News Column

Fitch Affirms Wisconsin Electric Power Co., WI GAS, & ERGSS; Outlook Stable

August 12, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) of Wisconsin Electric Power Co. (WEPCO) at 'A' and long-term IDR of Wisconsin Gas LLC at 'A-'. Fitch also affirmed the long-term IDR of Elm Road Generating Station Supercritical LLC (ERGSS) at 'A'. The Rating Outlook is Stable for all entities. A full list of rating actions is included at the end of the release.

WEPCO and WI Gas are wholly owned regulated utility subsidiaries of Wisconsin Energy Corp. (WEC). ERGSS is a direct subsidiary of WEC's non-utility energy segment, We Power LLC.

In a prior review, Fitch placed the 'A-' long-term IDR of WEC on Watch Negative following WEC's announcement of its planned acquisition of Integrys Energy Group (Integrys). Please refer to Fitch's press release titled 'Fitch Places WEC's Ratings on Negative Watch Following Acquisition Announcement' dated June 24, 2014, for further details.

KEY RATING DRIVERS

2014 Rate Case

Fitch believes the agreement reached by WEPCO and WI Gas with three large consumer groups in the pending rate case provides earnings and cash flow visibility through 2016, at levels consistent with the current financial profile of the two utilities. The agreement provides for a net non-fuel electric rate increase of $41.5 million to be effective in January 2015, which is net of an offset of $26.2 million related to various bill credits. The $26.2 million credit expires in one year at which time the full increase becomes effective. WI Gas requested a rate increase of $21.1 million in 2015 and $21.4 million in 2016. The recovery of capital investments in electric and gas aging infrastructure is the main driver of rate request.

Under the agreement, WEPCO and WI Gas' authorized ROEs and capital structures remain competitive with other recent rate case outcomes. The authorized ROEs for WEPCO and WI Gas would be set at 10.2% and 10.3%, respectively, and WI Gas' common equity ratio would increase to 49.5% from the current 47.5%, while WEPCO's would remain unchanged at a 51% equity midpoint. The settlement is subject to approval by the Public Service Commission of Wisconsin (PSCW), and a final decision is expected in the fall of 2014. Fitch expects an outcome that is generally consistent with the terms of the agreement outlined above.

Pending Acquisition of Integrys

WEC's pending acquisition of Integrys bears no impact on WEPCO and WI Gas' credit profiles, in Fitch's view. WEC plans on funding part of the transaction with parent-level long-term debt, and management has no plans to lever up the utilities. Furthermore, the utilities have ring-fencing measures that limit the amount of dividends that can be upstreamed to WEC, require the utilities to maintain their regulatory capital structures within a specified range, and prohibit them to loan funds, directly or indirectly, to WEC. Both WEPCO and WI Gas have their own separate credit facilities and can access the debt capital markets independently of WEC.

In the event of a one-notch downgrade at WEC upon resolution of the Watch Negative, the resulting two-notch rating differential between WEPCO and WEC would be consistent with Fitch's parent and subsidiary notching criteria.

Adequate Credit Metrics

Fitch forecasts credit metrics to modestly decline over the next two years, as the utilities complete their environmental and gas expansion projects. By 2017, with the bulk of capital spending behind them and benefits of additional rate increases, credit metrics return to levels that are more adequate for the 'A' rated utility median profile.

Fitch models WEPCO's debt/EBITDAR to range between 3.5x and 3.8x over 2015-2018, while FFO-adjusted leverage is expected to remain slightly below 4x. The expiration of bonus depreciation contributes to weaker cash flow measures. For the LTM ended March 31, 2014, credit metrics are strong with debt/EBITDAR and FFO-adjusted leverage at 3.2x and 2.8x, respectively.

Fitch projects WI Gas' debt/EBITDAR to range between 3.4x and 3.6x over 2015-2018, while FFO-adjusted leverage is expected to hover in the low 4xs. 2015 represents the weakest year as the utility incurs incremental capex associated with the Western Wisconsin Gas Lateral expansion project. Importantly, a rate increase in 2016 allows timely recovery of capital spending associated with the project. For the LTM ended March 31, 2014, credit ratios were solid for the current rating category with debt/EBITDAR at 2.9x and FFO-adjusted leverage at 3.7x.

Elevated Capex

Management plans on spending approximately $3.3 billion on utility capex over the 2014-2018 period, earmarked primarily towards the upgrade of the utilities aging electric and natural gas base infrastructure. WEPCO plans on spending approximately $2.4 billion over 2014-2018, split primarily between its electric and gas operations. Projects are smaller in scope vis-a-vis the large renewable generation and environmental-related spending of prior years. Key projects include the conversion of the Valley Power Plant from coal to natural gas for a total cost of approximately $65 to $70 million and a target completion date for late 2015, and the construction of a new hydro powerhouse at Twin Falls for an estimated cost of approximately $60 to $65 million and a target completion date in 2016. Both projects have received approval from the PSCW.

