News Column

Fitch Rates KG&E's FMBs 'A-'; Outlook Positive

June 26, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A-' rating to Kansas Gas & Electric Company's (KG&E) $250 million offering of first mortgage bonds (FMB), 4.30% series due July 15, 2044. Proceeds from the offering will be used to retire $250 million of Westar Energy (WR; Issuer Default Rating (IDR) 'BBB'; Positive Outlook) senior secured 6% coupon debt. The Rating Outlook is Positive.

On Friday, June 20, 2014, Fitch affirmed the ratings of WR and KG&E and revised their Rating Outlooks to Positive from Stable. KG&E and WR's ratings are the same reflecting the companies' strong rating linkage and Fitch criteria.

For further information regarding the rating action, please see the press release 'Fitch Revises WR & KG&E's Outlook to Positive; Ratings Affirmed' dated June 20, 2014.

KEY RATING DRIVERS

--A generally balanced regulatory environment in Kansas;

--A conservative strategy focused on Kansas utility operations;

--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 Kansas and strengthening post-2014 estimated EBITDA leverage and coverage ratios and solid funds from operations (FFO) credit metrics. WR's large capex program, which pressured EBITDA leverage in 2012 and 2013, is expected to moderate post-2014.

Fitch believes that more manageable projected capex levels in concert with forward equity issuance in 2014 and 2015 and estimated rate relief effective Jan. 1, 2016 will improve EBITDA leverage to 3.5x in 2016 from 4.2x in 2013.

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 La Cygne generating facility in 2016.

WR's capital investment is estimated to approximate $3.4 billion 2014 - 2018. During this period, capex peaks at $814 million in 2014 and hits an expected low of $591 million in 2016. WR's capex is expected to average $657 million during 2015 - 2018, compared to $780 million and $814 in 2013 and 2014, respectively, approximately 80% of peak 2014 capex.

Transmission investment is expected to rise sharply from $169 million in 2013 to $228 million in 2017. Transmission investment during 2014 - 2018 is estimated at $1 billion. During the same time period, WR plans to invest $826 million in generation and $756 million in distribution system improvements.

GRC: WR plans to file its next GRC with the Kansas Corporation Commission (KCC) in the spring of 2015. Fitch expects that new rates will be effective Jan. 1, 2016, give or take a month or two.

The GRC is expected to seek recovery of remaining costs related to environmental work at the La Cygne generating facility which is 50% owned by WR. In addition, the GRC will seek recovery of investment and expense related to generation and distribution system infrastructure investment.

In November 2013, the KCC issued an order that authorized WR to increase rates $30.7 million to recover La Cygne environmental upgrade costs in the utility's abbreviated rate case filing.

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 $730 million and $270 million revolving credit facilities are both secured by KG&E's first mortgage bonds. Furthermore, no regulatory or corporate structures are currently in place to restrict the migration of cash between parent and subsidiary.

Solid Liquidity: As of March 31, 2014, consolidated WR cash and cash equivalents were modest at $9.1 million and total available liquidity was $780 million, including available borrowing capacity under its revolving credit agreements and cash and cash equivalents. Maturities are manageable with approximately $675 million of debt scheduled to mature 2014 - 2018.

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 Kansas, a service territory economy not prone to boom-bust cycles and competitive retail rates. Capex spending is focused on infrastructure reliability, environmental compliance and transmission investment.

WR's constructive, integrated business model and balanced regulatory/political environment in Kansas supports the utility's creditworthiness.

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.

RATING SENSITIVITIES

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 Kansas could trigger future negative rating actions. More specifically, a restrictive outcome in WR's GRC resulting in weaker-than-expected earnings, cash flows and credit ratios in 2016 could result in future credit rating downgrades.

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'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology: Including short-Term Ratings and Parent Subsidiary Linkage' (Aug. 5, 2013);

--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 19, 2013);

--'Rating U.S. Utilities, Power, and Gas Companies' (March 11, 2014).

Applicable Criteria and Related Research:

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722085

Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=836768

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Philip W. Smyth, CFA

Senior Director

+1-212-908-0531

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Shalini Mahajan, CFA

Senior Director

+1-212-908-0351

or

Committee Chairperson

Dennis Pidherny

Managing Director

+1-212-908-0738

or

Media Relations

Brian Bertsch, +1 212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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