May 29 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed the Long-term Issuer Default Ratings (IDR) of Westar Energy, Inc. (WR) and its utility operating subsidiary Kansas Gas and Electric Company (KGE) at ‘BBB’. Fitch has also affirmed WR and KGE’s securities ratings. WR’s preferred stock rating of ‘BBB-‘ has been affirmed and withdrawn. A full list of rating actions follows at the end of this release. The Rating Outlook for both WR and KGE is Stable. Approximately $3.2 billion of debt is affected by the rating actions.
—A generally balanced regulatory environment in Kansas;
—Management’s strategic focus on utility operations in Kansas;
—Large capex program, including significant environmental investment;
—Moderate pressure on projected credit metrics in 2013 and 2014 and rebound in 2015;
—Rating linkage between WR and KGE
The ratings and Stable Outlook reflect a relatively balanced regulatory compact in Kansas and credit metrics that are generally in-line with the ‘BBB’ IDR. WR’s large capex program, which includes significant environmental investment, is expected to result in increasing debt leverage that will exert moderate pressure on the utility’s consolidated credit metrics in 2013 and 2014, before rebounding in 2015.
In addition, the ratings affirmation and Stable Rating Outlook reflect WR’s relatively predictable earnings and cash flows, management’s strategic focus on utility operations in Kansas, a service territory economy not prone to boom-bust cycles and competitive retail rates.
Credit Metrics and Capex
WR’s coverage and leverage measures are expected to rebound in 2015, reflecting anticipated rate relief and declining post-2013 capex. Fitch expects WR’s capex to peak in 2013 at just under $900 million, declining an estimated 28% through 2015.
During 2013 - 2015, WR expects to invest $2.3 billion on infrastructure replacement and enhancement to ensure reliability and meet energy policy initiatives with regard to environmental and renewable investment. Fitch assumes management will fund its external requirements via a balanced mix of debt and equity.
2013 - 2015 Ratios
Fitch projects WR EBITDA coverage and leverage ratios will approximate 4.5x and 4.1x, respectively, in 2015 and FFO coverage and leverage ratios 4.2x and 17%. EBITDA coverage and leverage ratios in 2012 were 4.4x and 4.2x respectively, and FFO coverage and leverage ratios 4.8x and 20.7%. WR’s consolidated credit metrics are estimated by Fitch to weaken in 2013 and 2014 before rebounding in 2015, driven by rate relief and declining capex requirements. EBITDA coverage and leverage measures are expected to weaken during 2013 - 2014 to 4.3x and 4.5x, respectively, and FFO coverage and leverage ratios to 4.0x and 15.2%
Low Rates and Constructive Regulation
WR’s retail rates are well-below the industry average - $0.087 per KWh versus $0.10 cents per KWh. Fitch believes rate recovery mechanisms in the state that timely reflect rising environmental and other costs in rates should facilitate a moderate trajectory for future rate increases during 2013 - 2015.
In April 2013, WR filed an abbreviated rate case (ARC) requesting that the Kansas Corporation Commission (KCC) approve a $31.7 million, 1.7%, rate increase to recover costs related to environmental upgrades at the La Cygne Generating Station. The plant is 50%-owned by WR. Under Kanas statute, a final order is expected to be issued by year-end 2013. 2012 GRC
In 2012, WR reached a settlement agreement with intervenors in WR’s 2012 general rate case that was ultimately approved by the KCC (with minor modifications).
The KCC order authorized a $50 million rate increase in April 2012, effective May 1, 2012. WR had requested a $91 million revenue increase.
The settlement in the 2012 GRC was silent with regard to return on equity (ROE) and other typical rate case parameters. However, the KCC order adopted a 10% ROE and an 8.40% weighted average costs of capital to be used for regulatory accounting purposes. In addition, the KCC-approved settlement authorized WR to file its ARC within 12 months. The ARC was filed by WR with the KCC earlier this year as indicated above.
The authorized ROE in WR’s previous GRC, which was issued in January 2009, was 10.4%.
Cost Recovery Mechanisms
State and federal jurisdictional cost-recovery mechanisms for certain expenditures mitigate regulatory lag and provide a level of stability to WR’s financial profile, in Fitch’s opinion. Of particular importance is WR’s environmental cost recovery rider (ECRR) and FERC-approved transmission formula rates and transmission delivery charge (TDC).
The ECRR and TDC facilitate recovery of environmental and transmission related costs, which are major elements of WR’s estimated 2013 - 2015 capex. The riders allow WR to recover costs associated with environmental and transmission investment outside of general rate case proceedings.
Similarly, WR’s retail energy cost adjustment mechanism (RECA) facilitates timely recovery of fuel and purchase power costs. RECA rates are set annually based on forecast fuel and purchase power costs and retail sales. RECA rates are set quarterly with annual true-ups.
Regulatory mechanisms are also in-place for the deferral/recovery of pension and other post-employment benefits expense, energy efficiency and other costs. While the ECRR is not available to recover WR’s share of La Cygne capex, full recovery of pre-approved environmental remediation costs is likely through its pending ARC filing and WR’s next GRC filing.
WR has a $1.0 billion commercial paper program backed by committed $270 million and $730 million revolving credit agreements maturing in February and September 2016, respectively. The credit facilities are secured. As of March 31, 2013, WR had cash of $5.6 million on its balance sheet and short-term debt of $143.1 million.
WR/KGE Rating Linkage
WR and KGE’s credit ratings are the same, reflecting centralized operations and treasury functions and a consolidated capital structure used for ratemaking. Westar and KGE conduct business under the Westar Energy brand name and have functionally integrated utility operations.
KGE relies on Westar for its short-term cash needs, and Westar’s revolving credit facilities are collateralized by KGE’s first mortgage bond indenture. Furthermore, no regulatory or corporate structures exist to restrict the migration of cash between the two entities.
An adverse shift in the currently balanced regulatory compact in Kansas could trigger future negative rating actions. More specifically, restrictive ARC/GRC outcomes that result in lower-than-expected earnings and cash flows and, ultimately, weaker credit ratios in 2015 would likely lead to future credit rating downgrades.
In addition, an unexpected, prolonged plant outage at a major base load, coal or nuclear plant or change in strategy could lead to lower credit ratings Greater than anticipated debt reduction and/or higher than expected rate increases could result in future positive rating actions.
Fitch has affirmed the following ratings with a Stable Outlook:
—Long-term IDR at ‘BBB’;
—Senior secured debt at ‘A-‘;
—Senior unsecured debt at ‘BBB+’;
—Preferred stock at ‘BBB-‘ and withdrawn;
—Short-term IDR at ‘F2’;
—Commercial paper at ‘F2’.
—Long-term IDR at ‘BBB’;
—Senior secured debt at ‘A-‘;
—Pollution control revenue bonds at ‘A-‘;
—Short-term IDR at ‘F2’.