For further information regarding the rating action, please see the press release 'Fitch Revises WR & KG&E's Outlook to Positive; Ratings Affirmed' dated
KEY RATING DRIVERS
--A generally balanced regulatory environment in
--A conservative strategy focused on
--Lower post-2014 WR consolidated capex and improving credit metrics; and,
--Rating linkage between WR and KG&E.
Positive Outlook: The KG&E rating and Positive Rating Outlook reflect a relatively balanced regulatory compact in
Fitch believes that more manageable projected capex levels in concert with forward equity issuance in 2014 and 2015 and estimated rate relief effective
In this scenario, Fitch would likely upgrade KG&E's rating one-notch concomitant with issuance of a final decision in WR's general rate case (GRC), which is expected around year-end 2015.
Capex: Fitch expects WR's capex to decline in 2015 and 2016, primarily reflecting completion of its large environmental remediation program at its jointly owned
WR's capital investment is estimated to approximate
Transmission investment is expected to rise sharply from
GRC: WR plans to file its next GRC with the
The GRC is expected to seek recovery of remaining costs related to environmental work at the
Rating Linkage: KG&E is a wholly-owned operating subsidiary of WR, which itself is an operating utility. KG&E and WR's ratings are the same, reflecting highly centralized operations, including shared employees, treasury and corporate functions, as well as a consolidated capital structure for ratemaking purposes. KG&E and WR conduct business under the Westar Energy brand name, have functionally integrated utility operations and WR's revolving credit agreements contain cross default provisions.
KG&E relies on WR for its short-term cash needs. WR's
Solid Liquidity: As of
Low Risk Profile: The rating and Positive Rating Outlook reflects WR's relatively predictable earnings and cash flows, management's conservative strategic focus on utility operations in
WR's constructive, integrated business model and balanced regulatory/political environment in
Balanced Regulatory Compact: In recent years, WR has worked with the KCC and policy makers to implement tariff mechanisms designed to recover costs outside of GRC proceedings, enhancing timely cost recovery prospects.
These riders include the following: a fuel adjustment mechanism (adjusted quarterly and trued-up annually); environmental cost recovery rider, FERC formula rate rider; transmission delivery charge and property tax adjustment.
In addition, deferral mechanisms are deployed for storm damage and other costs, including pension and energy efficiency. Abbreviated rate cases are also permissible under state law and capex for major projects may be approved in advance as to prudence.
In Fitch's opinion, these regulatory mechanisms streamline GRC proceedings, reduce risk and potential rate lag and support WR and KG&E's creditworthiness.
Moderation in WR's planned capex, new equity issuance and a final KCC order in WR's anticipated 2015 GRC resulting in EBITDA leverage improvement to 3.6x or better on a sustained basis would likely result in future positive rating actions.
Conversely, an adverse shift in the currently balanced regulatory compact in
A change in management's current strategy and/or meaningfully higher-than-expected capex could also lead to future adverse credit rating actions.
In addition, an unexpected, prolonged plant outage at a major base load, coal or nuclear plant could lead to lower credit ratings.
Any combination of these or other factors resulting in EBITDA leverage weakening to 4.1x or worse on a sustained basis could lead to future credit rating downgrades.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology: Including short-Term Ratings and Parent Subsidiary Linkage' (
--'Recovery Ratings and Notching Criteria for Utilities' (
--'Rating U.S. Utilities, Power, and Gas Companies' (
Recovery Ratings and Notching Criteria for Utilities
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Source: Fitch Ratings
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