WI Gas plans on spending approximately $750 million over 2014-2017, compared with $430 million over the previous four years, a 76% increase. The bulk of the spending is projected in 2015 with nearly $300 million of capital investments, earmarked primarily towards the construction of an 85-mile gas lateral in the Western part of Wisconsin. Growth in customers and demand is driven by propane to gas switching and industrial load growth. Management estimates the Wisconsin gas lateral extension project cost to be in the range of $175 million to $185 million with an expected completion date in late 2015. The PSCW approved the project in July 2014. Fitch expects WI Gas to recover the capital spending starting in 2016.

Timely and adequate recovery of and on capital investments will be critical to maintaining the existing rating profile at WEPCO and WI Gas. Fitch expects the utilities to use a balanced mix of internally generated funds and long-term debt issuances to fund capex. In addition, Fitch's Base Case model incorporates a parent equity infusion to WI Gas at the peak of capital spend, primarily to fund a portion of the gas expansion project in Western Wisconsin.

Low-Risk Business Model

The ratings of WEPCO and WI Gas reflect the low-risk business profile of their regulated utility businesses that operate in what Fitch considers to be constructive regulatory compacts across the regulatory jurisdictions of Wisconsin and Michigan. Wisconsin is the largest contributor to WEPCO's revenues with approximately 87% of total revenue in 2013. Wisconsin rate design features timely recovery of fuel and commodity costs, and a gas cost recovery mechanism that stabilize earnings and cash flows. Other supportive features include the use of forward-looking test years, a partial cash return on CWIP for infrastructure investments, and above-average authorized ROEs.

Ample Liquidity

The utilities have ample liquidity to meet working capital and other short-term obligations. WEPCO and WI Gas have separate bank credit facilities with total available access of $500 million and $350 million, respectively. Both facilities mature in December 2017. At March 31, 2014, there were $131.2 million of borrowings outstanding under the facility. Cash and cash equivalents was $26.7 million. WI Gas had $288 million of borrowings outstanding under the facility and no cash on hand. The credit facilities include a financial covenant that total debt to capitalization should be no greater than 65%. WEPCO and WI Gas were both in compliance at March 31, 2014.

Debt maturities are considered manageable. WEPCO has $250 million due in 2015 and 2018. WI Gas has $125 million due in 2015. Fitch expects these debt obligations to be refinanced at maturity.

Ratings of ERGSS

The ratings of ERGSS are closely linked to WEPCO's. ERGSS services its debt obligations with the rental payments it receives from WEPCO related to the lease of the Power the Future (PTF) generating plants. As such, the ratings of ERGSS reflect the credit profile of WEPCO.

RATING SENSITIVITIES

WEPCO

Factors that could lead to positive rating actions: Given current rating levels and a sustained elevated capex program over the forecast period, positive rating actions are unlikely in the near term.

Factors that could lead to negative rating actions:

--Although not anticipated by Fitch, a deterioration of the Wisconsin regulatory compact could lead to negative rating actions.

--Debt/EBITDAR over 3.8x on a sustained basis could lead to negative rating actions.

WI Gas

Factors that could lead to positive rating actions:

Given current rating levels and a sustained elevated capex plan over the forecast period, positive rating actions are unlikely in the near term.

Factors that could lead to negative rating actions:

--Although not anticipated by Fitch, a deterioration of the Wisconsin regulatory compact could lead to negative rating actions.

--Debt/EBITDAR over 4.0x on a sustained basis could pressure the ratings.

Fitch has affirmed the following ratings with a Stable Outlook as follows:

WEPCO

--IDR at 'A';

--Senior unsecured debt at 'A+';

--Preferred stock at 'A-';

--Short-term IDR and commercial paper (CP) at 'F1'.

WI Gas

--IDR at 'A-';

--Senior unsecured debt at 'A';

--Short-term IDR and CP at 'F1'.

ERGSS

--Long-term IDR at 'A';

--Senior unsecured debt at 'A+'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

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

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

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

Applicable Criteria and Related Research:

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

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

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

Recovery Ratings and Notching Criteria for Utilities

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=849354

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

Philippe Beard, +1 212-908-0242

Director

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Glen Grabelsky, +1 212-908-0577

Managing Director

or

Committee Chairperson

Robert Hornick, +1 212-908-0523

Senior Director

or

Media Relations:

Brian Bertsch, +1 212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Business Wire


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters