Deterioration in the regulatory compact in
--Given the stay-out provision of APS' last GRC, higher than expected operating and other costs 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.
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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