Due to the risks inherent in the diversified business portfolio, Fitch rates
OTP contributes approximately two thirds of consolidated earnings. The Stable Outlook reflects Fitch's expectations that utility earnings and cash flows will be supported by regulatory mechanisms that afford timely recovery on investments during a period of high capital spending at OTP and the manufacturing and infrastructure businesses will sustain the recent improvement in financial performance.
KEY RATING DRIVERS
--Strong and stable performance at OTP;
--Large capex program at OTP with constructive regulatory recovery mechanisms;
--Lower risk profile with downsizing of diversified business portfolio;
--Modest parent debt balances and low consolidated leverage.
Offsetting the higher risks and volatility of the non-regulated businesses, is a relatively low consolidated leverage position. Parent-level long-term debt approximates only
The earnings recovery is evident in the improvement in key credit metrics. EBITDAR to interest improved to 4.58x for the latest 12 month (LTM) period ended
OTP continues to perform strongly but faces pressures from a large capex program that management projects will increase rate base from
During the capex cycle which is centered on new transmission projects as part the broader regional CapX2020 Program and the
OTP's capex recovery mechanisms provide for timely recovery of invested capital and operating earnings and cash flows are expected to be supported by construction work in progress (CWIP) on the transmission projects as well as recovery riders on the
Other regulatory mechanisms are considered constructive and OTP authorized return on equity (ROE) in its largest jurisdictions are above industry average. OTP enjoys full commodity and purchased power recovery across its three state service area. OTP's rural service area in
Credit metrics are strong although Fitch expects modest deterioration in coverage and leverage due to higher debt levels beginning in 2014. Measures strengthen throughout the forecast period as the capex cycle matures. EBITDAR to interest, 5.4x for the 12 months ended
Parent Subsidiary Linkage
Fitch's ratings of
Despite the downsizing of the non-regulated business investments,
Liquidity is strong for both
Execution and funding of a large capital investment program limits positive rating action for OTP and
Events that individually or collectively could result in a negative rating action include:
--A downturn in the economically sensitive non-regulated higher risk businesses could pressure earnings and consolidated leverage;
--An acquisition that is debt financed and/or heightens the business risk profile;
--Debt to EBITDAR above 4x (Fitch forecast models average 3.3x) on a sustained basis could result in a downgrade.
--A change in the regulatory structure which limits timely and full recovery of invested capital during this large capex cycle would likely result in a negative rating action;
--Failure to maintain a balanced equity component in its capital structure. Debt to EBITDAR above 4.25x (Fitch forecast models average 3.6x) could result in a downgrade.
Fitch affirms the following ratings with a Stable Outlook:
Otter Tail Corporation (OTTR)
--Long-term IDR at 'BBB-';
--Short-term IDR at 'F3';
--Senior unsecured at 'BBB-'.
--Long-term IDR at 'BBB';
--Short-term IDR at 'F3';
--Senior unsecured at 'BBB+'.
Additional information is available at www.fitchratings.com.
--'Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage',
--'Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)',
--'Recovery Ratings and Notching Criteria For Utilities',
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
Recovery Ratings and Notching Criteria for Utilities
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Source: Fitch Ratings
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