RPT-Fitch Affirms American Transmission Co. LLC at 'A'; Outlook Stable
July 26 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed the ratings of the American Transmission Company (ATC) as follows:
--Issuer Default Rating (IDR) at 'A';
--Senior Unsecured Debt at 'A+';
--Short-term IDR and Commercial Paper at 'F1'.
The Rating Outlook is Stable. Approximately $1.7 billion of debt is affected by today's actions.
KEY RATING DRIVERS:
--ATC's low business risk profile as a regulated electric transmission utility with no significant volume, commodity, or weather sensitivity;
--Solid financial performance metrics;
--Supportive federal and state regulatory frameworks;
--Large multi-year capital investment program;
--Somewhat restricted equity capital market access due to private ownership;
ATC operates under a Federal Energy Regulatory Commission (FERC) approved tariff structure that ensures cash flow stability with automatic annual updates to forward-looking rates, subject to an annual true-up, allowances for construction work in progress (CWIP) and pre-certification costs, and a 12.2% allowed return on equity.
At the state level, ATC benefits from a supportive regulatory environment in Wisconsin where the majority of its assets are located and is subject to regulatory oversight by the Public Service Commission of Wisconsin (PSCW) for project siting and construction. The ratings also take into consideration ATC's conservative funding strategy for capital expenditures based upon a balanced mix of debt and equity from contributing members.
ATC continues to demonstrate strong operating performance and stable cash flows. The company posted ratios of EBITDA to interest of 5.2x for the 12-month period ended March 31, 2013. Leverage, as measured by the ratio of debt to EBITDA, was 4.0x for the same time period. Fitch expects credit metrics to remain consistent at or near current levels over the next several years as ATC continues to add new assets into rate base. Going forward, Fitch projects EBITDA to interest and debt to EBITDA to average 5.2x and 4.1x, respectively, through 2016.
Rating concerns primarily relate to ATC's significant capital spending budget over the next 10 years. The company has already identified over $3 billion in potential growth projects. Additional projects to meet federal or state renewal portfolio standards may result in increased external funding requirements. Fitch notes that ATC is privately held by a consortium of utilities and has no direct access to equity. Additional rating concerns include: the potential loss of member support for equity financing, and the potential for unfavorable revisions to the current rate structure, as intervenors can request a change in the tariff.
In April of 2011, Duke Energy (IDR rated 'BBB+' with a Stable Outlook by Fitch) and American Transmission Co. announced the creation of Duke-American Transmission Co. (DATC), a 50/50 joint venture that will build, own and operate new electric transmission infrastructure in North America. On April 30, 2013 DATC acquired Atlantic Power Corp.'s 72% ownership interest in the Path 15 transmission line, located in Central California, for $56.4million in cash including the assumption of $137.2 million in existing debt. Going forward, Fitch expects future acquisitions and projects to be funded by a balanced mix of debt and equity and notes that increased levels of capital spending will place financial pressure on ATC's owners' to fund their portion of equity financing.
While annual capex is currently forecasted to average approximately $336 million through 2015, Fitch expects moderately higher capex budget in 2016 and 2017 as the planned Bay lake transmission project enters service and the Badger Coulee and Cardinal Bluffs transmission projects reach the construction phase. Capital expenditures are forecasted to approximate $474 million in 2016 and $414 million in 2017.
The proposed Bay Lake transmission project will improve the stability and reliability of the regional electrical grid in northern Wisconsin and the Upper Peninsula of Michigan and help facilitate additional transmission into Michigan.
ATC currently plans to file for approval with the Michigan Public Service Commission and PSCW in late 2013 and 2014, and a decision is expected in late 2014 or first quarter of 2015. The total cost of the project is currently estimated to be between $273 million and $429 million dollars and if approved, construction is expected to begin in 2015 to meet in-service dates of late 2016 through 2017.
The proposed Badger Coulee Line from La Crosse, WI to Madison, WI, will support the transfer of renewable energy into Wisconsin to help meet public policy goals in the state and the greater Midwest region. ATC currently expects to file an application to build the line with the PSCW later this year and the project is currently estimated to cost between $470 million and $500 million dollars. If approved, construction on the new line would begin in 2016 to meet an in-service date of 2018. Xcel Energy Inc. (IDR rated 'BBB+'; Stable Outlook) will be a 50% partner on this project.
The proposed Cardinal Bluffs transmission project from Middleton, Wis., to northern Dubuque County, Ia., will help to improve local and regional stability and will enable Iowa to bring renewable generation to market. ATC currently expects to file an application to build the line with the PSCW in 2014 and the total cost of the project is currently estimated to be $425 million dollars. If approved, construction is expected to begin in 2016 to meet and in-service date of 2018. ITC Holdings Corp. will be a 50% partner on this project.
The Badger Coulee and Cardinal Bluffs transmission projects qualify for Midwest Independent System Operator's (MISO) Multi Value Project cost methodology, which would spread the cost of the project across the entire MISO region, with ATC customers paying about 10%-15% of the project's total cost.
Fitch expects increased levels of capital spending to be funded with the same balanced mix of debt and equity of prior years and for management to maintain a capital structure of approximately 50% - 55% debt to equity. As of March 31, 2013, ATC exhibited a balanced capital structure with a debt to capitalization ratio of 54%.
Fitch notes that ATC has revenue concentration among its five largest customers, who collectively comprise over 90% ATC's total revenues on an ongoing basis. Mitigants to customer concentration include the essential nature of ATC's network service to the business of its customers in addition to a solid customer credit profile.
The Stable Outlook assumes that ATC will continue to finance capital expenditures with a prudent mix of debt and equity to maintain credit metrics that are commensurate with their rating category and that the regulatory environment will continue to support cash flow stability.
Fitch views ATC's liquidity position to be sufficient. The company has access to short-term liquidity through a five-year $350 million unsecured revolving credit facility that matures in December 2017. The facility provides backstop support for the company's commercial paper program. As of March 31, 2013, ATC had $181 million of commercial paper outstanding. Debt maturities are manageable and are expected to be refinanced upon expiry. ATC has no maturities through 2014 and $100 million of Senior Notes due in 2015.
Positive Actions: No positive rating actions are expected at this time. Negative Actions: The loss of member support for equity financing would likely lead to a rating downgrade. Additionally, the potential for unfavorable revisions to the current rate structure due to challenges from intervenors, could cause a negative rating action.
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